AQA AS/A Level Business Revision Guide PDF

REVISE AQA AS/A LEVEL AQA ludes Business...

REVISE AQA AS/A LEVEL AQA ludes Business nc FREE REVISE AQA AS/A LEVEL I REVISION REVISE AQA AS/A LEVEL Business n Business on io li n t GUIDE AND WORKBOOK e e di Our study resources are the smart choice for those studying AQA AS/A Level Business, This book will help you to: REVISION Organise your study with the one-topic-per-page format Speed up your revision with summary notes in short, memorable chunks Track your revision progress with at-a-glance check boxes GUIDE AND WORKBOOK Check your understanding and exam skills with worked examples Develop your exam technique with exam-style practice REVISION GUIDE AND WORKBOOK questions and full answers. ludes nc FREE I n on io li n t e e di THE REVISE SERIES For the full range of Pearson revision titles across KS2, KS3, GCSE, AS/A Level and BTEC visit: www.pearsonschools.co.uk/revise www.pearsonschools.co.uk [email protected] CVR_AQA_A_BUSINESS_RGW_1117_CVR.indd 1 08/08/2016 09:32  AQA REVISE AQA AS/A LEVEL Business REVISION GUIDE AND WORKBOOK Series Consultant: Harry Smith Author: Andrew Redfern For the full range of Pearson revision titles across KS2, KS3, GCSE, AS/A Level and BTEC visit: www.pearsonschools.co.uk/revise Published by Pearson Education Limited, 80 Strand, London, WC2R 0RL. www.pearsonschoolsandfecolleges.co.uk Text and illustrations © Pearson Education Limited 2016 Produced, typeset and illustrations by Cambridge Publishing Management Ltd Cover illustration by Miriam Sturdee The right of Andrew Redfern to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. First published 2016 19 18 17 16 10 9 8 7 6 5 4 3 2 1 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 9781292111131  Contents 3.1 What is business? 37 Using the marketing mix 77 Exam skills 2 38 Product 78 Exam-style practice 1 Why businesses exist 39 Product portfolio analysis 79 Case study 1 2 Missions and objectives 40 Price 80 Case study 2 3 Common business 41 Promotion objectives 42 Distribution (place) 3.6 Human resource 4 The importance of profit 81 Human resource objectives 43 Exam skills 5 Exam skills 82 Exam skills 44 Exam-style practice 6 Size and form of business 83 Human resource 45 Case study 7 Ownership: aims and performance 1 objectives 3.4 Operations 84 Human resource 8 The role of shareholders performance 2 46 Operational objectives 9 Exam skills 85 Exam skills 47 Analysing operational 10 The external environment 1 performance 86 Job design 11 The external environment 2 48 Uses of operational data 87 Organisation design 1 12 The external environment 3 49 Exam skills 88 Organisation design 2 13 Exam skills 50 Increasing efficiency and 89 Human resource flow 14 Exam-style practice 1 productivity 90 Exam skills 15 Exam style practice 2 51 Lean production 91 Motivational theories 1 3.2 Leadership 52 Capacity and technology 92 Motivational theories 2 efficiency 93 Financial methods of 16 Management and 53 Exam skills motivation leadership 1 54 Improving quality 94 Non-financial methods of 17 Management and 55 Exam skills motivation leadership 2 56 Inventory and supply 95 Choosing motivational 18 Exam skills chains 1 methods 19 Management decision 57 Inventory and supply 96 Exam skills making 1 chains 2 97 Employer–employee 20 Management decision 58 Exam skills relations making 2 59 Exam-style practice 98 Employee disputes 21 Management decision 60 Case study 99 Exam skills making 3 100 Exam-style practice 22 Exam skills 3.5 Finance 101 Case study 23 The importance of 61 Setting financial stakeholders 1 objectives 1 3.7 Strategic position 24 The importance of 62 Setting financial 102 Mission and corporate stakeholders 2 objectives 2 objectives 25 Exam skills 63 Exam skills 103 Strategy and tactics 26 Exam-style practice 1 64 Budgets 104 SWOT analysis 27 Exam-style practice 2 65 Cash flow forecasts 105 Exam skills 28 Case study 66 Break-even 1 106 Financial accounts 1 3.3 Marketing 67 Break-even 2 107 Financial accounts 2 29 Marketing objectives 68 Profitability 108 Using financial ratios 1 30 Market research 69 Exam skills 1 109 Using financial ratios 2 31 Interpreting marketing data 70 Exam skills 2 110 Using financial ratios 3 32 Price and income elasticity 71 Sources of finance 1 111 The value of financial 72 Sources of finance 2 accounts and financial 33 Exam skills 73 Exam skills ratios 34 Segmentation, targeting 74 Improving cash flow 112 Exam skills and positioning 75 Improving profitability 113 Analysing the internal 35 Mass and niche markets 76 Exam skills 1 position 36 Exam skills 114 Core competencies 3.8 Strategic direction 163 Exam skills 115 Analysing human resource 142 Choosing strategic 164 Assessing the use of performance direction 1 digital technology 1 116 Exam skills 143 Choosing strategic 165 Assessing the use of 117 Exam-style practice direction 2 digital technology 2 118 Case study 144 Exam skills 166 Exam skills 119 Political 145 Porter’s strategies 1 167 Exam-style practice 120 Legal 146 Porter’s strategies 2 167 Case study 121 Exam skills 147 Bowman’s strategic clock 3.10 Strategic change 122 Economic change 148 Comparing strategic 168 Managing change 1 123 Economic factors positions 169 Managing change 2 124 Fiscal and monetary policy 149 The value of strategic positioning 170 Exam skills 125 Trade and protectionism 150 Exam skills 171 Managing organisational 126 Globalisation culture 1 127 Exam skills 151 Exam-style practice 172 Managing organisational 128 Social change 151 Case study culture 2 129 Technological change 130 Corporate social 3.9 Strategic methods 173 Exam skills 152 Assessing a change in 174 Managing strategic responsibility 1 scale 1 implementation 131 Corporate social 153 Assessing a change in 175 The role of organisational responsibility 2 scale 2 structure in strategic 132 Exam skills implementation 133 The competitive 154 Managing growth 176 Network analysis 1 environment 1 155 Types and methods of growth 177 Network analysis 2 134 The competitive 156 Exam skills 178 Exam skills environment 2 157 Assessing innovation 1 179 Why strategies fail 1 135 Exam skills 158 Assessing innovation 2 180 Why strategies fail 2 136 Investment appraisal 1 159 Exam skills 181 Exam skills 137 Investment appraisal 2 160 Assessing 182 Exam-style practice 138 Exam skills internationalisation 1 183 Case study 139 Exam-style practice 140 Case study 1 161 Assessing 184 Answers internationalisation 2 141 Case study 2 162 Assessing 195 Exam-style internationalisation 3 practice answers  AS & A level Had a look Nearly there Nailed it! 3.1.1 Why businesses exist Businesses are diverse, ranging from the simple to the vastly complex, and are involved in all aspects of life. However, the purpose of all businesses is the same – to meet the needs of people. The incentive to meet these needs may vary from one business to another depending on the industry, sector or the motives of the owners. However, all businesses meet these needs through a transformation process that creates a product (goods or a service). The more value a business can add to its products the more competitive it is. Added value can be achieved through branding, quality, convenience and service. labour (people) input goods s transformational and capital (finance) land (natural resources process outputs services (adds value) and materials) shows business This diagram nesses you how busi creates m ee t add value, and goods and services ’s ne ed s people ne rs. o w reward their to meet the reinvested for needs of customers business growth the role of business business sells the reward products to profit for owners generate revenue if revenue is greater than total costs Why businesses exist Real world McDonald's Businesses are important because they: McDonald’s adds value to its products create wealth through its strong global brand. For create jobs example, when customers see the golden arches (the develop new products to benefit big M) which make up the McDonald’s logo, they know society exactly what to expect from a McDonald’s restaurant support other businesses in the wherever they go. Value is also added through the country, such as by purchasing convenience and speed of service. materials provide a source of tax revenue for the government. 1 What are three different examples of a good and three different examples of a service? 2 Why does the government encourage new business start-ups? 3 What are two ways that a car manufacturer might add value? 1 AS & A level Had a look Nearly there Nailed it! 3.1.1 Missions and objectives Although there are slight differences between missions, aims and objectives, they all set out to do the same thing – act as targets and give the business direction. Running a successful business can be very difficult. The owners and employees often have to make decisions in response to external pressures and unforeseen factors. The aims and objectives of a business give clarity to the decision-making process. Mission statement Real A mission statement sets out a business’s overall world Oxfam purpose to direct and stimulate the entire organisation. Oxfam, the globally renowned aid charity, has the A mission statement will focus on: following mission statement: the organisation’s values ‘To create lasting solutions to poverty, hunger, and non-financial goals social injustice.'’ the benefits of the business to the community or stakeholder how consumers are to be satisfied. Employees – the mission statement acts as a Investors – many shareholders will set of guiding principles for employees. It brings want assurances that their money is employees together with a shared purpose and being invested in an ethical business communicates the values that underpin with strong values. A mission will also the business. A mission statement can communicate the ambition of the have a significant influence on corporate business to potential stakeholders culture – ‘the way we do things around Mission and its desire to grow. here’. statement Owners/directors – directors need Customers – many organisations to see the bigger picture and think strategically. use their mission statement as a The mission statement helps the directors form promise to their customers. It lays and align the business strategy. down what they can expect from the goods and services they consume. The objectives hierarchy The relationship between The objectives hierarchy shows the relationship between the aims, mission and objectives missions and objectives throughout a business. The objectives of a business will flow from the mission and aims. Whereas a mission aims outlines the vision of the business in broad terms, the objectives will be SMART (see mission page 3). Whereas a mission statement will statement be communicated to all stakeholders, some objectives may only be shared with managers and employees. corporate objectives functional objectives finance marketing operations people 1 What is the purpose of a mission statement? 2 What is the difference between business aims and business objectives? 2  AS & A level Had a look Nearly there Nailed it! 3.1.1 Common business objectives Objectives are medium- to long-term plans established to coordinate the business and act as targets. Corporate objectives are those set by the owners or directors of the business. These will then influence the functional objectives set at departmental level. Businesses set objectives to: SMART provide quantifiable steps to achieve aims The appropriateness of an objective can be clarify direction of the business analysed using SMART. All objectives should be: measure success against targets Specific provide targets to motivate and reward Measurable employees Agreed influence potential lenders/investors. Realistic Time-related Financial and non-financial It could be argued that achieving most of these objectives will impact the bottom line objectives and overall aim of most businesses – profit. common objectives financial non-financial profitability market brand customer share recognition satisfaction shareholder growth value personal sustainability survival satisfaction Some objectives are more appropriate for small businesses, such as survival and personal satisfaction of the owner. Factors which influence Exam business objectives focus Business objectives Size – objectives may change as a business grows Aims and objectives are very important and becomes more successful. Most businesses when when you are evaluating as part of starting up will aim to survive. an answer. Always try to identify the Sector – unlike most private sector businesses, public objectives of the business in the sector organisations are driven by meeting customer case study. needs, not profit. Evaluation is about picking out the key Market – some markets are more competitive than issues facing a business. Therefore, if you others and this will determine objectives, such as can argue that a certain course of action targeting market share. will support a business in achieving its objectives then you have a strong point Ownership – a Plc must satisfy shareholders, therefore of evaluation. will set objectives around shareholder value. Owner – the owner may simply run the business for love of the job. Consumer satisfaction – how to achieve this. 1 Why should objectives be SMART? 2 Are some objectives more important than others? 3 AS & A level Had a look Nearly there Nailed it! 3.1.1 The importance of profit Profit is one of the main incentives of running a business. The wealth created through profit allows the owners of a business to reinvest the money into new projects and stimulate economic activity. Profit is also important because it secures the long-term success of a business. Profits can be reinvested to help the business grow and keep up with the demands of the ever-changing business environment. Profit is what is left after all costs have been deducted from revenue. Revenue Costs Revenue is the value of sales made during a Variable costs are those that change directly trading period. It also includes products sold on with the level of output or sales, such as the credit as well as those sold for cash. materials used to make a product. A business can increase revenue by increasing Fixed costs are those that do not change with the price of its products and by stimulating more the level of output or sales, such as rent. demand. Calculating fixed and variable costs can help when making decisions about profit margins, average Make sure you are clear about the difference between price and cost. Always look at this distinction from the costs and pricing decisions. A business can business’s point of view, not the customer’s. improve profit by reducing either of these costs whilst maintaining value in their products. 50 costs VC TR 40 30 price 20 FC fixed 10 costs quantity / output 0 1 2 3 4 5 6 7 8 9 10 quantity / output Revenue vs profit Calculating profit Revenue is an important measure of success for most Revenue is the value of sales made during a businesses. Achieving high revenue demonstrates trading period. It also includes products sold that the business has been able to produce a product on credit as well as those sold for cash. that is desirable at the right price for consumers. A business can increase revenue by increasing However, the real test is if the business has been the price of their products and by stimulating able to turn revenue into profit. As the saying goes, more demand. ‘revenue is vanity, profit is sanity’. price total variable costs Exam   focus Profit margin quantity sold total fixed costs When analysing sales revenue of a business it is also important to consider the profit margin. It   is difficult to analyse the success of a business total revenue  total costs  profit without being able to compare revenue and profit. 1 How is profit calculated? 2 What is the difference between variable and fixed costs? 3 How might a business increase its revenue? 4  AS & A level Had a look Nearly there Nailed it! 3.1.1 Exam skills These pages will give you practical advice, tips and examples on how to approach the different types of questions you will come across in your exams. 1 Which one of the following is a reason for having a mission statement? When answering multiple choice questions always give an A To communicate the values of the business answer even if you’re not sure – B To communicate the financial performance of you may still gain a mark. the business C To communicate the product range of the business D To communicate the strategy of a business (1 mark) 2 Which of the following is not a variable cost for a business? Variable costs change with the A Wages level of output. So your task is to identify which one of these B Insurance does not. C Packaging D Raw materials (1 mark) Question type:  3 A business sells 120 units in its first week of trading. The calculation business sells each unit for £15. The variable cost to produce Write down any formulae.  each unit is estimated at £8. The business also acquires fixed costs of £800 per month. Select the figures you require.  Calculate the profit for one week. Show currency, units and decimals as  (5 marks) appropriate.  heck your answer – does it make  C 120 units 3 £15 each 5 £1800 revenue sense? Is it logical? £8 3 120 units 5 £960 total variable costs £8 00 4 4 weeks in a month 5 £200 fixed costs per week £1 800 2 (960 1 200) 5 £640 profit 4 Explain one reason why a new business start-up that sells This question only requires the rare vintage clothing might decide not to set an objective candidate to explain one reason, concerned with profitability. but it is important to develop the (4 marks) point and make linked strands of A new start-up might choose not to set an objective development using appropriate based around profitability because it may initially be connectives. ‘Therefore…’ ‘As a concerned with generating enough cash flow to keep the result…’ business growing. Therefore the business may initially set an objective to attract X number of customers per week. This is especially important if the clothing is rare as the potential number of customers may be small. 5 AS & A level Had a look Nearly there Nailed it! 3.1.2 Size and form of business Businesses come in all forms and sizes. The nature and size of each business will determine the most appropriate form of ownership. There are benefits and drawbacks to each type of business and issues that all businesses have to face as they make the transition between different forms of ownership. Private sector vs public sector Public businesses: are owned and funded by national Private businesses are: or local government owned by shareholders and account for approximately private individuals Some industries and 19% of UK employment most businesses in the UK businesses feature aspects are driven by public interest driven by profit motive (most) of both the private and public are made up of public corporations, determined by market forces. sector, such as the NHS. public services and municipal services. 100% private 50/50 100% public privatisation selling of public owned industries to raise capital and improve efficiency Business forms Incorporation The diagram below outlines how a business may change its form as Incorporation involves the it grows. registry of a business with Companies House and Sole traders includes documents such as a easy to start up – no registration size – as businesses grow they gain more access to capital Memorandum of Association and requires wide range of skills and Articles of Association. flexibility own boss but long hours sole traders keep all profits owned by individuals self-employed Limited liability unlimited liability. Where the liability of the Private limited company owners is detached from the must go through process of company. Shareholders can incorporation lose their investment in the limited liability event of financial difficulties, customers may trust a limited  but their personal belongings company more than sole trader private limited company are safe, unlike with unlimited wider access to capital – easier owned by shareholders liability where there is no to borrow money as a limited separate legal entity distinction in law between the company. individual and the business. Public limited company can raise capital through selling  shares to the public size measured by market capitalisation ability to take over other businesses can lose control of the business public limited company pressure to pay dividends to its  large publicly owned 1 What are the benefits of running shareholders. companies as a sole trader? Non-profit organisations 2 Why is limited liability A business may also be set up as a charity – a not-for- important? profit business. A charity may be exempt from tax on most 3 Why would a business want to forms of income. Alternatively, a business may take the change from a private limited form of a mutual. A mutual can take any legal form, but it is company to a public limited distinguished by the fact that it is run for the benefit of its company? members (employees, customers or community). 6  sole traders AS & A level Had a look owned by individuals Nearly there Nailed it! 3.1.2 self-employed Ownership: aims and objectives The aims and objectives of a business will be influenced by the type of ownership, its size and the external environment in which it operates. private limited company owned by shareholders Aims and separate objectives legal entity of different organisations sole traders owned by individuals  Public limited company (plc) – a public limited company has external self-employed shareholders due to stock market floatation. As a result, the aims and objectives of the business are likely to relate to increasing shareholder value. Private limited companies and sole traders do not have this pressure to satisfy external shareholders. As a Plcsoleis traders more likely to operate in international markets, its objectives may by owned alsoindividuals refer to how it public limited company self-employed intends to operate in these markets. large publicly owned private limited company companies owned by shareholders separate legal entity Private limited company (Ltd) – many businesses can be formed as a private limited company. Although the limited status does not necessarily influence aims and objectives, the business may have ambitions to become a Plc. Objectives are also likely to involve private limited company growth and expansion. owned by shareholders separate legal entity charity Sole trader – sole traders are typically small businesses and owned public limited by one company person. If the business is newly formed the objectiveslarge publicly owned on are likely to focus survival, establishing a loyal customer base or building reputation. companiesObjectives sole traders may only extend to providing the owner with a comfortable income. owned by individuals self-employed public limited company Charity – a charity is a not-for-profit organisation so obviously its large publicly owned aims and objectives will not focus on the incentive of profit. A charity companies may set a unique way to measure its success, such as the number of donors, the number of people it has supported or the awareness of the cause it promotes. private limited company charity owned by shareholders separate legal entity Real world Twitter Exam focus Case study and charity In 2013 Twitter floated itself on ownership the New York Stock Exchange. The initial public offering was valued at $14.2bn In any case study consider the type of and the share price for its first day of trading ownership of the business in question. Even if settled at aroundcompany public limited $44 per share. the objectives of the business are not explicit large publicly owned in the case study, these can be inferred by the companies type and nature of the business. For example, a business that has been open for a year may expect returning customers and start to make a profit. charity 1 Why is survival an appropriate objective for a sole trader? 2 Why might the objectives of a private limited company shift as it becomes a public limited company? 7 AS & A level Had a look Nearly there Nailed it! 3.1.2 The role of shareholders A shareholder is an individual or an institution that owns a percentage of a company. Shareholders invest in companies to make a profit (return) on their investment. Shareholders can influence the decision making in companies and often have a vote in key company policy. Shareholders and their percentage stake Has a 10% share of the company and is entitled to 10% of any profits paid via dividends. Has the right to vote at the Majority shareholder controls Annual General Meeting (AGM). 10% the company with over 51% and can therefore decide company policy. 18% Shareholders gain from shares in 54% two ways: through profits returned in the form of dividends and the 18% appreciation of share value when they come to sell them. Share price changes Share prices are affected by the company’s performance and the business environment in which it trades. A company’s share price could fall even if it is performing well if there are fears for its future. Example of factors that may affect share price company announces increase of profits for first quarter of 7% on last year the company announces 500 job losses 1300 dividend of 3p per share price in pence 1100 share announced 900 a takeover bid from a 700 large US firm is rumoured 500 economic downturn – 300 investors feel nervous and demand for shares falls, 100 leading to a fall in price. Jan Jan Jan 1999 2000 2001 time (months) When share prices rise When share prices fall Managers may receive a bonus. The company may become vulnerable to a takeover. The company finds it easier to raise capital. Price fall gives an indication of poor performance. Consumers with shares feel more confident The company finds it harder to raise capital. to spend. Consumers with shares feel less confident The business may receive positive publicity. to spend. 1 Why are shareholders important to a company? 2 Give three reasons that the share price of a company might change. 3 Why is share price important for a company? 8  AS & A level Had a look Nearly there Nailed it! 3.1.2 Exam skills Have a look at the examples of exam-style questions below. Each question refers to the issues facing different forms of business ownership. Note how context is still important for these types of questions. Options A and C are both good distractors. It is possible for the owner of a limited company to keep Which one of the following is a benefit of limited liability? all of the profits if they are the sole A The owner keeps all of the profits shareholder. A public limited company can also sell shares to the general B The owner’s personal belongings are safe public. However, these are not the benefit of limited liability. B is the only C The business can sell shares to the public correct answer. D The business is easy to set up (1 mark) Question type: explain When answering on an ‘Explain’ question you should: identify the reason/purpose benefit, and so on say why – state the cause Explain one reason why the decision of a company to show an understanding of the recall faulty products could lead to a fall in their share price. (4 marks) relevant issues Recalling faulty products could lead to a fall in a  apply your answer to the question company’s share price because the market will anticipate context a fall in profits. If a company has to recall faulty products  develop your explanation with cause it will have to refund customers and this is likely to and/or consequence. impact their profits and reputation. As a result there will be less demand for their shares and share prices will fall. The candidate has shown an understanding of factors that may reduce the share price of a company. They have also applied the context by explaining how a product recall would Explain one way that a photographer with little experience lead to the anticipated fall in profits of running a business might benefit from setting up as a sole and impact the company’s reputation. trader. (5 marks) A photographer might benefit from setting up their business as a sole trader because the process is The candidate has started by clearly relatively straightforward and the photographer could start trading immediately. A sole trader does not need identifying the benefit – easy to set to be registered with Companies House which saves up. They have then gone on to say why time and money. As a result the photographer can start it is easy to start as a sole trader trading and see if there is sufficient demand for his/her (no need to register with Companies photographs without committing too much capital to House) and have then applied starting the business. their answer to the context of the photographer. An easy way to apply your answer to the context on a short answer question is to refer to the product of the busines s. In this case ‘photographs’. 9 AS & A level Had a look Nearly there Nailed it! 3.1.3 The external environment 1 All businesses operate within an external environment. Unlike the internal functions, a business cannot control these external forces but instead must adapt and respond to these pressures. If a business responds quickly to a change in the external environment, it can gain advantages over its competitors. External forces competition market conditions economic factors The demographic factors such as consumer incomes, business such as birth rates, interest rate changes migration, consumer tastes environmental issues market conditions such as consumer preference for fair trade such as consumer incomes, competition, products and green business practices growth in demand Market conditions and competition Real There are a range of factors that might determine world Mobile phone industry how attractive or changeable a market is. These The pace of technology and new product factors may determine how responsive and flexible a development is a key market factor in the business needs to be in order to succeed within its mobile phone industry. Most smartphone market. Some of these factors include: manufacturers launch a new product every the growth rate of the market 6–8 months. Furthermore, sales growth the typical profit margin that businesses can for smartphones in Western Europe and generate the USA is declining, whilst Africa and Asia the number and size of competitors in the market Pacific offer considerable growth opportunities for the pace of innovation and new product manufacturers and network development providers. the bargaining power of suppliers and customers the level of differentiation between competitors the seasonality of the product See page 133 for more on the volatility of costs incurred by businesses, Porter's Five Forces. such as commodity prices. Exam focus Case studies and market factors Whenever you are reading a case study, try to pick up on the key issues within the business. However, it is just as important to understand the market factors that may influence the business in question. You should always try to think about the market issues listed on the left. Even if these are not explicitly referred to in the case study, you can always infer the market factors by considering the industry, type of business and nature of the product. Another way to remember this is by using MOPSS as an acronym for the factors you might consider when analysing a market – market, organisation, product, stage and state. 1 What factors might determine the bargaining power of a customer? 2 What might be the impact on a business operating in a market with a large number of competitors? 3 Give examples of three products that have seasonal demand. 10  AS & A level Had a look Nearly there Nailed it! 3.1.3 The external environment 2 Economic factors A key economic factor is the income of consumers. Incomes are determined by the gross domestic product (GDP). GDP is a measure of the output of an economy in terms of the goods and services it produces over a year. High GDP will increase the incomes of consumers leading to increased spending on a range of goods Remember that consumer spending and services. revised GDP price GDP on luxuries will respond differently to 4.8 that on necessities to a change in 4.4 incomes. Consumers may purchase 4.0 more luxury items as their incomes rise, but there may be little change 3.6 in demand for necessities as % change 3.2 incomes fall. 2.8 2.4 Low GDP may result 2.0 Example of in unemployment and 1.6 falling incomes. Spending the effects of 1.2 will fall for certain goods changes in GDP 2003 2004 2004 2005 2005 2006 2006 2007 and services. q4 q2 q4 q2 q4 q2 q4 q2 time (months) Interest rates are Interest rates closely linked to the An interest rate is the cost of borrowing money or the reward for saving. level of inflation and the exchange rate. High interest rates 3.5% cost of existing loans may increase Low interest rates consumers may have less disposable cost of existing loans may fall income (consequence of increased demand for products bought on credit 2.0% mortgage payments) may rise e.g. luxury goods demand for products bought on credit consumers more likely to spend may fall disposable income rises consumers more likely to save their money savers lose out on earnings from 1.0% investments Demographic factors Stakeholder groups Demography is the study of the human population. Remember that the population forms two key There are a number of key demographic issues stakeholder groups. affecting the UK. These are: the UK population is growing, leading to an increase in demand for most goods and services. Changes in the Changes in the migration to the UK from Eastern European population will impact population will impact countries is growing, fuelling growth in the the size of a potential the size of the labour labour market. market and their market and the skills of wants and needs. those workers. the UK population is getting older, changing the demand for different products and services. 1 How might consumers react to an increase in interest rates? 2 Identify three consequences of an increase in average incomes. 3 What are the benefits of a growing population? 11 AS & A level Had a look Nearly there Nailed it! 3.1.3 The external environment 3 Environmental factors Government tries to ensure businesses pay for the total cost of production including the external costs, such as pollution, which ultimately has to be paid for by society. There are benefits and drawbacks for a business of being environmentally friendly. for against avoid negative publicity from the media environmental business practices opportunity for increased cost of differentiation raw materials avoids fines or penalties increased cost of imported through waste disposal environmental legislation opportunity for lower profit margin government incentives on fair trade goods such as tax relief creates a sustainable The benefits and drawbacks of environmentally business friendly business practices. UK environmental legislation includes: the Environmental Protection Act, 1990 Exam Environmentally the Environment Act, 1995 focus the Climate Change Act, 2008. friendly businesses In the past, environmentally friendly businesses have gained an advantage over others that are less ‘green’. However, as consumer Real attitudes change, they expect businesses to be world Fairtrade environmentally friendly as standard. Therefore, it becomes less of a competitive advantage and Global retail sales of Fairtrade more of a prerequisite to be able to operate products such as coffee, sugar successfully in a competitive market. This is a and bananas increased by 15% good point of balance to consider whenever in 2014. The UK is currently discussing environmentally friendly business the world’s largest market for practices. Fairtrade produce. 1 What is Fairtrade produce? 2 Why does the government impose environmental legislation? 3 Identify three external environmental factors that might have an impact on a business. 12  AS & A level Had a look Nearly there Nailed it! 3.1.3 Exam skills The following exam-style questions with exemplar answers cover the topic The external environment. Demographics is the study of 1 Which of the following refers to a demographic factor that may the human population. influence business activity? A Trends increasing for consumers who want ethical products B The population of the UK getting older C Gross domestic product increasing by 1.2% in the last 3 months D Interest rates falling by 0.5% There are three pieces of (1 mark) context that the student should take from this question. 2 Explain one market factor that might affect an independent 1. independent restaurant, 2. restaurant that has recently opened on a busy high street in a wealthy recently opened and suburb of a large city.  (4 marks) 3. wealthy suburb. One market factor that may affect this business is the extent to which other local restaurants are differentiated from this one. As the restaurant has set up in a busy suburb it is likely that there This answer identifies a will be lots of competition. For customers to be drawn away from relevant market factor other more established restaurants the new restaurant must ‘differentiation’ and applies offer something different. For example, as it is a wealthy area it the explanation to the context is likely that competitors will be up-market restaurants. The new given. The student has made restaurant could differentiate itself by selling unique dishes or good use of an example. having a specific theme, such as a seafood restaurant if there are no other seafood restaurants in the area. 3 Analyse how a small business that sells building materials for Two different economic landscape gardening might be affected by the economic trends in variables are included in Table 1. (9 marks) this question. Is there any relationship between the two? Table 1 Qtr 1 Qtr 2 Qtr 3 Qtr 4 GDP % change 0.2 0.2 0.5 0.4 Question type: analyse Interest rate 2.0 1.5 1.5 1.0 When answering an ‘analyse’ question you should: The economic forecast suggests that the rate of growth in the economy is likely to increase at a steady rate. This growth is  demonstrate a good likely to boost demand in the economy as people spend more understanding of the money. It is also likely that unemployment will be falling. For concept/s in the question this reason people may choose to spend more money on home  use appropriate key terms improvements such as their garden. As a result, small gardening  apply your answer effectively businesses are likely to see a rise in sales revenue. However, this to the question’s context may depend on the time of year as gardening is seasonal.  identify and analyse at least Interest rates are also falling and this could encourage people to one issue borrow more money and spend instead of saving. Many people  develop your analysis with may choose to borrow money to landscape their garden and this cause and/or consequence. is another factor that could lead to increased demand for the small supplier of building materials. 13 AS & A level 3.1 Had a go Nearly there Nailed it! Exam-style practice 1 Have a go at the questions below that apply the concepts covered in Unit 3.1. They are examples of question types that you will find on both sections of Paper 1. There are answers on pages 195 and 196. 1 Which one of the following is not a benefit that a business Remember to eliminate one can bring to society? answer at a time. A Enhance the country’s reputation B Create employment opportunities C Improve equality in a country D Create wealth for individuals (1 mark) 2 What is meant by the term ‘real income’? Start by narrowing this answer down to two options. What A Incomes adjusted with inflation might ‘real income’ take into B The measure of a country’s total output consideration? C The amount people take home after tax D The level of income required to achieve basic necessities (1 mark) Always write out the formula to help ensure you reach the right answer. 3 A business spent: The alternative options are always £10 000 on raw materials possible answers if you calculate the £30 000 on fixed costs numbers incorrectly, for example get £7500 on other variable costs something the wrong way round. The business now buys its raw materials 10% more cheaply from a new supplier. What effect will this have on its profit level? The profit level will: A increase by £2500 B fall by £2500 C increase from £2500 to £3500 D increase by 10% (1 mark) 4 Based on the data shown in Table 1, calculate the fixed costs for the business. Show your workings.  (4 marks) What number do you need to Table 1 find the fixed costs for this business? Selling price £8.50 Total revenue £25 500 Total contribution £17 700 Total costs £21 000 14  AS & A level Had a go Nearly there Nailed it! 3.1 Exam-style practice 2 5 Explain one way that an electrician, registering their Only one benefit needs business as a private limited company, might benefit when explaining. Remember to apply operating in a competitive local market. (5 marks) the context. Your answer might 6 Explain how a fall in GDP might affect a national delivery take into account ‘electrician’ or company. (4 marks) ‘competitive local market’. Standard Chartered A good way to start an ‘explain’ Standard Chartered has warned investors that it question is to clearly define the will experience a second-successive fall in annual concept being addressed in the profits after an unexpectedly poor performance question, for example, GDP. from its trading division. The bank reported a 44% drop in half-year profits. The UK-listed bank halved its dividend payout plans and is considering the possibility of raising more capital from investors. Tougher economic conditions in emerging markets Read the context before and a wave of new regulation have created answering the question. difficulties for Standard Chartered, which rode out the financial crisis far better than most banks. 7 To what extent is the payment of dividends important for the long-term success of a public limited company? Remember to show balance in your (16 marks) answer by discussing factors other than dividend payments or a limiting factor. You might use examples from Question type: to what extent the context to make your point. When answering a ‘To what extent’ question you should: demonstrate a good understanding of the concept/s in  the question use appropriate key terms  apply your answer effectively to the question’s context analyse reasons for and against  develop your analysis with cause and/or consequence  bring a comparative issue of factor into your answer This style of essay is likely to appear  evaluate the extent to which you agree with the on Section D of the A level Paper 1 statement and justify your answer. so only answer this question if you are revising for your A level exam. It requires the same skills as all the other essay questions but is not directly linked to a specific case study context. 8 A large supermarket chain operating in a competitive market is considering a review of its environmental policies around its food produce and packaging. The economy in which the supermarket operates is also facing recession. To Note that the context in this question what extent are environmentally friendly business practices comes from relating your answer to a key to the success of such a business? specific examples of environmental (25 marks) business practice. Context will also be drawn from the fact the business is a retailer in a competitive market and the economic context of a recession. 15 AS & A level Had a look Nearly there Nailed it! 3.2.1 Management and leadership 1 This unit looks at the importance of managers and leaders in running a successful business. In this unit you will revise several theoretical models for analysing management and leadership and the benefits and drawbacks of each model. Managers are also The role of managers involved in key organisational decisions. setting For example, setting estimating resources co-ordinating teams targets company policy around needed allocating budgeting performance targets. resources planning organising forecasting giving instructions to subordinates giving guidance and instruction Managers reporting on performance controlling directing e.g. financial reporting monitoring targets and budgets monitoring employee performance motivating delegating enforcing company e.g. conducting appraisals employees authority policy and rules Trait theory Behavioural theory The belief that leaders and managers The behavioural theory of leadership suggests that there hold certain traits that distinguish is an appropriate style of management or leadership them from other people. There is determined by the context, situation and nature of disagreement about the exact traits the task. There are a number of theories that explore that constitute a successful leader. behavioural management and consider different styles One argument against this theory is based on a number of different factors. For example, task that successful leaders have been vs relationship styles (the Blake and Mouton Grid) or the found to possess very different traits extent to which a manager tells employees or listens to from one another. their opinions (the Tannenbaum–Schmidt Continuum). The Blake and Moulton grid This grid identifies a number of approaches to leadership based on the extent to which a manager is focused on their concern for production and their concern for people. Neither aspect is focused on entirely. Manager might care, but does not get the balance right. Hence neither the task nor employees’ well-being are completely satisfied. A relaxed working environment. High focus on both. In theory this Manager is concerned with should be highly successful as the relationships and motivation of high country team employees’ needs should be employees. Task may not get done. club leader aligned to those of the concern for people organisation. Employees feel Overall the Blake and Mouton Grid involved and have a stake in the can be used to help managers middle success of the business. reflect on their own practice and of the road identify strategies to improve their management/leadership skills. Authoritarian. Driven by targets Perhaps focused on self and produce and getting the task done. Cares not leading the organisation. low impoverished or perish little for well-being or feelings of Dissatisfaction and disorganisation. low high employees. An ineffective manager. concern for production 1 In your opinion what are the three most important roles of a manager? 2 Describe two management styles identified on the Blake and Mouton Grid. 16  ​ S & A level A Had a look Nearly there Nailed it! 3.2.1 Management and leadership 2 The Tannenbaum–Schmidt Continuum This shows where a manager’s approach lies on a continuum, ranging from the manager imposing strict authority at one extreme, through to employees having full freedom to act as they choose at the other extreme. Continuum can be used to make choices about which approach to adopt, but no advice is given on how the approach should be chosen based on the circumstances. leader gains ideas and opinions from ideas and opinions valued by leader team before making the decision and decisions made as a team autocratic empowered laissez-faire authoritarian boss-centred leadership subordinate-centred leadership leadership leader style top-down use of authority by leader decisions area of freedom by subordinates tells sells suggests consults joins delegates abdicates Advantages and disadvantages of different leadership styles Leadership style Advantages Disadvantages focused on getting the task done  an lead to low levels of motivation if c high levels of control suitable for employees don’t feel respected or valued unskilled workforce no opportunity for employees to be Autocratic speeds up decision-making process involved in decision making – important in times of crisis no opportunity to collect ideas and (authoritarian) suitable for implementing a clear opinions of the workforce that might be vision held by the leader valuable employees might not feel as though they have a stake in the business  evelops a team spirit – more d  ecision making can take a long time when d opportunity for employees to ‘buy done by committee in’ to the task if they feel they have employees may not see the ‘bigger Democratic had a say picture’ and vote for decisions that allows a manager to collect ideas and benefit them opinions from the whole workforce a llows employees autonomy to make lack of control over the workforce –  their own decisions, often leading deadlines and targets might be missed Laissez-faire to higher levels of creativity and tasks may not be coordinated very well  motivation amongst workers Leadership theories In an exam you could be asked questions directly linked to one of the leadership theories. These might be questions such as ‘To what extent is the Blake and Mouton Grid a useful tool in helping X improve her leadership skills?’ For this reason it is important to understand the uses of these theories, but also their limitations. Choosing a management/leadership style There are a number of factors to take into account when trying to identify the best approach to management/ 1 What is a laissez-faire leader? leadership. These are: labour force, nature of task, timescale, 2 What factors might determine the type of personality and tradition. leadership style suitable for a situation? 17 AS & A level Had a look Nearly there Nailed it! 3.2.1 Exam skills The questions below apply the concepts of management and leadership. For these questions refer to the Print Eastwood case study on page 28. Three of these terms relate Which of the following is not a recognised leadership style to how a manager will deal associated with business? with their subordinates. A Autocratic B Democratic C Theocratic D Laissez-faire In this answer it is important to (1 mark) show an understanding of this leadership theory. It is not enough just to describe Dave Nutton’s leadership style based on the information in the case study. With reference to the Blake and Mouton Grid. Explain the management style adopted by Dave Nutton. (5 marks) The candidate makes a statement Dave’s leadership style is ‘produce or perish’ meaning identifying the leadership style of he is more concerned about the task than he is about Dave Nutton. The candidate has used people. Dave Nutton shows little evidence of being evidence from the case study and people orientated as he insists on making the final clearly understands the Blake and decisions about artwork himself. Dave does seem to Mouton Grid. be task driven as he has acted quickly to ensure he can make the most of the opportunity of the imminent closure of a competitor. The key term in this question is delegate. It is a useful approach to Analyse how important it is for Dave Nutton to delegate start your answer by defining the key responsibility to his workforce. (9 marks) concept addressed in the question. Delegation is passing on authority to a subordinate to make their own decisions on a specific task or project. Delegating tasks will allow Dave to concentrate on other managerial roles such as the planning of Print Eastwood’s expansion. As Dave hopes to expand his business it is This is a good start to the answer. The likely that he will be involved in o