Business book answers

revision answers

Analysis techniques:

● Standard level I.
1500 words
Big international business
Something they have achieved.
● STEEPLE analysis:
- Social ● SWOT analysis: ● CUEGIS analysis:
- Technology - strengths (internal factors) - change
- Ethical - weaknesses (internal - culture
- Economical factors) - ethics
- Political - opportunities (external - globalization
- Legal factors) - innovation
- Environmental - threats (external factors) - strategy

● AO analysis:
- AO1 → knowledge
- AO2 → application &
analysis
- AO3 → evaluation
- AO4 → create (justify,
investigate, opinions…)

1. BUSINESS ORG. & ENVR.

1.1 Introduction to business management:

Entrepreneur vs intrapreneur:
● Entrepreneurs: individual who organizes, plans and ● Intrapreneurs - the act of being an entrepreneur but as
manages a business taking financial risks. an employee within a business.
- owners/ operator of organization - employees of an organization
- takes substantial risks - takes medium to high risks
- visionary - innovative
- rewarded with profit - rewarded with pay and remuneration
- responsibility for workforce - failure is absorbed by the organisation
- failure incurs personal costs

4 factors of production:
CAPITAL - money/ investment - financial resource
ENTERPRISE - the idea (driving force) - human resource
LAND - where?/ physically - physical resource
LABOR - work/ who? - human resource
 What is a business?
- A business is an organization of one or more people that sell goods and services to a determined audience. -
They try to make as much benefit possible from the ideas they develop.
- Governments encourage this to provide jobs.
- It is the coming together of CELL to produce something of value.

Why do businesses exist?

To sell goods and services to an audience.
- Goods → tangible things that become yours.
- Services → intangible actions you don’t have ownership over.

❖ CAPITOL → anything worth something to a business (assets).

Why start a business?
- lost a job Problems faced by start-ups:
- independence - competition
- financial security - building a customer base
- market opportunity - lack of record keeping
- social connections - lack of working capital (-ve capital)
- risk-taking personality - poor management skills
- legacy/ leave a mark - changes in business environmen

Main business functions:

A small business entrepreneur may have to do all or outsource to specialist firms.
- Marketing (4p’s)
- Finance & accounts (money management)
- Human resources Management (managing the personnel)
- Operations management (converting raw materials into goods)
 Internal & external factors that affect a business:
OUTSIDE

Populati Governme Economi World Social

factor
s/
INTERNAL FACTORS:

BUSINESS ACTIVITY:
GOODS/
CELL Org. HR. SERVICE
(input S
resources (output/
) Finance Marketing waste)

Legislatio Pressur Consumer Environmen

Competiti

4.09.20
❖ Customers are the people or organizations that buy a product, while consumers are the one who actually use
it. They may be the same entity or not.
Eg: a parent (customer) buys a birthday present for their children (consumer).

Types of products:
● Consumer goods & services → products sold to the general public.
- Single use (a can)
- Durable use (a phone)
● Capital goods & services → products bought by businesses in order to produce other goods.
- Single use (raw materials to make a product)
- Durable use (machinery)

Industrial sectors:
● Primary Sector → org. Operating here are involved w/ the extraction, harvesting & conversion of natural resources.
As economies develop the percentage of people that work here decreases because there’s little value added in the
production.
● Secondary sector → org. Operating here are involved with the manufacturing or construction of products.
Developing countries have a dominant secondary sector. BRICS countries.
● Tertiary/ Service sector → they specialise in providing services to the general population. MEDCs tend to rely
heavily on this sector.
 ● Quaternary sector → subcategory of the tertiary sector. Businesses here are involved in intellectual, knowledge based
activities. This is mainly in MEDCs because it requires a highly educated workforce. Businesses here invest for
growth and evolution (scientific research, ideas…)

❖ The chain of production:

Production → Manufacturing → Services → Consumers
The link between each sector to produce good and services.

❖ Insolvence → bankrupt
❖ To find a gap in the market ≠ there’s a market in the gap.
❖ Venture capitalists → investors that look for ideas and take most of the profit.
❖ Office angels → investors that help our small businesses and take a small % of the profit.

What is a business plan:

It’s a report detailing how a business sets out to achieve its goals and objectives. It also helps to reassure
financial lenders, investors, banks and venture capitalists that they have researched their business idea.
- Summary of business plan & yourself
- Financial forecast
- Your operations
- Employees/ team
- Marketing and sales information
- Objectives

Steps & factors to consider to start a business:

Steps:
1. Write a business plan/ executive Factors:
summary 1. Business idea → feasible idea needed;
2. Obtain a start-up cost. (own savings, finding a gap in the market.
loans…) 2. Finance → for manufacturing and
3. Obtain a business registration. marketing.
(licensing requirements…) 3. Human resources → personnel for the
4. Open a business bank account. chain of production.
(facilitate financial operations). 4. Enterprise → skills required to plan ahead
5. Marketing. (the business has to be & organize to be successful.
known). 5. Fixed assets → premises and capital
equipment.
6. Suppliers → to provide raw materials,
finished stock of products and support
services.
7. Customers → needed so the business
doesn’t fail.
8. Marketing → to convince lenders and
buyers that their product is a winner.
9. Legal issues.
 Business sectors:
● Private → are not run by the government.
- Sole traders → (autónomos) someone who owns a personal business.
- Partnerships → profit-seeking business owned by two or more people.
- Corporations → businesses owned by their shareholders.
LTC: (private limited company) cannot raise share capital from the general public. Shares
can only be sold to private members and friends and cannot be traded without the
agreement of the BOD (board of directors), so that directors can have control over the
company.
PLC: (public limited company) is able to sell its shares to the general public via the stock
exchange.
● Public → run by the government.
- army/ police
- Hospitals
- Schools

❖ Stakeholders → anyone with an interest in the business. (interests, ownsers, employees…).

❖ Shareholders → someone who owns a portion of the business. (can be a stakeholder, owner). A shareholder gets dividends
and can make more money by offloading their shares.
❖ A company is owned by shareholders while a business also covers ownerships like sole traders,
partnerships…
❖ Social enterprise → organisations that seek to maximise profits while also maximizing benefits to society and the
environment. Their profits are used to fund social programs.
- Non-profit (eg. charities)
- For-profit (eg. cooperatives): are revenue-generating businesses with social objectives at the core of
their operations

❖ Added Value → the process of covering all the costs of production & making profit. A business that doesn’t have added
value won’t survive long-term.
Added value = value of output - value of input.
❖ Opportunity cost → the next best option foregone (given-up). Decision makers will want to minimize the opportunity
cost when making decisions. Eg. upgrading equipment or funding a marketing campaign.
❖ Triple bottom line in business:
- Profit
- Environment
- People

1.2 Types of organisations:

❖ Nationalisation → when a private company becomes public.

❖ Privatisation → when a public company becomes private.
❖ Furlough (erte): a temporary leave of employees due to special needs of a company. The government
gives a small assistance when the company isn’t making money and it’s not their fault.
❖ Dividends: profit you get back from investing in the business at the end of the year. You might not get
paid always so that the business can reinvest the money.

How are businesses classified?

1) Activity: by sectors (primary, secondary, tertiary, quaternary).
2) Size:
- Turnover → total value of sales over a given time (revenue, non-profit).
- Employees → number of workers.
- Capital employed → amount of money invested within the business (funds, starting cost…).
- Profit → profit levels (added value).
- Stock market value → value of the shares of whose shares are traded.
3) Legal structure:

- Unincorporated business → has unlimited liabilities the owners or partners carry all the
responsibility of the company and its debts.
Eg: sole traders and partnerships.
- Incorporated business → has limited liabilities the owners or partners separate
themselves from the business (create its own bank account). If the business is sued they
claimants don’t go after the owners.
Eg: LTD and PLC.

Public sector Vs Private sector

Government on behalf of Who owns it? Shareholders

the people.

Ministers Who makes long term BOD (board of directors)

decisions?

Managers Who makes day to day Managing directors

decisions?

Government Who gets the profit? Shareholders (dividends)

 Non-profit organisations:
Private companies have aims other than profit and look to do a social good. The profit they make is
reinvested into the company.
● Micro -finance providers: they lend small loans to those who don’t have money (eg.
families in Africa).
● NGO’s: non-governmental organisations that have no participation or representation of
any government. (eg. UNICEF).
● Charities: organisations set up to provide help and raise money for those in need. (Eg.
Caritas).
● Pressure group: organisations created by people with the same interest who lobby
businesses and government to change policies. (Eg. green-peace)
● Cooperative: a business owned by individual members to reduce costs and they share
the profits & benefits. For-profit social enterprises owned and run by their members.
● Public-private partnerships (PPPs): involvement of the private sector (for
management, financial investment) in the public sector to benefit the public.
● Public corporation: business enterprise owned and controlled by the state.

❖ Debt vs equity:
- With debt you pay back with interest and keep all the control.
- With equity you’re selling ownership of the business (loses control and power) & you don’t have to
pay back the profit.

The Stock exchange market:

is the place where people trade second hand shares. Once you float your shares you can’t control the
market. Secondary market. You buy shares through brokers (agents). Supply and demand set the prices
of the shares.
- Companies issue stock to grow economies of scale and they make permanent capital (don’t
have to pay back loans).
- IPO (initial public offering) is the first time a company issues shares (floatation) → becomes a PLC.
Companies only make money with IPOs.
- Bull market is when the economy is doing well.
- Bear market is when the economy is bad.

❖ A stock is a share in the ownership of a company. Stock represents a claim of the company’s assets,
earnings and sometimes voting rights.

Businesses objectives:
1. Survival:
- early stages of business
- when trading is difficult
- when there’s a threat or takeover
2. Growth:
- economies of scale
3. Profit:
- Profit maximization
- Satisficing
Profit vs non-profit marketing:
1. Profit Marketing:
- To let potential customers in your target market know about your product or service and
how it can benefit them (view to selling).
- Corporation keeps the money, customers enjoy.

2. Non-profit Marketing:
- They support a cause.
- They want to build awareness and gain financial support for its cause.
- The surplus (money left over, not profit) is reinvested into the business.

Similarities Differences

Both will use the marketing mix (Price, Major difference is the fulfillment of the customer.
Product, Place, Promotion)

Public relations professionals build For profit → the customer fulfills his need by purchase of the goods or
visibility of the organization. (Non-profit services.
relies on donations) Non-profit customer → recognizes the need of others and their ability to
help through donations/ service.

Many nonprofits conduct retail sales of promotional items to raise

funds.

1.3 Organizational objectives:

LO. explain the importance of setting objectives in managing an organization and the purpose of
mission and vision statements.

The hierarchy of objectives:

1. Aim
- what wants to be achieved in the long-term that gets broken down to be achieved.
- mission statement → a statement of the business core aims, phrase in a way to motivate
employees, satisfy investors, society and the environment. (eg. To work my way into building
passions and then leave a legacy behind.)
2. Mission
- vision statement → a statement of what the organisation would like to fo.
3. Objective
- the breaking down of the big aim.
- (SMART: Specific.Measured.Attainable.Realistic.Timed.)
4. Strategy
- the breaking down the objective
5. Tactic
 - the breaking down of the strategies.
- day to day.

CSR (Corporate Social Responsibility):

The consideration of ethical and environmental issues relating to business activity.
Drawbacks:
- Short-run costs could increase
- Shareholders may be reluctant to accept lower short-run profits
- Loss of cost and price competitiveness
Benefits:
- Better brand recognition/ positive reputation.
- Customer loyalty
- Better financial performance.
- Improved quality.
- Attracts investors
- Employee motivation & good relations.

CUEGIS: SKARSI: how the 20 mark CUEGIS is broken down into

- Change: reflecting the criterias to assess.
- Culture: - Knowledge
- Ethics: - Application
- Globalisation: - Reasoned Argument
- Innovation: - Structure
- Strategy: - Individual & Societies (Stakeholders → anyone
involved).

❖ Igor Ansoff was a russian american who was known as the father of business management.

Anasoff’s Matrix:

Existing Products New Products

Existing Markets MARKET PENETRATION PRODUCT DEVELOPMENT

- Involves selling more of - New products aimed at
existing products. existing customers.
- Least risk. - Moderate risk.

New Markets MARKET DEVELOPMENT DIVERSIFICATION

- Finding new customers - Selling new products to new
for existing products. customers. (Market research)
- Moderate risk (careful - High risk.
market research). - Don’t rely on one market.
1.4 Stakeholders:

Stakeholders are any person or organisation that has a direct interest or is affected by the
performance of the business.
● External stakeholders:
- Suppliers
- Communities
- Government
- Creditors
- Competitors
- Customers
● Internal stakeholders:
- Employees
- Managers
- Owners
● Stakeholder conflicts:
- Business decisions can have -ve and +ve effects on stakeholders.
- It's rare for all stakeholders to be either +ve or -ve affected by one business activity.
- It's possible for one stakeholder group to experience both -ve and +ve effects from the
same business decision.

Stakeholder mapping helps managers prioritise their decisions & actions.

Level of interest

Level of Low High

power
Low A (minimum effort) B (keep informed)

High C (keep satisfied) D (maximum effort)

❖ Shared value is a concept that new businesses should only start to solve the world's problems.
It focuses on identifying and expanding the connections between societal and economic
progress. Has 3 elements:
- Beyond CSR
- Corporate citizenship
- Sustainability
- They make profit

1.5 External Environment:

❖ This assesses the importance of external influences on business performance and decision-
making. To survive a business must respond to external factors that are beyond their
control.
 - Constraints limit the nature of decisions that a business can make. Eg. legal
requirements imposed by governments.
- Opportunities can arouse from external influences. Eg: introducing new technology in
advance to rival firms.

PEST or STEEPLE analysis:

Is a framework for assessing the key features of the external environment facing a business. Is
a tool that assesses the opportunities and threats of the external environment on business
activity.
- Social
- Technological
- Ethical
- Economical
- Political
- Legal
- Environmental

❖ Business cycle: the measure of how well the economy of different countries are doing. Has
booms and busts.
Boo
Prosper Long-term

Billio
Upgrad
Recessio

Bu

Time
❖ How to measure a recession: the decline in the GDP for two quarters or more in a row.
❖ Inflation: sustained increase in the general level of prices for goods and services. Measured as
an annual percentage increase. As inflation rises, every euro you own buys a smaller percentage
of a good or service.
Measured:
- Wholesale Price Index (WPI): idex that is used to measure the change in the average
price level of goods traded in the wholesale market.
- Consumer Price Index (CPI): a measure of the cost of a fixed ‘market basket’ of
consumer goods and services.

❖ Trade deficit: an economic measure of a negative balance of trade in which a country’s imports
exceeds its exports. It represents an outflow of domestic currency to foreign markets. Occurs
when a country imports more than it exports.
1.6 Growth and evolution:

❖ Scale of operation: The maximum output that can be achieved with the available inputs
(resources) - this scale can only be increased in the long term by employing more of all inputs.

Economies of Scale:
Are the costs advantages that a business obtains due to expansion. It’s the reductions in a firm's unit
(average) costs of production that result in an increase in the scale of operations. The more you produce
the more you can spread the costs and the average cost per unit is reduced.

● Internal/ organic: when a business expands its own operations by relying on developing its own
internal resources and capabilities.
- Buying Economies:
Large firms that buy raw materials in bulk and place large orders for capital
equipment usually receive discounts. They’ve paid less for each item purchased
and may receive a better treatment as the suppliers want to keep large
customers.
- Financial Economies:
Small businesses are perceived as being riskier than larger businesses that have
developed a good track record. Therefore, larger firms find it easier to find
potential lenders and to raise money at lower interest rates.
- Technical Economies:
Businesses with large-scale production can use more advanced machinery. This
may include using mass production techniques, which is more efficient. A larger
firm can also afford to invest more in research and development.
- Managerial Economies:
As a firm grows they can hire specialist managers who are likely to be more
efficient as they possess a high level of expertise, experience and qualifications
compared to one person in a smaller firm trying to perform all of these roles.
- Risk-bearing Economies:
Larger firms produce a range of products. This enables them to spread the risks
of trading. If the profitability of one of the products it produces falls, it can shift its
resources to the production of more profitable products.
- Selling Economies:
Marketing costs are fixed costs and as a business gets larger, it is able to spread
the cost of marketing over a wider range of products and sales – cutting the
average marketing cost per unit.

● External/ organic: Are lower long run average costs resulting from an industry growing in size.
- Good reputation:
Can gain reputation for high quality production and popularity.
- Technological progress:
Increases the productivity within the business.
- Improved infrastructures:
 Ensure prompt deliveries, improves efficiency and communication between
workers, customers and suppliers. The growth of an industry may encourage
government and private sector firms to provide better infrastructures.
- Skilled labour workforce:
A firm can recruit workers who have been trained by other firms in the industry.

Diseconomies of scale:
The disadvantages of being too large. A firm that increases its scale of operation to a point where it
encounters rising long run costs experiences internal diseconomies of scale. You want to enjoy
economies of scale until you reach your optimum point which will start to increase costs.

● Internal: Are the higher long run average cost arising from a firm growing too large.
- Growing beyond a certain output can cause a firm's average costs to rise.
- Controlling the firm:
Hard to supervise everything that is happening in the business. Management
becomes more complex and meetings are needed quite often. Increase in
administrative costs and the firm can make the firm slower with changes.
- Communication problems:
Difficult to ensure that everyone is aware about their duties and opportunities.
May not get a chance to exchange their views and innovate ideas.
- Poor industrial relations:
Higher risks for larger firms as there will be more conflicts and diverse opinions.
Lack of motivation can cause strikes.

● External: Are the higher long run average costs resulting from an industry growing too large
- Too much industry growth:
Larger firms → transportation increase → congestion → increased journey time → high
transport cost → reduced worker productivity.
Growth of industry may increase competition for resources, pushing up the price
of key sites, capital equipment and labour.

❖ 3 Reasons for remaining small:

- Keep control
- Adapt quickly
- Keep exclusivity.

Integration:
When one firm combines with another business. Can happen by a merger (friendly deal where
two businesses join together) or by a takeover (forced/ sometimes hostile deal where one firm
buys the shares of another).

● Vertical Integration: occurs when a firm expands by combining with an existing business in the
same industry but at a different stage of the production process.
- Forward VI →
firm buys into another in a later stage of production; closer to the end user. (eg. farmers
buy the local milk processing plant).
 - Backward VI →
a firm buys into another firm in an earlier stage of production; closer to the supply chain/
raw materials. (eg. KFC buys the country’s biggest poultry processing plant).
1. Advantages:
- Controls the production process (quality, delivery of materials)
- Increase entry barriers to potential competitors.
- Increase control of the market.
- Able to deal with any periods of shortage.
2. Disadvantages:
- Increase in costs (may need more staff)
- Inexperience in the field could be costly.
- Possible diseconomies of scale could arise.
- Decrease ability to increase product variety.

● Horizontal Integration: occurs when firms in the same industry and at the same stage of
production process combine to form a larger business.
1. Advantages:
- Reduces competition and increases market share.
- Greater control on prices to make more profit.
- Gain new ideas.
- Scale of operations greater → may experience economies of scale.
- They could remove some workers to increase profit.
2. Disadvantages:
- Business may have different objectives.
- Costs a lot of money to merge/ takeover.
- Communication problems.
- Customers may have to pay larger prices because of the lack of competition.
- Customers have less choice/ range of products and services.

❖ Conglomerate: a combination of multiple business entities operating in entirely different

industries under one corporate group, usually involving a parent company and many
subsidiaries. Conglomerates are often large and multinational.
❖ Acquisitions → purchase (eg. merger or takeover).

Diversification:
Firms can also expand by diversification (takeover/ merging in an unrelated industry). When a
firm increases the range of businesses it’s involved in, it may develop into industrial combine
(conglomerate).

1. Advantages:
- To spread their risks (if sales in an industry are depressed another could provide better
sales).
- To obtain other revenue sources (not dependent in one market)
- To increase the range of products they make or sell.
- To develop into a conglomerate.
- To take advantage of existing expertise, knowledge and resources in a company.
 2. Disadvantages:
- May result in the slowing growth of its core business.
- Adding management costs.
- Losses may occur during the market consolidation process.
- Complex dealings with the legal requirements of different countries.

Inorganic growth:
Limited strategies.

● Strategic alliance: agreements between firms in which each agrees to commit resources to
achieve an agreed set of objectives. Does not involve buying into each other's companies. (eg.
rent a car recommends Hilton hotel and vice versa).

● Joint venture: two or more businesses agree to work closely together on a particular project and
create a separate business division to do so. (eg. Adidas and Kanye West collaborated to do
yeezys).
Advantages:
- Business may seek a partner in another country with local knowledge in order to enter a
new market successfully.
- Synergistic effect.
- Complexities airing from social and cultural differences persuade many businesses to do
this in order to gain inside information on how to operate in a country.
- Avoids costly mistakes
- Access to supply chain through partner
- Understanding of cultural differences
- To comply with local laws and regulations.
- Some countries block foreign business so joint ventures are the only option.
Disadvantages:
- Having to share profits
- Unreliable partners
- Clash of cultures between companies or countries
- Having to establish a working relationship from a distance
- There’s an imbalance in levels of expertise, investment or assets brought into the venture
by the different partners.
- Different cultures and management styles result in poor integration and cooperation.

Franchising:
Is where a large company allows a smaller business to use their name. It’s a method of external
growth. Martha Matilda Harper (a maid) invented franchising with her hair salon, by giving other
people the chance of owning a business.
Eg: McDonalds, Subway, Perfect Pizza.

● Franchisor: allows the use of their business name for an agreed length of time. They must
provide the money to start their business.
● Franchisee: provides material, training and advice. They must make regular payments to the
franchisor. They must pay a royal payment (commission) based on the sales revenue.
 Advantages:
- Good chance of success
- It’s easier to borrow money because of proven success.
- Experience to solve problems which have been overcome already.
- Support is available from the franchisor.
- Advertising is organised and paid for by the franchisor
- Franchisees are usually small - so they can pay attention to detail.

Disadvantages:
- Franchise can be removed.
- The franchisee cannot make all of the decisions.
- Cannot sell the franchise without permission.
- The franchisee has to make royalty payments to the franchisor.
- Supplies have to be purchased from the franchisor - which may be expensive.

❖ MNC’s (Multinational company): a company that has the 4 factors of production (CELL) spread
around the world.
❖ FDI (Foreign direct investment): what the host country seek
❖ WTO (World trade organization): police of trading between nations
❖ Remittance: send the money they earn from a foreign country to their home country.

Globalization:
Describes an ongoing process by which regional economies, societies and cultures have
become integrated through a globe-spanning network of communication and trade. The
integration of the world’s economies.
What has driven this:
- Improvement in communications and technology
- Transport is much faster and cheaper
- Opening up trading channels.
- Deregulation of economies (rules and regulations governing business removed)
- Removal of capital exchange control; allowing FDI to flow(eg. investment in other countries made
easily)
- Free trade
- Consumer tastes have changed (more willing to try foreign products)
- Emerging markets in developing countries
Effects of globalisation:
- Increased competition
- Foreign competitors
- Deregulation
- New opportunities

Advantages: - Travel and shipping is quicker

- Increased worldwide economic output - 60million people no longer live in poverty
- Culture mixture - Increase standard of living
- Medical & technological advancements - More free trade
- Cheaper products everywhere - Fragmentation of families (move away to
- Increase natalidad y esperanza de vida earn money)
- Driver containerism - Fewer languages spoken and less
cultural diversity.
Disadvantages: - May be the beginning of the end of
- Not good for the environment → climate humanity (will it cause extinction)
change… - Loss of domestic industry

MNC’s (Multinational company):

a company that has the 4 factors of production (CELL) spread around the world. Has led to
globalisation.

Disadvantages for the host:

- Cause disasters
Eg: Bhopal disaster 1985; Cherobyl.
- McDonaldization/ Cocalization is the term given to the impact of fast food
outlets in countries where obesity was previously almost unheard of. This has an
effect on health costs and also on cultural values.
- Losing cultural identity
- No long term loyalty to the country (some multinational companies will leave if
there are negative changes in the external environment of host countries).
- Low wage employment (manual employment eg: sweatshops)
- Might destroy local businesses

Advantages for the host:

- They create jobs
- Important driver for globalisation
- Bring FDI (foreign direct investment) eg. infrastructure…