Edexcel GCSE Business Studies Textbook PDF

Dynamic Learning is an online subscription solution that supports teachers and students with high- quality content and unique tools. Dynamic Learning incorporates elements that all work together to give you the ultimate classroom and homework resource. Teaching and Learning titles include interact...

Dynamic Learning is an online subscription solution that supports teachers and students with high- quality content and unique tools. Dynamic Learning incorporates elements that all work together to give you the ultimate classroom and homework resource. Teaching and Learning titles include interactive resources, lesson-planning tools, self-marking tests and assessment. Teachers can: Use the Lesson Builder to plan and deliver outstanding lessons Share lessons and resources with students and colleagues Track student progress with Tests and Assessments Teachers can also combine their own trusted resources alongside those from Edexcel GCSE (9–1) Business which has a whole host of informative and interactive resources including: Starter activities, task worksheets, self-marking Test Yourself quizzes and teacher notes for each topic Ready-made key content Powerpoints that can be edited by teachers Quantitative skills worksheets and a complete set of practice exam papers Answers for the quantitative skills worksheets and all of the questions in the textbook Edexcel GCSE (9–1) Business is available as a Whiteboard eTextbook which is an online interactive version of the printed textbook that enables teachers to: Display interactive pages to their class Add notes and highlight areas Add double-page spreads into lesson plans Additionally the Student eTextbook of Edexcel GCSE (9–1) Business is a downloadable version of the printed textbook that teachers can assign to students so they can: Download and view on any device or browser Add, edit and synchronise notes across two devices Access their personal copy on the move To find out more and sign up for free trials visit: www.hoddereducation.co.uk/dynamiclearning  Edexcel GCSE (9–1) BUSINESS SECOND EDITION Ian Marcousé i 9781471899355.indb 1 07/03/17 4:35 PM  In order to ensure that this resource offers high-quality accurate, the official specification and associated assessment support for the associated Pearson qualification, it has guidance materials are the only authoritative source of been through a review process by the awarding body. information and should always be referred to for definitive This process confirms that this resource fully covers guidance. the teaching and learning content of the specification or part of a specification at which it is aimed. 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Examiners will not use endorsed resources as a source of Endorsement does not cover any guidance on assessment material for any assessment set by Pearson. activities or processes (e.g. practice questions or advice Endorsement of a resource does not mean that the resource on how to answer assessment questions), included in the is required to achieve this Pearson qualification, nor does it resource nor does it prescribe any particular approach to the mean that it is the only suitable material available to support teaching or delivery of a related course. the qualification, and any resource lists produced by the While the publishers have made every attempt to ensure awarding body shall include this and other appropriate that advice on the qualification and its assessment is resources. The Publishers would like to thank the following for permission to reproduce copyright material. Photo credits can be found on page 290. Acknowledgements Pg. 112, Top tips for writing a business plan. © The Prince’s Trust. The original version can be found at https://www.princes-trust. org.uk/help-for-young-people/tools-resources/business-tools/business-plans; pg. 119, extract from The Guardian, 12 March 2015, © Guardian News & Media Ltd 2016; pg. 145, extract from The Guardian, 3 August 2016, © Guardian News & Media Ltd 2016; pg. 190, extract from The Guardian, 26 January 2016, © Guardian News & Media Ltd 2016; pg. 258, extract from The Guardian, 11 August, 2016, © Guardian News & Media Ltd 2016. 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. 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You can also order through our website: www.hoddereducation.co.uk ISBN: 978 1 4718 9935 5 © Ian Marcousé 2017 First edition published in 2009 This edition published in 2017 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 2021 2020 2019 2018 2017 All rights reserved. Apart from any use permitted under UK copyright law, no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or held within any information storage and retrieval system, without permission in writing from the publisher or under licence from the Copyright Licensing Agency Limited. Further details of such licences (for reprographic reproduction) may be obtained from the Copyright Licensing Agency Limited, Saffron House, 6–10 Kirby Street, London EC1N 8TS. 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Printed in Italy by Printer Trento A catalogue record for this title is available from the British Library. 9781471899355.indb 2 07/03/17 4:35 PM  Contents Introduction vi Theme 1: Investigating small business Topic 1.1 Enterprise and entrepreneurship 2 1 The dynamic nature of business 2 2 Why new business ideas come about 7 3 How new business ideas come about 11 4 Risk and reward 15 5 The role of business enterprise 21 6 Adding value 25 7 The role of entrepreneurship 29 Exam-style questions on Topic 1.1 34 Topic 1.2 Spotting a business opportunity 36 8 Customer needs 36 9 Market research 41 10 Market segmentation 46 11 Market mapping 50 12 The competitive environment 53 Exam-style questions on Topic 1.2 57 Topic 1.3 Putting a business idea into practice 59 13 Business aims and objectives 59 14 Business revenue, costs and profit 64 15 Break-even 70 16 The importance of cash 76 17 Cash flow forecasts 80 18 Sources of small business finance 85 Exam-style questions on Topic 1.3 90 Topic 1.4 Making the business effective 92 19 Ownership and liability 92 20 Franchising 96 21 Business location 100 iii 9781471899355.indb 3 07/03/17 4:35 PM  22 Marketing mix 106 23 Business plans 110 Exam-style questions on Topic 1.4 114 Topic 1.5 Understanding external influences on business 116 24 Stakeholders 116 25 Technology and business 121 26 Legislation and business 126 27 Introduction to the economy 131 28 The economy and business 135 29 External influences on business 142 Exam-style questions on Topic 1.5 146 Theme 2: Building a business Topic 2.1 Growing the business 148 30 Methods of growth 148 31 Finance for growth 153 32 Changes in aims and objectives 157 33 Business and globalisation 162 34 Ethics and business 168 35 Environment and business 172 Exam-style questions on Topic 2.1 176 Topic 2.2 Making marketing decisions 177 36 Product 177 37 Price 181 38 Promotion 185 39 Place 191 40 Marketing mix and business decisions 195 Exam-style questions on Topic 2.2 199 Topic 2.3 Making operational decisions 201 41 Business operations 201 42 Technology, productivity and production 207 43 Managing stock 211 44 Procurement: working with suppliers 215 45 Managing quality 219 46 The sales process 223 Exam-style questions on Topic 2.3 228 iv 9781471899355.indb 4 07/03/17 4:35 PM  Topic 2.4 Making financial decisions 230 47 Business calculations 230 48 Understanding business performance 235 Exam-style questions on Topic 2.4 242 Topic 2.5 Making human resource decisions 244 49 Organisational structures 244 50 The importance of effective communication 250 51 Different ways of working 255 52 Effective recruitment 260 53 Effective training and development 265 54 Motivation 270 Exam-style questions on Topic 2.5 276 Glossary 278 Index 285 v 9781471899355.indb 5 07/03/17 4:35 PM  Introduction Acknowledgements Many thanks to all the people involved along the way in making this GCSE course a success – and therefore helping the book. Key figures include the team of entrepreneurs who helped me devise the original course, plus the modern driving force of Isla Billett and Colin Leith. For the book itself, many thanks to Michelle Billington and Louise Stubbs, plus the Hodder input from Beth Cleall and Melissa Richards. Personally, the most important input came from my 3-year-old grandson James, whose question: ‘Why do shops die?’ deserves a 12-mark exam question of its own. For him, my wife Maureen and the rest of my family, writing books means time locked away – so my love, thanks and apologies to them all. Dedication This book is dedicated to Marcousés: Carly, James, Lily, Owen, Scarlett, Skye and Tilly Using this book There are five main ways to use this book. The very best students might use all of them, but using any one of the five will help towards exam success. Read it. The chapters are written to be read. They’re not too long, and are packed with real-life examples to help make the theory more understandable. A classroom lesson plus a read through the relevant chapter will put you in control. If you can find the time, test yourself on the ‘End of chapter exercises’. Look it up. The index at the back of the book helps you find the precise topic your homework is about – or the topic you’ve been told is coming up in tomorrow’s test. That means you only need to read what you need. Make sure to check whether there are relevant definitions given in the ‘Revision essentials’ boxes. Build on it. At the end of each chapter are exam-style ‘Practice questions’. Each question gives you some text about a real business, then exam-style questions. Each one is a mini-mock exam. Have a go and then ask your teacher for a copy of the author’s answers (available in the Answer Guide). This will be a very useful way of preparing for the exams. Revise it. At the end of each section of the book are multiple choice questions that enable you to test yourself quite quickly (and without much writing). These sections of the book mirror the specification and are therefore helpful for exam preparation. Your teachers have the answers in their Answer Guide. Key revision terms. Towards the end of the book is a very full Glossary. It covers every term set out in the Specification – and is therefore crucial to your exam revision. Teachers will be pleased to know that an Answer Guide is available for this book: Edexcel GCSE (9-1) Business Answer Guide, ISBN 978-1510405288. vi 9781471899355.indb 6 07/03/17 4:35 PM  Theme 1 Investigating small business 1 9781471899355.indb 1 07/03/17 4:35 PM  Topic 1.1 Enterprise and entrepreneurship 1 The dynamic nature of business Business enterprise is about starting something growth that, by late 2013, Facebook offered to buy the of your own. It would probably be a business, but business for $3 billion. In 2016, Snapchat overtook it might also be a charity or a sports club. The key Twitter to become one of the biggest social media is that you want to do it, and that it proves to be a outlets in the world, with 150 million users daily. success. However, changes in technology, in fashion The company’s value hit $18 billion, with Spiegel and in the economy mean that success can never becoming a multi-billionaire in five years. be taken for granted. These changes represent the The dynamic nature of business arises because dynamic nature of business, and are illustrated by the of changing customer tastes and needs, which are following story. driven by changes in technology and in other factors In 2011, Evan Spiegel made a presentation to his outside the business’ control. The unexpected ‘out’ university class about an app idea called Picaboo. He vote in the 2016 European referendum was a case in demonstrated photos being taken and sent by phone, point. Suddenly companies had to rethink their plans and then disappearing. His classmates weren’t in the light of a new economic reality. Successful impressed. Convinced he was on to something, businesses are the ones that can adapt quickly to Spiegel kept working on the idea with two friends. new circumstances. A couple of months later, a renamed Snapchat got 160 150 a low-key launch. Student take-up in California Number of active users daily (millions) 140 130 enabled the new business to raise $13.5 million in 120 99 110 100 89 venture capital in early 2013. Such was Snapchat’s 80 74 81 65 59 60 50 40 20 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 Figure 1.1 Growth in Snapchat usage worldwide Every teenager who wants to be an entrepreneur is a rescue from wanting to be on The X Factor or Big Brother. Duncan Bannatyne, entrepreneur and ‘dragon’ on Dragons’ Den When starting a new business, all the challenges speed up. Decisions that a big company has months to Evan Spiegel first presented his idea for Snapchat think about must be decided immediately. Should the to his classmates in 2011 new burger bar buy one milkshake machine or two? 2 9781471899355.indb 2 07/03/17 4:36 PM  1 The dynamic nature of business Quickly, decide! Should it sign up to Just Eat or create its own e-commerce website and app? Decide! In business, Who? virtually every decision costs money and, because most A successful start-up requires a huge list of qualities start-up businesses are short of cash, the personal and skills, especially if starting up on your own. pressure involved in each decision gets ever-greater. Among these are: ◆ personal qualities: determination, resilience (can The three main questions to ask about start-ups are: bounce back from setbacks), enthusiasm, hard- 1 Why? working, decisive, willing to take risks 2 Who? ◆ skills: can listen as well as speak, can plan and 3 How? organise, can persuade, can manage others ◆ resources: can find help when needed (finance or Why? advice), may have exceptional knowledge of a special topic (for example, building a website). The main motive for starting up something new is desire. People want satisfaction from a sense of Of course, few entrepreneurs (business risk-takers) achievement. If they could get it from their normal have all these qualities, but without quite a number workplace, they might not take the risk of starting of them it will be hard to succeed. on their own. The next most important motivator is the wish to be How? your own boss. Independent decision making allows The most common way to start a new enterprise is to the individual to do things the way that they think trial a business idea while still working, often from is best. Most jobs involve a degree of compromise. your own home. It is tried out in a limited way before When you are running something for yourself you committing too much money and time. may not be able to afford the best, but at least you Duncan Goose, however, started bottled water know that you will get the best you can afford. So, brand One as a social enterprise by giving up his the chef who hates working in a cramped kitchen regular job. The water is bottled in Wales and sold with second-rate ingredients may long to be in a throughout Britain, with the profits going to the One position to make all the decisions. Foundations, a UK-registered charity funding water Then, of course, there is money. A person may start a projects in Africa. It took him six months, without burger bar because of their conviction that they will pay, to get the enterprise going. make a fortune. Such a person may dream of retiring When people need to raise capital to help them start early, with a beachfront house and a huge fridge a business, they write a business plan. This sets out packed with beer. The typical business to go for the aims, the strategy, the financial forecasts and would be a franchise, in which the individual buys financial requirements. If carried out professionally, the rights to open a local branch of a business that a good business plan greatly increases the chances of already exists (and makes good profits). The Subway getting funding. Crucial to a good business plan is a sandwich chain works in this way. sensible sales forecast based on independent market research. The common question that gets asked in business is, why? That’s a good question, Ideas are easy. Implementation is hard. but an equally valid question is, why not? Guy Kawasaki, marketing specialist and Jeff Bezos, founder of Amazon venture capitalist 3 9781471899355.indb 3 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship Drawing the right conclusions Business is exciting because of its dynamic nature. A business may seem to be unstoppable one year. Every decision works out well. The next year, nothing is quite the same. A best-selling business book called In Search of Excellence was written to explain why 43 companies were excellent. Famously, by the time the book was published even some of those companies were struggling. The dynamic nature of business is such that today’s star can be tomorrow’s fall guy. If there is one general point that can be made about business, it is that sustained business success comes to companies that keep talking to customers and keep adjusting to their new needs and wants. A man is a success if he gets up in the morning and gets to bed at night, and in between he does what he wants to do. Bob Dylan, musician Revision essentials Dynamic nature of business: the idea that One works to provide clean water in Africa business is ever-changing because external factors, such as technology, are always changing. Venture capital: risk capital provided by an Talking point investor willing to take a risk in return for a Which of the ‘who?’ qualities are strengths of share in any later profits; the venture capital yours? Which are weaknesses? provider will take a share stake in the business. 4 9781471899355.indb 4 07/03/17 4:36 PM  1 The dynamic nature of business End of chapter exercises 1 Outline two dynamic forces currently putting in business start-up among women and non- pressure on companies in the market for: white people’? (a) potato crisps Although women make up 50 per cent of the working population, only 5.2 per cent (b) takeaway pizza. of executive directors of big businesses 2 Look at Figure 1.1 on page 2 and calculate the are women. About 15 per cent of the UK percentage increase in active users between population is non-white but only 1.5 per cent the second quarter of 2015 and the second of executive directors are non-white. This quarter of 2016. apparent ceiling on career prospects 3 Why might a young entrepreneur prefer to may explain the huge amount of interest start a franchise, such as Subway, than a in business start-up among women and wholly independent business? non-white people. Unfortunately, even then discrimination may apply. A recent 4 Without looking back at the text, briefly write survey suggested that banks charge down what you understand by the ‘why’, ‘who’ businesswomen a one per cent higher and ‘how’ of starting a business. interest rate than businessmen. 5 Read the following extract. Why might the 6 Outline two possible reasons why a bank figures ‘explain the huge amount of interest might charge businesswomen a higher rate of interest than men. Practice questions The big day was 9 December 2013. The first successfully to supermarket buyers, and in ever Cuckoo Foods muesli yoghurt pot was basics such as shelf-life. Anna’s mum wanted sold in Selfridges, London. For friends-since-13 fresh fruit, but an agreed shelf-life of 20 days Anna Mackenzie and Lucy Wright it was both made that impossible. the start of something exciting and the result After Selfridges, further success came from of 18 months’ work. Anna’s mum’s recipes distribution deals with Waitrose, Ocado and for muesli were a starting point, when Anna AMT, a coffee-shop chain with 50 outlets in realised they’d make a really good on-the-go railway stations – perfect for busy commuters. breakfast. Having just finished university, she Helped by astute PR (free publicity in and Lucy started working on recipes, ingredients newspapers and magazines), Anna and Lucy and learning about the market. Eventually they were able to double sales turnover to £400,000 came up with a range of bold tastes: mango and in 2016. They seem very keen to push far beyond coconut, elderflower and cranberry, and many that in the coming years. others. The target market was always clear: young, busy, foodie people. When asked about the single most important quality needed in an entrepreneur, both They got in touch with other foodie answered ‘resilience’. For continued business entrepreneurs, such as the former boss of growth, they’ll need that and more. Rachel’s Organic. He gave advice on pitching 5 9781471899355.indb 5 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship Total: 15 marks 1 Look up the word ‘resilience’ and outline why it might be important in a start-up such as Cuckoo Foods. (2) 2 State two more entrepreneurial qualities that Anna and Lucy will need in the future. (2) 3 Outline one factor that might be helpful about having a clear target market. (2) 4 Anna and Lucy are very ambitious and are already considering the best way to continue their growth. Their options include: ◆ Option 1: Grow by developing new products other than muesli. Cuckoo Foods sold its first product in Selfridges in 2013 ◆ Option 2: Focus on becoming the number 1 in the market for muesli. Justify which one of these options they should choose. (9) 6 9781471899355.indb 6 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship 2 Why new business ideas come about In 2015, UK sales of Danone’s Activia yogurt brand ◆ Social media comments may have weakened fell back to £170 million. Back in 2011, the brand consumer confidence in the health story long- was the UK’s top seller, with sales of £240 million. promoted by Danone for its Activia brand. This decline created space for newcomers. The Greek ◆ Pressures on household incomes may have yoghurt brand Total saw sales jump from £20 million pushed customers to buy cheaper brands. in 2010 to £50 million in 2015, while a brand that was Price is another important factor. The price of a product new to the UK in 2013, The Collective, saw sales of or service is a key influence on the level of demand. £14.5 million in 2015, up by 52 per cent. This is the If a company charged too low a price, customers may essence of why new business ideas come about. lose confidence and go elsewhere: a wedding dress for Consumer tastes change constantly, creating new £99.99 might not win hearts and minds. opportunities for business success. Some are filled by existing big companies with big pockets, but In the vast majority of cases though, higher prices surprisingly many are filled by bright new businesses push demand down. A price increase for Pepsi would with new ideas. cut demand, especially if it made it more expensive than Coca-Cola. Price increases may push products New business ideas come about because there are: out of people’s price range and encourage customers ◆ changes in what consumers want to look for cheaper substitutes. ◆ products and services becoming obsolete ◆ changes in technology. An industry begins with customer needs, not with a patent, a raw material Business opportunities are like buses. or a selling skill. There’s always another one coming. Theodore Levitt, economist and business Richard Branson, founder, Virgin Group thinker Changes in what Products and services consumers want becoming obsolete We may all want a brand-new BMW, but most will A product or service is obsolete if no one wants it any not be able to afford one. For changes in consumer longer. There is no longer great demand for chimney taste to matter, they must be backed by the ability to sweeps, as few people have an open fire. Similarly, pay. This is known as demand. there’s hardly any demand for traditional butcher’s There are several possible reasons why consumers shops as people eat less meat and, in any case, buy it changed their mind about Activia, leading to a fall in supermarkets. As people change their behaviour, in demand: some businesses stop being relevant. Among ◆ There may have been a change in customer taste, London’s black cab drivers, there’s real concern that with people preferring creamier, Greek-style yoghurt. sat-nav systems and Uber may make them obsolete. 7 9781471899355.indb 7 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship Businesses therefore need to think ahead to how customer habits are changing and try to keep one Changes in technology step ahead. Apple had a fabulously profitable product Until mobile phone networks operated at the in the iPod but saw that people would want one bandwidth known as 3G, smartphones could hardly hand-held device rather than an iPod and a phone. function. Vodafone launched 3G in the UK in late Apple led consumers towards the iPhone. Today the 2004, but it was only over the following two years iPod is obsolete. Long live the iPhone! that it became widespread. Apple’s iPhone arrived just on cue in early 2007. Without 3G technology, Figure 2.1 shows the drift downwards in iPod sales there would be no iPhone as we know it. New between late 2009 and 2014. The data stops there technology is a classic cause of new business ideas. because Apple decided that iPod sales were no longer high enough to be worth listing in their accounts. In the last quarter shown, iPhone sales outpaced iPod sales by 15 : 1. If changing customer tastes keep making products and services obsolete, it is critical to keep coming up with new, bright business ideas. For chocolate companies such as Ferrero, it means keeping up with changing tastes and fashions; for companies such as Dyson and Apple, the key is to keep up with changes in technology. Obsolescence never meant the end of anything, it’s just the beginning. Vodafone was the first network to launch 3G Marshall McLuhan, writer 24,000 Unit sales (thousands) 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Actual sales The trend Figure 2.1 Global quarterly sales of the Apple iPod, 2002–14 (Source: Apple Inc. accounts) 8 9781471899355.indb 8 07/03/17 4:36 PM  2 Why new business ideas come about Table 2.1 New technologies and their potential uses Drawing the right conclusions New technology New products/uses In 2016, there were more than 600,000 business GPS (global Sat nav start-ups in the UK, with more than 200,000 in positioning system) Pet-monitoring collar London. Overwhelmingly, the start-ups occur Self-driving cars because individual entrepreneurs see new 3D printing One-off prototypes to test opportunities due to changes in customer taste or new product ideas the arrival of new technology. The individuals have Tailor-made artificial limbs the initiative and the financial backing to turn their Made-to-measure printed business dream into reality. Their chances of success shoes will depend on: RFID (radio- Keeping tabs on stock in-store ◆ whether their idea was as original and as relevant frequency Race timing (how marathon as they believed identification) runners are monitored) ◆ whether their competitors prove tougher and Libraries (more efficient than cleverer than had been expected barcode scanning) ◆ whether their customers become customers who stay; customer loyalty is crucial. Changes in technology have two main impacts: they create opportunities for new things, and increase Revision essentials the likelihood that old things will become obsolete. Combined, this means problems for slow-moving Demand: the number of units that customers companies and exciting opportunities for smaller, want – and can afford – to buy. newer, speedier ones. The key for new small firms Entrepreneurs: business people who see is to keep fully on top of the new technology, and be opportunities and are willing to take risks in making them happen. willing to take risks trying out new ideas. Obsolete: a product or service with sales that Once a new technology rolls over you, have declined or come to an end as customers find something new. if you’re not part of the steamroller, you’re part of the road. Stewart Brand, business author 9 9781471899355.indb 9 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship End of chapter exercises 1 What changes might come about over the The 2017 launch of Nintendo’s new games next three years in the markets for: console, the Nintendo Switch, had been (a) chocolate predicted for several years. After great (b) mobile phones. success selling 101 million units of the Wii system, the follow-up Wii U achieved a 2 Outline two factors that might cause sales of the Sony PS4 to decline. shockingly weak 13 million units. Sales were falling month-on-month. In the first week of 3 Outline two factors that might cause June 2016, Sony’s PS4 outsold the Wii U by a motorbikes to become obsolete. factor of eight globally. The Wii U wasn’t old, 4 Look at the quote by Marshall McLuhan on but it was becoming obsolete. page 8. What do you think it means? 5 Read the following extract. Discuss the 6 What factors may prove the most important factors that may have led to the Wii U in ensuring that the Nintendo Switch console becoming obsolete by 2016. will be a success? Practice questions In 2012, Rikke Rosenlund was walking her costs dog owners £44.99 and borrowers £9.99 neighbour’s dog. She had too many work each year. The site quickly attracted more than commitments to own one herself, and she 50,000 members and today has more than realised that many families have problems with 300,000. Then, with BorrowMyDoggy needing caring for their dogs in holiday times. A keen more and more staff to handle the level of Facebook user, Rikke started thinking about demand and develop the website, Rikke opted for a social network of dog lovers. It would bring crowdfunding as a way to raise extra capital. With together those with insufficient free time to be such a large community of dog lovers, it was no a dog-owner and those dog-owners lacking surprise that £1.5 million was raised in 2015, even the time to look after their own dogs. But what though the business had not yet made a profit. exactly would a dog website look like and do? Not many years before, the idea of The solution was BorrowMyDoggy.com. BorrowMyDoggy would have been laughed at, but changes in lifestyle affect what services people feel they need. For time-poor people, Rikke’s idea has been hugely useful. Total: 20 marks 1 Outline why it may be important for BorrowMyDoggy to keep up with changes in technology. (2) 2 Explain the importance of ‘demand’ to new businesses. (3) 3 Identify one entrepreneurial characteristic shown by Rikke in this story. (1) 4 Outline one factor that might lead Rikke’s business to become obsolete in future. (2) BorrowMyDoggy connects dog owners and dog lovers 5 Evaluate whether Rikke’s idea will be a Rikke took her time developing the site but, by success. You should use the information 2014, it was fully open. To become a full member above as well as your knowledge of business. (12) 10 9781471899355.indb 10 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship 3 How new business ideas come about Creative thinking stems from asking questions. rubberised top that would give when cars ran over it; Three-year-olds can drive their parents crazy by the action of pushing down the rubber top wipes the constantly asking ‘why’: ‘why does granny smell?’, reflector clean – just like a cat’s eye blinking. ‘why are raspberries red?’, and so on. In fact, just such a question about raspberries made the producer of Slush Puppie drinks decide to make the raspberry flavour a blue colour. The red (strawberry) and blue (raspberry) made a more eye-catching display. The ability to ask ‘why’ is at the root of creativity, innovation and how business ideas come about. Disneyland will never be completed, as long as there is imagination left in the world. Walt Disney (1901–66) Why not? Cat’s eye reflectors made their inventor a fortune It is also vital to ask ‘why not?’. The three-year-old is trying to find out the way the world is. Creative thinkers Many ‘why not?’ questions are much less significant also ask ‘why shouldn’t the world be different?’ In 1933, than Percy Shaw’s. For example, why not have Percy Shaw became the inventor of one of the world’s a strawberry-flavour Calippo ice lolly? Such an most widely used ideas. Driving home in dense fog he obvious idea might be hugely significant if it proves a nearly drove off the road and crashed, but was saved commercial success. by the flashing eye of a cat sitting on a fence. Two years later he patented the cat’s eye, an invention that made Original ideas him a fortune. Brilliantly, he made a reflector with a Most of us have lots of creative thoughts. We look in Minor change Dramatic innovations an ice cream cabinet and wish there were a mint choc ice or a mango lolly. The problem is that we may not tell anybody about these thoughts, or – worse – we may try to tell someone but fi nd that nobody listens. It follows that creativity may only have meaning if Strawberry Dyson Hybrid car iPhone Cat’s eyes it is backed up by effective communication. Percy Calippo Ball (petrol & battery) Shaw had his idea and developed it himself. Most Figure 3.1 A new product will sit at some point of us have neither the money nor the ability to along a scale ranging from minor change to achieve this. dramatic innovation 11 9781471899355.indb 11 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship Well-run businesses encourage the sharing of original ideas. Ordering a tailor-made kitchen from German manufacturers used to involve a three- month wait before delivery. Now staff at a leading German kitchen manufacturer have found new ways to use their computer-aided design (CAD) system to cut delivery times to three weeks. For some businesses, original ideas are the basis of the operation. A good example is Codemasters Ltd, a private company in the UK that produces games software. It has grown from the bedrooms of two teenager brothers in 1984, to employing hundreds of people around the world, but especially in the UK. It is Europe’s largest privately owned software business. The hoverboard was declared illegal for road and It built its business on Brian Lara Cricket and LMA pavement use Manager, but today its key games are Dirt Rally and FIA Formula One World Championship. Without The creativity that emerges from the new ideas a business such as this would inevitably company comes from the many ideas fade away. of the people who are here. The man who has no imagination has John Rollwagen, chief executive no wings. Muhammad Ali, greatest ever boxer Adapting existing products and services New ideas and competitive The overwhelming majority of new product launches advantage are derived from an existing product success. This is Competitive advantage is a term given to any factors as true for James Bond films as it is for chocolate bars. that help a business to succeed when competing Adapting existing products or services is an attractive against direct rivals. For airline Ryanair that business proposition because: advantage comes from low-cost operations that allow ◆ It usually requires less research and development, it to charge low prices. For many other businesses, and other investment, to develop a new product original ideas are the key. Examples include: variation than a completely new product. It is ◆ Swegway hoverboards – the 2015 launch gained also likely that you have already developed the a lot of publicity and sales until the government production machinery and methods that can now announced that the hoverboards were illegal for be adapted to Product B. Overall, adapting is a use on public roads and pavements. This new idea much cheaper option, and that makes it possible deserved better. to enjoy high profit margins. ◆ The Tesla Model 3 – due to be launched in 2018, ◆ It is easy to underestimate how hard it is to find a this all-electric car promises to deliver a powerful, new product that people love (80 per cent of new thrusting engine and be as fun to drive as any products fail). So, if you have a success, it makes petrol car. If it lives up to its promises, the price of sense to milk it. Your chances of making money around £30,000 should allow it to become the first from a new Superman film are greater than from mass-market electric car. creating a brand new film. 12 9781471899355.indb 12 07/03/17 4:36 PM  3 How new business ideas come about ◆ Launching an adapted product can successfully protect your first/main product. If you have Drawing the right created Cadbury Dairy Milk, why leave yourself conclusions vulnerable to attack from rivals by leaving open For companies such as Heinz, with stable, big sellers the opportunity to do a bubbly version or one like ketchup and baked beans, new ideas are a luxury. with nuts and raisins. If they work, that’s wonderful, but if they don’t they’ll Here are two examples of successful adapted still go on selling more than £500 million in the UK. products: For other businesses, new ideas are essential. The ◆ Monster Energy Ultra, a zero calorie energy drink smartphone market is unforgiving, as shown by that tastes more like a soft drink, was launched the struggles of Nokia, Sony and Siemens. Several into the £500 million market for energy drinks. By companies have done well with one phone but then offering a no-calorie energy drink, brand owners disappeared from this huge market. The need for new Coca-Cola hope to bring more women into the ideas is constant. energy drinks sector. The ability to keep coming up with ideas tends to ◆ The 2015 launch of Giant Crumpets pushed depend on: Warburton’s crumpet sales up 13.3 per cent to ◆ Staff who really care and are engaged in the jobs £63.3 million, while rival Kingsmill’s sales of they do: Google, yes; Sports Direct, no. crumpets fell by 26.3 per cent. ◆ The amount of cash the company devotes to research and development, market research and Talking point investing in new technology. This may require Can you come up with a new chocolate bar that a business to limit its dividend payouts to can match the advertising slogan once used by shareholders to make sure there’s enough capital Cadbury’s Crunchie for ‘that Friday feeling’? for financing the future. ◆ The diversity of the recruitment approach: if all managers are ageing men, it may be hard to spot the new possibilities in dynamic, younger markets, such as mobile gaming. Revision essentials Adapting existing products: finding new products based on the original one, such as Wall’s White Chocolate Magnum. Competitive advantage: a feature of a business that helps it to succeed against rivals. Original ideas: ideas that have not been done before. 13 9781471899355.indb 13 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship End of chapter exercises 1 Outline two benefits that a business can gain Encouraging and using ideas ‘from the from asking the question ‘why’. floor’ can have dramatic results, as at 2 What might be a correct business response BMW’s Mini factory at Cowley, Oxford. The to the following questions: BMW group announced that suggestions (a) Why are organic foods so expensive? from staff at Cowley have saved the company £10.5 million in two years. Of the (b) Why does Aldi keep gaining market share? 14,333 suggestions staff put forward, three 3 Suggest two ways in which managers could quarters were put into action. They ranged encourage staff to share their own ideas from cutting unnecessary use of paper to about new products. more complex engineering solutions. 4 Read the following extract. What is the most likely explanation for the high number of 5 Discuss whether the staff should get a suggestions from the Cowley staff? Explain financial reward for the suggestions that are your reasoning. put into action. Practice questions In early 2016 Chinese technology brand SpeedX impossibly expensive due to high European received more than $2.3 million from an import taxes placed specifically on bikes from American crowdfunding site; 1,500 cyclists were China. Despite this costly learning experience, desperate to get their hands on a $1,499 Leopard he still believes the business will be a huge smart bike. The promotional video for the super- success. strong bike showed that it could take the weight Total: 13 marks of a Lamborghini, while offering real-time monitoring, coaching and feedback. 1 If the price is unchanged and sales of the Leopard smart bike hit 12,000 in the Chief executive Li Gang explained that the coming year, calculate the revenue that idea arose back in 2014, when he had piled will be generated. (2) on 50 pounds and his partner had developed 2 Outline one possible reason to explain diabetes. They took up cycling and, while riding, Li Gang’s success in launching the Li thought up ways to make the experience more Leopard. (2) interesting and more effective. He decided he needed feedback on calories used at different 3 Li Gang wants to build his business to speeds and in different gears, plus data on his become the world number 1 in smart heart rate and rate of dehydration. bikes. He sees two options: ◆ Option 1: Look for original ideas to After a lot of time spent with Chinese bike create different bikes. manufacturers, he knew all he needed about ◆ Option 2: Create new products adapted production quality and costs. from his Leopard bike. Unfortunately for Li, he failed to check on the different rates of import duty and VAT in Justify which one of these options he should different countries. Bikes sent to Europe proved choose. (9) 14 9781471899355.indb 14 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship 4 Risk and reward Risk is about chance. What is the chance that a tried advertising them in a popular computer particular outcome will occur? Large firms know weekly. A £70 advertisement brought in £7,000 that, over the years, only one in five new products worth of orders. In 1986, they formed a company, is a success. So, the chance of failure is four out of Codemasters Ltd. It went on to produce some of the five. Does that mean firms should never launch new longest-lasting games software brands, such as Colin products? No. They must either: McRae Rally and LMA Manager. In summer 2015, it ◆ make enough profit from existing products to fund held the number two spot in the UK games chart five new product launches for every one success with Dirt Rally. Today the business has sales of over ◆ make sure that the one success is big enough to £100 million per year, employs more than 500 people make up for the failures. and is worth around £250 million. Risking £70 on an advertisement has resulted in fabulous wealth and The biggest risk is not taking any risk. an amazing achievement. Mark Zuckerberg, founder of Facebook Table 4.1 What are the main risks? At the start In the early When growth days is rapid Identifying a Making sure ‘Overtrading’ – market gap big your initial sales growing enough to be customers faster than you profitable come back for can cope with more financially Raising (more Running out of Struggling to than) enough cash during the manage rapid capital off-season rises in staff, especially middle management Getting the Running out The right people of energy and entrepreneur working in the self-belief owner may right way when times are struggle to be a Mark Zuckerberg invented Facebook tough good manager Building a Coping with The boss and Risks can yield rewards base of initial customers competition when it arrives staff may become complacent, so In 1984, two teenagers, Richard and David Darling, the rise leads to the fall moved on from playing computer games to writing them. They produced the games for fun, but then 15 9781471899355.indb 15 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship Risk But most UK business are sole traders or partnerships, and therefore have unlimited liability (see Figure 4.1). Business failure This means that the company founder/boss is liable Half of UK business start-ups fail within five years. personally for any and all of the business debts: That means they have closed their doors. Some £100,000 here for an unpaid bill, £150,000 there to others survive but without making enough profit to an unhappy customer who has successfully sued. feel happy. If a teacher hands in his or her notice to Starting your own business can be a path to huge start their own business, not only are they giving up riches, but it can also be a path to a personal financial a steady salary and a high degree of security, they disaster. are also giving up a guaranteed pension in years to come. 0.45 Business failure may not only use up all the family’s savings, but may also put huge strains on the family Sole traders itself. Divorce can be a consequence of a business 1.6 Limited companies failure. This is why new businesses only tend to be 3.3 started by people with huge self-confidence and, Partnerships preferably, deep pockets. Financial loss If a limited company gets into financial trouble, the Figure 4.1 Business organisations in the UK owner is protected personally from business losses. (figures in millions) If the company has £200,000 of debts that it cannot repay, the problem stays with those owed the money. The company owner does not have to pay. When Lack of security companies fail, the people who suffer most are the Adults often have responsibilities (children, a suppliers and the workers. mortgage, credit card debts) that force them to look Table 4.2 The way it is: risky business Business start-up Business idea Risks Top10 Hotels: British Website and app giving users a Breaking into a competitive market such business started in 2011; it ranking of top ten hotels in more as hotel listings. The idea was good but raised more than £8 million than 100 cities; easier to use than not quite strong enough. They ran out of in start-up capital but closed sites such as TripAdvisor, which list cash before getting established. in December 2015. thousands of hotels. Park Bikeworks opened in A city-centre place for bicycle riders Gaining grants because of its Derby in 2013, backed by to store their bikes, take a shower, encouragement of environmentally £490,000 of government have a coffee and then get to work; friendly commuting. It didn’t reach its funding plus £170,000 from it also had a wide range of high-end monthly break-even point, making it the Derby Enterprise Growth bikes for hire or purchase. impossible to generate a secure, regular Fund. It closed in March 2015. income for the two founders. Barnsley-based nightclub G4 mainly provided management The owners of G4 stood to make financial owner G4 collapsed in services to other nightclub owners, losses personally if the business February 2016 after two but in a declining market it became continued, so they decided to close it years of falling sales. impossible to make a satisfactory profit. down beforehand. 16 9781471899355.indb 16 07/03/17 4:36 PM  4 Risk and reward for a secure, stable income. Working for the council Profit and wealth or for Marks and Spencer means a regular salary. Starting a small business can generate huge returns. Even entrepreneurs who have gone on to make Most working people struggle to save much from fortunes have had periods when they weren’t sure their salary. They may be comfortable but can of the next pay packet. Starting a business is full of never become rich. Starting a business creates factors that are outside your control, such as an ice the possibility of selling it once it is established. It cream parlour hit by a cold, wet summer. A regular could be sold completely, or part of it could be sold pay packet may be very difficult to achieve. The to outside shareholders by ‘floating’ it on the stock lack of financial security is a major risk factor when market. In 2005, Tim Warrillow and Charles Rolls set starting a business. out to launch new ‘mixer’ soft drinks into a super He who is not courageous enough to premium-priced sector above long-standing market take risks will accomplish nothing in life. leader Schweppes. Sales of Fever-Tree sodas went Muhammad Ali, boxer stunningly well, growing to more than £10 million by 2011 and more than £50 million by 2015. The founders were able to sell shares for more than £100 Reward million in 2016, while still holding a dominant stake Business success in the business. Wealth indeed. Excitement comes from taking risks (that is, the risks generate the rewards). It is the difference between Independence riding a bike on the flat and riding it down a steep Many people dislike being told what to do, especially hill; or watching Brazil play football compared with if they do not respect their boss. For such people, watching Austria. At every stage in starting and starting up on their own may be ideal. By becoming building a business, risks have to be taken and new independent, they can make their own decisions and, skills have to be learnt. This provides the buzz that if necessary, their own compromises. People with makes it exciting to be an entrepreneur. this motivation may struggle if they start to employ others who have different ideas or standards from their own, however. Risks in business (and in life) are unavoidable. Well- run firms think about the risks that they may face, and then estimate the possible impact. For example, the cost of a football team dropping out of the Premiership is said to be about £100 million. Apart from the top five sides, each of the other clubs will think about the chance of relegation and its cost. If there are three relegation places for 15 teams, there is a 20 per cent chance of relegation every year. So, a wise club chairman would have a plan for how the team would cope. Sadly, the experience of teams such as Nottingham Forest and Leeds United suggests that not every club does this. Excitement comes from taking risks 17 9781471899355.indb 17 07/03/17 4:36 PM  Topic 1.1 Enterprise and entrepreneurship Drawing the right conclusions For a small firm there is more to consider than just risk and reward. There are also the consequences. When book publisher Bloomsbury risked a £2,500 advance to JK Rowling, it was not going to break the bank, even if Harry Potter proved a flop. Needless to say, that risk brought Bloomsbury a reward measured in hundreds of millions. But if a small firm takes a big risk, failure may drag the business down. Clearly, it is vital to think not only about the chance of something going wrong, but also the consequences. Apple can risk £500 million on a technology that may or may not work as £500 million is only 0.5 per cent of the money it keeps in its bank account. For a small firm, risking £10,000 may mean risking the ‘With great risk comes great reward.’ whole future of the business. Thomas Jefferson, former US president Clever businesspeople therefore try to weigh up: ◆ the chances of success or failure Talking point ◆ the costs or benefits of success or failure If your parents spent the family’s entire savings on ◆ the implications for the business as a whole. starting a new pizza delivery business, how would Educated risks are the key to success. you feel about the balance of risk and reward? William Olsen, chief executive The Harry Potter series proved a great success for Bloomsbury after it risked a modest advance on author JK Rowling 18 9781471899355.indb 18 07/03/17 4:36 PM  4 Risk and reward Revision essentials Business failure: the collapse of a business, Lack of financial security: uncertainty for the probably leading to its closure. business owner about day-to-day family income and assets. Independence: the need by many business owners to make their own decisions and be their Risk and reward: the balance between the worst own boss. that can happen and the best that can happen. End of chapter exercises 1 Outline two significant risks that might be Skye and Ted Barton took over the family faced by a small sports shop in your local fish-and-chip shop when Skye’s parents high street over the coming year. retired. The business kept them going financially but seemed to be going nowhere. 2 Richard Branson started his first business at Skye looked into buying the shop next door school, launching Student magazine, before to create the space for a sit-down restaurant going on to found the Virgin group. Outline section. She was sure that would attract two rewards Richard Branson may have office workers at lunchtime. Her calculations received from his initiative. showed that it would cost £18,000 and could 3 Outline the balance between risk and generate an extra £9,000 profit a