EDEXCEL

EDEXCEL GCSE
GCSE (9–1)
(9–1)
EDEXCEL
EDEXCEL GCSE
GCSE(9–1)
(9–1)

BUSINESS
BUSINESS
BUSINESS
Ian
IanMarcousé
Marcousé
Ian
IanMarcousé
Marcousé

ANSWER
ANSWER
ANSWER GUIDE
GUIDE
ANSWER GUIDE
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ISBN: 9781510405288
© Ian Marcousé 2017
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Contents
Introduction

Theme 1: Investigating small business

Topic 1.1 Enterprise and entrepreneurship 5
1 The dynamic nature of business 5
2 Why new business ideas come about 8
3 How new business ideas come about 11
4 Risk and reward 13
5 The role of business enterprise 16
6 Adding value 19
7 The role of entrepreneurship 22
Exam-style questions on Topic 1.1 25

Topic 1.2 Spotting a business opportunity 26

8 Customer needs 26
9 Market research 28
10 Market segmentation 31
11 Market mapping 33
12 The competitive environment 35
Exam-style questions on Topic 1.2 38

Topic 1.3 Putting a business idea into practice 39

13 Business aims and objectives 39
14 Business revenue, costs and profit 42
15 Break-even 45
16 The importance of cash 48
17 Cash flow forecasts 51
18 Sources of small business finance 53
Exam-style questions on Topic 1.3 56

Topic 1.4 Making the business effective 57

19 Ownership and liability 57
20 Franchising 60
21 Business location 62
22 Marketing mix 65
23 Business plans 68
Exam-style questions on Topic 1.4 70

Topic 1.5 Understanding the external influences on business 71

24 Stakeholders 71
25 Technology and business 74
26 Legislation and business 77
27 Introduction to the economy 80

3
 Contents

28 The economy and business 83

29 External influences on business 86
Exam-style questions on Topic 1.5 89

Theme 2: Building a business

Topic 2.1 Growing the business 90
30 Methods of growth 90
31 Finance for growth 93
32 Changes in aims and objectives 96
33 Business and globalisation 99
34 Ethics and business 102
35 Environment and business 105
Exam-style question on Topic 2.1 108

Topic 2.2 Making marketing decisions 109

36 Product 109
37 Price 111
38 Promotion 114
39 Place 117
40 Marketing mix and business decisions 120
Exam-style questions on Topic 2.2 123

Topic 2.3 Making operational decisions 124

41 Business operations 124
42 Technology, productivity and production 127
43 Managing stock 130
44 Procurement: working with suppliers 133
45 Managing quality 135
46 The sales process 138
Exam-style questions on Topic 2.3 141

Topic 2.4 Making financial decisions 142

47 Business calculations 142
48 Understanding business performance 145
Exam-style questions on Topic 2.4 149

Topic 2.5 Making human resource decisions 150

49 Organisational structures 150
50 The importance of effective communication 153
51 Different ways of working 156
52 Effective recruitment 159
53 Effective training and development 162
54 Motivation 165
Exam-style questions on Topic 2.5 168

4
1 The dynamic nature of
business
Teaching advice
No doubt we all have our own icebreaker introductory exercises. My favourite has long been
the Penbrella (if you want it, email marcouse@btopenworld.com). Certainly there’s no reason to
start a GCSE Business course by reading through this chapter. This is more likely to form a first
homework, with students asked to read the text and answer some of the questions.
A key to the Introduction is to get students thinking about the ‘why’ of business start-up but
bearing in mind the uncertainties. And students might start thinking about the fact that not all
businesses pursue profit. The practice question on Cuckoo Foods will help here.

End of chapter exercises, page 5

1 Outline two dynamic forces currently putting pressure on companies in the market for:
(a) potato crisps
– Social pressure for ‘healthier’ eating, which is assumed to exclude crisps.
– New technology has allowed the development of alternatives such as flavoured
popcorns.
(b) takeaway pizza
– New technology such as apps has made it even more convenient to order pizza, which
has expanded the market.
– More exotic flavours may reflect more people going abroad for their holidays.
2 Look at Figure 1.1 on page 2 and calculate the percentage increase in active users between
the second quarter of 2015 and the second quarter of 2016.
➜ Percentage increase = increase/original × 100
➜ Increase = 150 − 89 = 61
➜ Answer = 61/89 × 100 = +68.5%
3 Why might a young entrepreneur prefer to start a franchise, such as Subway, than a wholly
independent business?
➜ The well-known ‘Subway’ brand makes it likely that sales will be reasonably high from
Day 1. An independent business has to prove itself.
➜ The entrepreneur may want the hand-holding implied by the franchise model.
4 Without looking back at the text, briefly write down what you understand by the ‘why’, ‘who’
and ‘how’ of starting a business.
➜ Why refers to the entrepreneur’s motive for taking a chance on starting up on their own.
➜ Who is about the type of person who becomes an entrepreneur.
➜ How is about their approach to the start-up, e.g. going for a halfway house as a
franchisee, or for a fully independent, perhaps innovative, start-up.

5
 Topic 1.1 Enterprise and entrepreneurship

5 Why might the figures ‘explain the huge amount of interest in business start-up among
women and non-white people’?
➜ If people see a ceiling on their prospects in large companies, they will be more inclined
to want to pursue a career where they are in control.
6 Outline two possible reasons why a bank might charge businesswomen a higher rate of
interest than men.
➜ The (perhaps male) decision makers at the bank may assume that businesswomen have a
higher risk profile than men (for which there is no research evidence).
➜ Another possibility might be that women propose start-ups in riskier types of business
than men, e.g. women wanting to start up restaurants while men want to start
something safer, e.g. a motor repair business.

Practice questions, page 5

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)
➜ Resilience means the ability to bounce back when things go wrong. Every business
start-up faces some glitches, so bounce-back ability is crucial.
2 State two more entrepreneurial qualities Anna and Lucy will need in the future. (2)
➜ Determination.
➜ Being decisive when faced with tough decisions.
3 Outline one factor that might be helpful about having a clear target market. (2)
➜ ‘Young, busy, foodie’ people are probably willing to pay relatively high prices as long
as the products are of a high enough quality and are highly convenient to buy (delivered
to the office, daily?).
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.
Option 2: Focus on becoming the number 1 in the market for muesli.
Justify which one of these options they should choose. (9)
➜ Case for Option 1:
– Anna and Lucy may feel that they are starting to reach the limits of the sales potential
of posh muesli yoghurt and therefore growth (within the UK) can be achieved only by
developing a new range of products. As long as they are the sorts of products bought
by muesli-yoghurt eaters, they won’t need to spend extra reaching new customers.
– There is also a sense in which small businesses are better off selling relatively small
quantities of a wide range of products (than a lot of a few products). The reason
is competition. If Anna and Lucy get big sales of, say, banana muesli yoghurt, big
companies such as Müller and Danone will simply copy – making it hard for Cuckoo
Foods to survive.
– The only downside of Option 1 is that it implicitly condemns Cuckoo to stay as a
relatively small, not hugely profitable business; successful, but not hugely so. Anna and
Lucy should become well-off, but not in the £100-million-yacht league.

6
 1 The dynamic nature of business

➜ Case for Option 2:

– To Cuckoo’s customers, the business is a passion of two yoghurt-eating entrepreneurs:
Anna and Lucy. The greater the evidence of yoghurt-loving behaviour, the better the
business story (in effect: ‘I’m happy to pay Cuckoo for my yoghurt because I believe in
what they’re doing’.) So coming up with new flavours (seasonal ones, perhaps) is good;
branching out into producing Cuckoo carrot cake may be a bit of a disappointment.
– Furthermore, Anna and Lucy show real understanding of their niche within the huge
market for yoghurt, so they can build on their strengths. Possibly they could supply
Tesco with own-label muesli yoghurt – boosting sales revenue but without their
customers realising that this is from Cuckoo Foods.
– The only downside is that the business will be 100% focused on muesli yoghurt, and
who can say whether that will continue to be what customers want? Health-related
foods seem to be as subject to fashion as ‘in’ and ‘out’ colours for clothing. So it might
be a concern to be overly dependent on this one type of food. Who wants a simple
change in foodie tastes to wipe one’s company out of business?

7
 2 Why new business ideas
come about
Teaching advice
This section could be a bit dry. It’s especially important to liven it up with some up-to-date
material. Obsolescence is always easy to find among smartphones and games consoles, so
make sure the material is up to date. Google ‘Apple investor relations’ and click onto ‘SEC filings’
and you’ll soon get to Apple’s latest quarterly accounts. About a third of the way into the SEC
filing is the company’s latest set of sales by units and by dollars, broken down by product and by
global region. That’s how to find the latest iPhone or iPad sales.
Another useful source is The Grocer magazine, which will tell you about forthcoming grocery or
confectionery product launches, allowing you to ask students why they think the new product
ideas came about.

End of chapter exercises, page 10

1 What changes might come about over the next three years in the markets for:
(a) chocolate
– Greater pressure for low-fat chocolate.
– Definitely more no-melt chocolate for hotter developing countries, e.g. India.
(b) mobile phones
– Answers clearly depend on where the market has got to by then. At the time of writing
the iPhone7 is soon to launch, probably with the option for wireless charging and
without the end of the headphone jack.
– The main longer-term issue is perhaps fiercer price competition in the centre of the
smartphone market.
2 Outline two factors that might cause sales of the Sony PS4 to decline.
➜ A brilliant new console from a competitor. Nintendo, perhaps?
➜ Steady loss of interest if software producers fail to come up with exciting new games for
the PS4.
3 Outline two factors that might cause motorbikes to become obsolete.
➜ Safety legislation might make bikes too boring to ride or too awkward, with enforced
heavy protective clothing.
➜ Changing social habits and attitudes might make the higher risks of motorbikes
unacceptable.
4 Look at the quote by Marshall McLuhan on page 8. What do you think it means?
➜ The reason products become out of date is that others have arrived that make them look
that way. So obsolescence is the start of something as well as the end.

8
 2 Why new business ideas come about

5 Discuss the factors that may have led to the Wii U becoming obsolete by 2016.
➜ With disappointing sales, perhaps Nintendo did not spend to keep the Wii U up to date,
allowing Sony’s PS4 to seem ever more impressive.
➜ Or perhaps there was an underlying problem with the design that made it look ever older
in relation to Sony.
➜ Finally, with games consoles there is a tipping point where disappointing hardware sales
can mean that new software dries up, which would make the Wii U seem obsolete.
6 What factors may prove the most important in ensuring that the new Nintendo Switch
console will be a success?
➜ Deep discussions with former owners of the Wii and the Nintendo handheld console,
plus others with current users of the PS4 and Microsoft One.
➜ To launch the hardware backed by plenty of new software, perhaps based on Super
Mario or Pokemon.
➜ Careful pricing – perhaps pricing it sharply below the PS4 or other competitor consoles.

Practice questions, page 10

Total: 20 marks
1 Outline why it may be important for BorrowMyDoggy to keep up with changes in
technology. (2)
➜ The idea is rooted in the technology needed for close, real-time communication
between dog owners and people who are dog lovers but not owners. If technology
changes, the
business must keep up.
2 Explain the importance of ‘demand’ to new businesses. (3)
➜ ‘Demand’ quantifies the level of interest shown by customers in buying the product.
➜ It is the factor that determines the amount of revenue the business will generate.
➜ It therefore affects the profit the business can make.
3 Identify one entrepreneurial characteristic shown by Rikke in this story. (1)
➜ One from:
– Saw the opportunity (can analyse/think through a situation).
– Took the risk of making something happen.
4 Outline one factor that might lead Rikke’s business to become obsolete in future. (2)
➜ Failing to keep up with technology. At the time of writing a BorrowMyDoggy app
would be the most important thing to get right. In three years’ time apps may be
history – with something new taking their place.
5 Evaluate whether Rikke’s idea will be a success. You should use the information given as
well as your knowledge of business. (12)
➜ It is reasonable to say it is a success: 300,000 × £45 = £13.5 million revenue (presumably
per year). Now all she needs to do is make sure that her costs are comfortably below
that level. Surely there is plenty of scope for making £1 million a year in profit. Even if
the site can maintain those member numbers for only a year or two, she should become
very wealthy.

9
 Topic 1.1 Enterprise and entrepreneurship

➜ Yet the text says it is not yet profitable – and therefore having to raise extra finance
through crowdfunding. No business is a success just because customers come – the
purpose is profit, not revenue. Perhaps the business idea is overly dependent on labour
input and therefore cannot make a profit, even with 300,000 members. If that is the case,
it may not be possible to achieve break-even, meaning the crowdfund investors are in for
some bad news.
➜ On balance it seems probable that Rikke will be able to do very well out of this business,
and all the while enjoying her contributions to the dog-loving community.

10
3 How new business ideas
come about
Teaching advice
This section should work well in the classroom. It’s what students choose Business for.
Encourage them to have their own ideas. As an ice cream fan, I feel that ice cream needs a lot of
innovation in the UK. A group discussion would be worthwhile, getting students to discuss their
likes and dislikes of current ice creams (in tubs and individual servings). Then prompt them by
asking them to discuss two new ice cream products: an ice cream on a stick with a raspberry
sorbet centre, vanilla ice cream around it and a milk chocolate coating; and a half-litre tub of
chocolate and vanilla – chocolate on one side and vanilla on the other, touching in the middle.
Would they want to try either? What do they think is the right price? Might they become regular
buyers?

End of chapter exercises, page 14

1 Outline two benefits a business can gain from asking the question ‘why’.
➜ Investigates the logic behind what’s out there, which may give rise to ideas about what
should be there.
➜ ‘Why?’ can lead on to a more relaxing ‘Why not?’. In other words: ‘Let’s do it!’
2 What might be a correct business response to the following questions:
(a) Why are organic foods so expensive?
– Some customers are looking to pay a price premium to show how much they care
about ethical considerations (such as the environment/their kids, etc.) or for the
perceived increase in the quality of the product.
(b) Why does Aldi keep gaining market share?
– Aldi keeps responding to positive feedback from customers (i.e. increasing sales and
customer numbers) and building more UK shops.
3 Suggest two ways in which managers could encourage staff to share their own ideas about
new products.
➜ If the business has 6–25 staff, a Friday night session paid for by the business could
feature a 30-minute business discussion slot (perhaps followed by a ban on shop talk
afterwards).
➜ A suggestion box could work if it is known that the manager reads every suggestion
personally.
4 What is the most likely explanation for the high number of suggestions from the Cowley
staff? Explain your reasoning.
➜ A good underlying level of motivation among the workforce, i.e. they care.
➜ There can’t be any feeling of ‘them and us’, i.e. ‘we’ (staff) won’t talk to ‘them’ (the
managers). So talking and sharing ideas is okay.

11
 Topic 1.1 Enterprise and entrepreneurship

5 Discuss whether the staff should get a financial reward for the suggestions that are put
into action.
➜ Case for financial reward: in a modern business world where directors get huge bonuses,
it is unfair if shop floor staff get zero financial reward for what might prove a good earner
for the business, so it’s not that the financial reward is the attraction, it is both a thank
you and a sign of shared enterprise, including rewards.
➜ Case against financial reward: the problem is the huge potential for unfairness – I put
forward a cost-cutting measure that makes sense but the boss chooses not to implement it;
you put forward an idea that sounds quite similar, it is adopted and you get £800. I’m pretty
fed up! The risk of unfairness can disrupt what might otherwise be a stable, motivated team.

Practice questions, page 14

Total: 13 marks
1 If the price is unchanged and sales of the Leopard smart bike hit 12,000 in the coming year,
calculate the revenue that will be generated. (2)
➜ $1,499 × 12,000 = $17,988,000
2 Outline one possible reason to explain Li Gang’s success in launching the Leopard. (2)
➜ He understood the market from the customer’s point of view.
3 Li Gang wants to build his business to become the world number 1 in smart bikes. He sees
two options:
Option 1: Look for original ideas to create different bikes.
Option 2: Create new products adapted from his Leopard bike.
Justify which one of these options he should choose. (9)
➜ Option 1:
– Li Gang may feel that as he created one successful brand of bike, he will have no
difficulties inventing others. And there is value in having a range of different product
lines, each with a separate brand name. In its Galaxy Note 7 disaster (they burst into
flames), Samsung suffered damage to its brand image that affected sales of all its
smartphones. Separate brands can be a huge advantage if things go wrong.
– On the other hand, it is easy to underestimate the value of an established brand. It
encourages people to try new products from the same company. So a new Leopard
bike may be much more successful than a new bike with a brand new brand name.
➜ Option 2:
– To build on strength. The Leopard name can become the brand that will take the
business forward. To be known as a super-strong, durable bike is a great starting
point. A known brand gives consumers confidence, makes them happier to try new
variations and builds loyalty. As a result, it is cheaper from a marketing point of view
(not having to have lots of quite different advertising campaigns).
– The only worry is that the brand name may limit the desired flexibility, e.g. to launch
a kids’ bike. A kids’ bike called Leopard is probably a non-starter – it sounds like a
combination of speed and danger!
– Yet the fact that the Leopard brand has limitations is not a true problem. The image of
strength and (implicitly) durability could be used for a mountain bike, a pro courier bike,
racing bikes and many more. Business is about what you can do, not what you can’t.
12
4 Risk and reward

Teaching advice
This is a major theme in the course. It is a transferable concept – that is, one a student could
use to answer many different questions, notably anything about decisions, strategy or start-up.
The figure below would be a valuable addition to your classroom wall. Whenever a new product
launch or a big business decision is in the offing, get students to rate it on the 0–10 scale for risk
and then reward. It is a way of familiarising students with the concept.

Extremely
No risk
high risk
0 1 2 3 4 5 6 7 8 9 10

No Extremely
reward high reward
0 1 2 3 4 5 6 7 8 9 10

End of chapter exercises, page 19

1 Outline two significant risks that might be faced by a small sports shop in your local high
street over the coming year.
➜ The most obvious is competition, such as a Sports Direct discount store opening locally.
This would draw away a lot of customers and might force the small store to make special
price offers that it probably can’t afford.
➜ A second risk is poor purchasing, perhaps buying too much of some things and not
enough of others. Unexpected success by the England football team might lead to a
run on shirts and even boots, while over-purchasing cycling shorts might prove an
expensive mistake.
2 Richard Branson started his first business at school, launching Student magazine, before
going on to found the Virgin group. Outline two rewards Richard Branson may have received
from his initiative.
➜ Perhaps the biggest reward for many entrepreneurs is independence. Making money
empowers you to make your own decisions in your own time – and to take risks that you
couldn’t take if your capital was really your mum’s.
➜ A second reward comes in the form of reputation/status. You are no longer a schoolkid,
you’re a successful entrepreneur. That will make it far, far easier to get further finance in
future.

13
 Topic 1.1 Enterprise and entrepreneurship

3 Outline the balance between risk and reward in the case of Bloomsbury’s £2,500
investment in JK Rowling.
➜ With the benefit of hindsight it is obvious that the risks were trivial in relation to the
rewards, but of course Bloomsbury did not have that benefit. The decision had to be
made between the certain spending of £2,500 compared with the possible benefits from
a book that would sell well.
➜ What proved the winning issue for Bloomsbury was that the upside to the rewards proved
virtually limitless, with vast sums coming in from book sales, film rights and so on.
➜ The balance proved to be extraordinarily in favour of reward.
4 Describe Ted’s attitude to risk.
➜ His attitude is very anti-risk. He appears not to realise that of course there is a risk that
the figures are wrong; that’s not the point. The key thing is whether there is a significant
risk of them being wrong, and even more, a big risk that they’re wrong on the downside
(no one minds if they make more money than expected).
5 Explain why it is necessary for all businesspeople to be willing to take risks.
➜ As in football results and horseracing, there are no certainties in business. As all
business decisions are about the future, and the future is unknowable, risk is an
inevitable part of every manager’s life. If you are not willing to take risks, you are not
willing to make a decision – so you’d better get a job working for someone else.

Practice questions, page 19

Total: 18 marks
1 Outline how the idea for Scoop came about. (2)
➜ Someone living in London spotted a gap in the market – for authentic gelato – and took
the initiative to do something about it (that’s entrepreneurial).
➜ He got in touch with Matteo and also organised the financing of the new business.
2 Define the term ‘competition’. (1)
➜ The number of companies offering a similar product/service to your own.
3 Outline one factor that was important in turning Scoop from a business idea into a business
success. (2)
➜ Matteo had the patience and good sense to realise that even if it took a long time to find
the right premises, it was time well spent.
4 State one problem Scoop faced following the start-up period. (1)
➜ The rainy summers in 2013 and 2014 (or the 2012 Olympics keeping visitors out of
Central London).

14
 4 Risk and reward

5 Evaluate the level of risk for Scoop’s future survival from its decision to dismiss Matteo.
You should use the information given as well as your knowledge of business. (12)
➜ The main risk surrounds dismissing the founder of the business. He would have been
the key decision maker for all day-to-day issues, from hiring and firing staff to deciding
which ice cream flavours to make today. There may be other intelligent staff within the
business, but no one else would have the combination of knowledge, skills and passion
that could be expected from the founder. Starting a business is difficult, but so is running
it day to day – it’s easy to waste money through a series of minor but bad decisions. The
shareholders may find that losing Matteo has practical consequences as well as the loss
of the organisation’s heart and soul.
➜ On the other hand, it is a business cliché that ‘no one’s indispensable’, in other words
anyone can be replaced. People thought that the death of Steve Jobs might mean the
death of Apple, but more than five years on from his death in October 2011, Apple was
still doing fine. As long as the shareholders can find an able manager to replace Matteo,
perhaps the risk level may be low. Sometimes in business the founder can be a problem
because they are too blinkered over how to achieve success – a new person may find it
easier to see the flaws in how things are done and may have new ideas for new products
or flavours.
➜ On balance, although there is a real risk that losing Matteo may weaken the glue that
holds Scoop together, it is also possible that a new person may find ways of boosting
sales and profit and therefore keep the business going for years to come.

15
 5 The role of business
enterprise
Teaching advice
This is a rather abstract section of the Specification, so I’ve tried to jazz it up a bit. The most
important issue is probably to establish a clear understanding of the difference between
goods and services. There will be exam questions directly on this topic, but probably only one-
markers. Far more important is the impact on application if a student can easily pick up whether
the context is production or service and can see the implications. Answers to 9- and 12-mark
questions thrive on such niceties.

End of chapter exercises, page 23

1 Why might it be more expensive to start up as a manufacturer of goods than as a service
business?
➜ Manufacturing is likely to require a far higher investment into physical resources such
as land and capital equipment, from high-tech machinery to delivery lorries. Of course,
some service businesses are also capital-intensive, such as setting up a mobile phone
network, but generally it is fair to say that manufacturing is more costly to set up than
service businesses.
2 (a) From Figure 5.1 on page 21, calculate the amount of the UK’s national output that is
generated by agriculture; then do the same for China.
– The UK’s percentage of GDP generated by agriculture is 100 − (79.6 + 19.7) = 0.7%
– China’s percentage of GDP generated by agriculture is 100 − (48.4 + 42.7) = 8.9%
(b) Outline why this information may be important to a producer of tractors.
– China’s GDP is significantly bigger than that of the UK (about five times the size). And
the country’s agricultural sector is more than 12 times the size of the UK’s in terms of
share of GDP (8.9/0.7 = 12.7). So the maths shows that the potential market for tractors
in China is about 60 times as great as in the UK. For a producer of tractors, that is very
useful information about potential market size.
3 Outline why it might be hard to get a shop to stock a brand-new product for the first time.
➜ The risk is high from the retailer’s point of view. a) Will the new product succeed, or
will two weeks of success while the launch advertising is on the screens be followed
by falling sales and unsold stocks? b) The space taken by the new product will have
displaced an established one, thereby losing some sales (and perhaps upsetting a few
loyal fans).
4 Could Mondelez make a case for saying that belVita biscuits are a need, not a want?
➜ It could try. It would claim that breakfast is the most important meal of the day and that
the best way to get busy, busy people to eat some breakfast is to give them something
they can munch on the go. Your body needs belVita!

16
 5 The role of business enterprise

5 Explain why it is important for consumers to think carefully about whether they really need
what they want.
➜ Life is a bit short to read the small print on every food or drink package, so we are
inclined to accept the general thrust of what the media tells us to be concerned about
(fat? sugar? e-numbers? food miles? organic?) and the main messages on the pack fronts.
➜ So we are swayed in directions we don’t necessarily need to go. We want to eat delicious
things (chocolate) but we also want to eat sensibly, for our weight and general health.
Manufacturers want to tell us that we can have it all: ‘with Tinkle’s low-fat chocolate you
can eat what you want – and go on, have another, we’re doing a BOGOF promotion.’
➜ Just as you wouldn’t consult a publican on how much to drink, it is best to avoid advice
from the food and drink industry on consumption. What we want and what we need are
different, and what we need, of course, is self-control (that’s torn it).

Practice questions, page 24

Total: 13 marks
1 Calculate the value of Deborah Meaden’s stake ‘today’. Then calculate her percentage
profit on the investment. (2)
➜ Value today is £13m × 25% = £3.25 million
➜ Her profit is £3,250,000 minus her £80,000 investment = £3,170,000
➜ % profit = £3,170,000/£80,000 × 100 = +3,962.5%
2 Apart from meeting a consumer need, outline one other possible factor that may have
persuaded Deborah Meaden to invest in GripIt. (2)
➜ The achievement of distribution in 2,000 Home Depot stores would have been very
important – in effect endorsing the product and the young entrepreneur.
3 If an investor offered to buy GripIt for £15 million, Daykin would have to choose between:
Option 1: Sell the business and use the capital to start all over again.
Option 2: Turn down the £15 million and be even more determined to make GripIt a success.
Justify which one of these options he should choose. (9)
➜ Option 1:
– If Daykin sold GripIt for £15 million and went to live in the South of France, he would
probably regret it. He likes a challenge and seems to have loved his entrepreneurial
life. Why stop now?
– The answer is that £15 million in the bank is a serious amount of capital. If he really
has six other ideas to launch in future, getting rid of the GripIt distraction and bringing
in a huge amount of capital seems good news.
– He will have learnt a huge amount about how to run a business and how to launch a
product and he can put it into practice straight away. Many entrepreneurs are better
at the start-up stage than the management/administration stage (such as Stelios of
easyJet) – if Daykin is like that he should certainly sell GripIt and reinvest in new
start-ups.

17
 Topic 1.1 Enterprise and entrepreneurship

➜ Option 2:
– Despite his fantastic success and despite having come up with six other products,
Daykin should be wary of assuming that it is easy to simply start again. Even having
£15 million in the bank would not guarantee success with the new products.
– Entrepreneurs and business leaders regularly find that success in one place is no
guarantee of success elsewhere. GripIt has made a great start, but Daykin might
find satisfaction in building the product and the business into a serious global force.
Making GripIt a global success might mean sales growing into the hundreds of
millions, creating hundreds of jobs in the UK and elsewhere. Those who have achieved
this, such as Emma Bridgewater with her pottery business, find it hugely fulfilling to
have been socially and economically useful (as well as getting rich).

18
6 Adding value

Teaching advice
This material is among the most conceptual within GCSE Business. It needs to be seen as a
fusion of marketing and finance. Value added occurs as a result of intelligent marketing (or, it
could be argued, intelligent product innovation). Accountants, however, may decide that it falls
within their remit.
For students the key things to bear in mind are:
➜ Business success relies on identifying sustainable value added (persuading people to pay
significantly more for something than it costs to make or provide)
➜ although high value added is vital, it is not sufficient on its own – you also need to ensure high
enough sales volume to make the business profitable
➜ value added can be increased by persuading people to pay more, or by cutting the costs of the
inputs (the risk with the latter, of course, being that lower costs may equal lower quality).
Adding value is pretty testing (after all, it is in every Business degree course), so it would be
good to use the exercises at the end of the chapter in class rather than for homework.

End of chapter exercises, page 27

1 Why does a company’s added value matter to its employees?
➜ Because (as Figure 6.1 shows) value added pays the employees’ salaries.
2 Briefly explain the sources of the added value in these cases:
(a) A £5 box of Celebrations chocolates.
– Fun and variety (not just eating one big Mars Bar).
– Can be given as a gift.
(b) A £54 ticket to see Chelsea play Manchester City.
– The excitement of seeing a live event.
– The excitement of seeing world-class players live.
(c) A £3 cup of coffee at Starbucks.
– Extra value comes from a place to sit down comfortably and chat to friends.
– A convenient location will add further value, e.g. at an airport.
3 Identify the USP that each of these firms is keen to establish:
(a) Ryanair.
– Lowest-cost airline and therefore lowest prices.
(b) L’Oréal.
– ‘You’re worth it’, i.e. you deserve the best quality/higher priced products.

19
 Topic 1.1 Enterprise and entrepreneurship

4 What might be the consequences of Ted Baker deciding to increase value added by cutting
its £185 million spending on the clothes it buys in from suppliers?
➜ Might get slightly lower-quality goods and undermine Ted’s quality image. That would
be a dreadful, self-inflicted wound.
➜ But it might manage to put pressure on suppliers without causing too much ill will, in
which case it might cut costs by £5 million or so and boost value added.
5 Outline two factors that create added value at the Oban Chocolate Company.
➜ Hand-making chocolates on-site would give the expectation of higher quality and
therefore higher price.
➜ Seeing the chocolates made (and that smell!) will get the saliva going and make the visit
an experience rather than just shopping – that adds value.
6 High value added is great for a business, but only if sales volumes are also high.
(a) Why may the Oban Chocolate Company have a problem?
– Relying on the tourist trade means little income for more than half the year – value
added is important, but only if the sales level is high enough to provide a profit.
– The process sounds very expensive in production costs – ‘good quality chocolate is not
cheap’ and handmade means high labour costs, meaning added value has to be high.
(b) What might they try to do to increase their sales volumes?
– E-commerce sales could offer a year-round opportunity, but the high prices may be
tougher to take for people who have not enjoyed the direct factory experience.
– Open a second shop in Glasgow or another city where there can be year-round
business.

Practice questions, page 28

25 marks
1 (a) Calculate how much value is added by making a cup of tea at this snack wagon. (2)
➜ Selling price − Bought-in costs (1)
➜ = £1.00 − 12p = 88p (1)
(b) Outline why it would be wrong to call this value added figure ‘profit’. (2)
➜ There isn’t 88p of profit because no allowance has yet been made for the running costs
of the van: labour, electricity and so on.
2 Outline one way in which Callum and Jamie might have added more value to their
snack bar. (2)
➜ Offer some ‘specials’ not offered by other burger bars, perhaps at rather higher prices,
such as a steak sandwich.
➜ Move the snack wagon to where people are willing to pay high prices, e.g. outside the
tennis at Wimbledon.
3 Identify the cost of ingredients for making a burger at Callum and Jamie’s snack bar. (1)
➜ 40p (1)

20
 6 Adding value

4 Analyse how a good location can add value to a business such as Callum and Jamie’s. (6)
➜ A good location offers convenience to customers, which is worth paying for (if you are
working on a building site locally, hunting for the nearest McDonald’s might cost half an
hour’s work time, which might be worth £8).
➜ A perfect location would be low-cost yet have lots of passing customers; that would boost
added value twice over.
5 Evaluate whether Callum and Jamie are likely to be able to create more value added with
their second business. You should use the information given as well as your knowledge
of business. (12)
➜ They are plumbers, whereas they are not cooks, so a plumbing business may well provide
more scope! And of course plumbing has some of the mystique that helps add value –
the customer doesn’t know whether the plumber has been brilliant or not – so the often
stunningly high price charged cannot really be argued with.
➜ But plumbing in Spain? Unless they are planning to focus on English speakers only,
there are probably dangers in this. Poor understanding of local regulations might mean
massive compensation claims, in which case the added value will have to be huge.
➜ Quite apart from the plumbing/Spain issues there is the important fact that this will be
their second business. Everyone learns from their mistakes and so it could be that added
value is greater as a result of a bit more experience/wisdom.

21
 7 The role of entrepreneurship

Teaching advice
For GCSE students, management is a mystery but entrepreneurship is cool. It’s what they
want the whole course to be about. Naturally that means Dragons’ Den (though it seems a
pale shadow) but even more it means doing things rather than simply listening to information
about them.
A simple idea is to run a Christmas market during one lunchtime in the last week of the autumn
term. In mid to late September you split your students into groups and get them working on
what their stall will be. So you might have six groups of four or five students, with each group
working on a money-making stall for the market. They will compete for who makes the biggest
profit, but must also co-operate within the class to promote the market as a whole. The great
thing about it is that although there is lots of prepping, strategising and working in advance,
it’s all over and done with on one day – it doesn’t drag on. Some schools like the winning group
to have a prize on top of their shared-out profits/dividends whereas others give all profits to a
nominated charity. There are many other ways to do this, of course, including:
➜ the Real Business Challenge (funded by Coca-Cola) www.therealexperience.co.uk/the-real-
business-challenge
➜ the School Enterprise Challenge www.schoolenterprisechallenge.org
➜ Tycoon in Schools (Peter Jones, Dragon) www.tycooninschools.com
➜ Citrus Saturday (organised by UCL) www.citrussaturday.org

End of chapter exercises, page 33

1 What might be attractive to entrepreneurs about taking risks?
➜ The thrill of battling against uncertainty and trying to win against rivals who would love
you to fail.
➜ They know that big rewards come only from taking risks.
2 Look again at Figure 7.1 on page 29 then answer these questions:
(a) Calculate how much more confident Americans are than those in the UK that they have
the skills for start-up success.
– Approximately 47 (US) minus 35.5 (UK), making a difference of 11.5 percentage
points.
– Proportionately, the Americans are 11.5/35.5 × 100 = 32.4% more confident.
(b) People in which country most fear start-up failure?
– Germany, by far in relation to the USA, not by much compared with the UK.

22
 7 The role of entrepreneurship

3 Why might an entrepreneur find it hard to manage the human resources needed for
business success?
➜ It requires a degree of empathy that many entrepreneurs do not really have – they like
to just get things done (training, mentoring and consulting can have huge long-term
benefits but do not get anything done today).
4 Outline one decision made by Paul Harwood that you think should help the business
succeed.
➜ The choice of location should help success. A good location adds value to a business
proposition, especially a service business such as a restaurant.
5 Outline two factors that may generate value added for The Fish House.
➜ Being touched by celebrity may help: 14 years with Rick Stein may make customers
expect higher quality and higher prices than from other new chef–proprietors.
➜ ‘Beautiful views’ must also add value, providing a further appeal to the senses in
addition to the taste and smell of the food.
6 Why may Paul Harwood find the life of a chef–proprietor a bit of a shock?
➜ Chefs work long, hard and intensely, but now Harwood needs other skills (and more
time) for handling the finances (or at least showing interest/concern for them), recruiting
and training new staff and making decisions about marketing the restaurant – in other
words, running the business.

Practice questions, page 33

Total: 13 marks
1 Outline one possible reason why managing human resources may be the hardest
problem for entrepreneurs. (2)
➜ Once you’ve made a decision about menu or machinery (one £2,000 milkshake-maker or
two £1,000 ones?), you live with the decision – job done. When you spend a whole day
interviewing for new staff and make your decisions, anything can still happen: your first
recruit doesn’t even turn up on Day 1, the second quits after five days. It is the lack of
control that employers find so hard.
2 Outline one important decision that Adele and Stephan need to make. (2)
➜ They need to re-think their opening times. Opening 7–11 is 16 hours a day; perhaps
8.00–8.00 would make a huge difference to the pressures on them.
3 Stephan is thinking ahead to how best to maintain the growth of Waffle Jack’s. He sees
two options:
Option 1: Build a barbecue cooking and eating area at the back of the premises to generate
higher evening revenues.
Option 2: Open waffle-only Waffle Jack’s kiosks in busy city sites, such as London’s West End.
Justify which one of these options they should choose. (9)

23
 Topic 1.1 Enterprise and entrepreneurship

➜ Option 1:
– This is a relatively low-risk way to build the business. The costs would be relatively
small, the project could be easily managed and communicating the proposition would
be low-cost (just telling the existing customers, for a start).
– But that also points to the limitations of this approach. It would largely be a way to
make more revenue out of existing customers and this might prove a problem. People
spending £40 on a steak meal might skip the £20 meal they would otherwise have. So
the extra revenues might be lower than anticipated.
– Furthermore, it adds a huge element of weather-based uncertainty to the business.
A sunny summer may prove very profitable, but a cloudy, damp one may not only be
poor for generating revenue, it may also lead to a lot of wastage in steaks gone off.
Higher costs with weak revenues is a recipe for business disaster.
➜ Option 2:
– Stephan is genuinely thinking about both of these options, but his real ambition is
Waffle Jack’s kiosks. So that is the option I will choose.
– A benefit of waffle-only expansion is in restricting the skills requirement for staff.
Instead of recruiting people who can cook a wide range of meals, the ability to work a
waffle machine represents a relatively low skill. Furthermore, in a kiosk there will not
be waiters and other staff, it is just one or two people in a kiosk, taking orders, making
waffles and taking the money. So the biggest problem in running the business should
be toned down. Running the kiosk would not be much different from running a coffee
bar kiosk.
– Opening kiosks has a relatively low capital cost compared with that for new shops
or knocking down walls to create a new BBQ area. This should mean that as long as
the kiosks prove profitable, Stephan can spread quite quickly across London and then
across the country. And then the world? Probably.
– Ultimately the question is a classic risk–reward issue: does the upside potential justify
the immediate capital put at risk? It is reasonable to say that the huge upside potential
of the waffle kiosks makes it worthwhile to test out one prime-site kiosk.

24
Exam-style questions on
Topic 1.1
Multiple choice questions, page 34
1 (b)
2 (b), (d)
3 (c), (d)
4 (c), (e)
5 (d)
6

Goods Services
(a) Mars, producers of Galaxy ✓
(b) The publishers of The Sun newspaper ✓
(c) John Lewis Partnership, owners of Waitrose ✓
(d) Aston Villa F.C. ✓
(e) Coca-Cola Inc., owners of Innocent Drinks UK ✓
(f) British Airways ✓

7 (b), (e)

Discussion question, page 35

8 Discuss why entrepreneurs are willing to risk starting their own business, even
though half of new businesses fail within 5 years. [6]
➜ They are willing to take the risk because they value their expected rewards more highly
than the risk itself. This may be a purely financial matter, for example expecting to make
£50,000 profit from a £10,000 investment. Or it may be more psychological, expecting
to enjoy the challenge and the authority involved in being your own boss. The expected
psychological rewards may outweigh the perceived risks.
➜ On the other hand, it may be a delusion based on the entrepreneur’s inability to believe
that the statistics apply to him/her. In other words, arrogance (or mad optimism) may
simply mean that they are ‘sure’ they’ll succeed. This is a more dangerous situation, as
family finances can be ruined by a reckless business start-up.

25
 8 Customer needs

Teaching advice
There is a risk in this section of the course that the material will seem too much like common
sense. So facts are helpful when teaching. Each week The Grocer magazine has a ‘mystery
shopper’ article based on visits to a randomly selected branch of Asda, Morrisons, Sainsbury’s,
Tesco and Waitrose. In 2016, Asda shops kept coming last in the rankings due to woeful
‘availability’, in other words, gaps on the shelves. One article mentioned the clothing fitting
rooms at one Asda branch having ‘carpets covered in stains and chewing gum’. At that time
Asda’s market share was falling sharply. Customers need rather more than Asda was offering.
Just one issue of The Grocer provides nice snippets (but you’ll only find it at big branches of
newsagents, probably WH Smith).

End of chapter exercises, page 39

1 (a) From the data in Figure 8.1 on page 36, calculate which of the supermarkets lost the
most market share points between 2010 and 2016.
– Tesco, which lost 2.1 percentage points (30.3−28.2).
(b) Identify one other supermarket chain that performed particularly poorly. Explain why
you chose that one.
– Asda, which lost 1.5 percentage points over that period, which looks more worrying
than Morrisons because Asda’s share is still falling, whereas Morrisons seems to have
turned a corner.
2 Look at Table 8.1 on page 38, then suggest the keys to meeting customers’ needs for a
supplier of:
(a) baby car seats.
– A wide range of products, brands and price levels; advice available on safety and
comfort of different brands; fitters available to fi x the seats safely in the car.
(b) lipstick.
– A wide range of products, brands, colours and price levels; product testers and mirrors
in store; the ability to buy online.
3 Name two types of customer who might not ‘value design and style above price’.
➜ Older people might care more about price than design or style.
➜ People whose income levels are low enough to mean that everything is about price.
4 Explain the message being communicated by the Dell computer advertisement on page 38.
➜ Dell is implying that customer feedback helps the company to understand better its
customers’ needs and therefore it is thanking them for gripes and complaints.

26
 8 Customer needs

Practice questions, page 40

Total: 18 marks
1 (a) Outline one indication that Big Blue understands its customers. (2)
– The TripAdvisor statistics are sensational: 83 out of 85 saying ‘excellent’ is a huge
endorsement of the company’s understanding of its customers’ needs.
(b) Outline one way in which the business may benefit from this understanding. (2)
– Strong understanding of customer needs can provide a significant competitive
advantage, in other words gaining sales from competitors who are not trying as hard.
– If customers become more loyal due to their needs being met, it is easier for a business
to sell at full price rather than having to offer discounts or BOGOFs.
2 State one reason why the TripAdvisor reviewer recommended Big Blue to others. (1)
➜ Because of the patience and kindness shown by the staff.
3 (a) Calculate the percentage of customers who rated Big Blue ‘excellent’. (2)
– 83/85 × 100 = 97.6% (or 98%)
(b) Outline one way in which Big Blue might reward Cyril and Beth for their customer
recognition. (2)
– Thank yous and praise.
4 The Big Blue Surf School is considering expanding. The managers see two options:
Option 1: Opening a second school in the North East, close to Newcastle.
Option 2: Offering cheaper rates to school groups, to attract extra summer business.
Justify which one of these options they should choose. (9)
➜ Option 1:
– If the Big Blue Surf School opens a second branch 50 miles away in Cornwall (or offers
cheap rates to school groups), there is a risk that it will suffer from ‘cannibalisation’ as sales
for the new service would be partly drawn from existing customers. But there is virtually
no chance of that happening between Cornwall and the North East – Penzance to
Newcastle is 477 miles so there can be no competition between them. Therefore a Big Blue
Surf School in Newcastle could succeed without dragging down the Cornwall business.
– Unfortunately, starting afresh in Newcastle might risk failing to capture the fantastic
customer service levels achieved in Cornwall (the TripAdvisor ratings are amazing).
If a new person was recruited for the North East who did things differently – perhaps
with a tighter focus on profit – the whole brand name might be damaged if the
customer service was weak.
➜ Option 2:
– Big Blue should choose the school group option because it can be done at low risk
to the overall finances of the business. With luck the extra business from school
groups will be channelled towards less busy days in term time (Monday–Wednesday,
perhaps), making all the extra revenue valuable.
– However, the risk with offering discounts is that people might come to always expect
cheaper rates. So school-aged surfers who had been happy to pay £25 an hour might
now expect to pay less because of the school trip.
– Overall, though, the extra business provided by school visitors returning in the
holidays would probably outweigh the downside of people expecting to pay less.
27
 9 Market research

Teaching advice
Market research is a classic example of the difficulty of familiarity. Students think they know
about market research and can be a bit blasé about the subject in the classroom. They simplify
research problems into ‘people lie’ rather than thinking about the underlying motivations that
might lead respondents to mislead.
What students have to understand is that big businesses with dozens or hundreds of brands can
find it difficult to make decisions without hard evidence. Market research is often that evidence
and companies are trying hard to find unbiased insights into their customers’ thoughts.
In September 2016 PepsiCo launched ‘Pop Works’ (containing 28g of sugar per 100g!) as its
entrant into the UK’s booming market for popcorn. Detailed quantitative research helped it
decide on ‘Sweet & Salty’, ‘Sticky Toffee Pudding’ and ‘Peanut Butter and Caramel’ flavours.
Personally I hope it’s a flop, but it is useful to have examples like this to discuss in the classroom.
With thanks to The Grocer magazine.

End of chapter exercises, page 45

1 How could secondary data about the pizza market be worth £495 of an entrepreneur’s
money?
➜ Secondary data gives key background facts such as whether the market is growing or
not. Which sectors are growing? (Delivery? Traditional toppings? Italian or American
bases?) This makes it easier to come to the right decisions about the style of restaurant,
the menu and perhaps also the prices. Opening a restaurant will cost in excess of
£30,000. Isn’t £495 a sensible insurance policy?
2 Outline one aspect of business start-up that Jack Wills might have found out via qualitative
research before wasting so much money starting Aubin & Wills.
➜ The key was to understand this different, older customer. The better Jack Wills managers
were at running Jack Wills, the harder it would be to run Aubin & Wills. Their focus
would have been the under-22 Jack Wills market, making them almost the worst people
to run a shop aiming at the 30-plus sector. So qualitative research into exactly what the
older market wants should have been a priority.
3 Explain why market research through social media may prove relatively unreliable.
➜ Social media is perhaps too ‘all or nothing’. Something is wonderful or it is horrible,
but most of business life takes place in the middle ground. So a good idea might either
be received as ‘great’ or ‘rubbish’ – but perhaps unpredictably and unreliably; ordinary
market research would be a bit more nuanced.
4 Outline two ways in which Pretty Polly’s managers should have been able to keep up with
changes in consumers’ shopping habits.

28
 9 Market research

➜ Just listening to customers would have helped. The Pretty Polly receptionist might have
been asked lots of times about leggings but never found any manager interested in
hearing from her. Managers often struggle to know what people in the company know
(knowledge management has become a trendy part of the subject in recent years).
➜ Market research would have been an alternative way to find out what customers wanted.
Well-run companies usually have regular, perhaps monthly, surveys into customer
opinion, to monitor trends.
5 Explain how the use of quantitative research might have helped avoid Pretty Polly’s
collapse.
➜ Quantitative research would have provided data on a large enough scale to be
statistically reliable, so the business might have found out the percentage of its customers
who wanted new product lines, such as leggings. That might have helped the business
make better decisions.
6 Do you think it is inevitable that factory workers suffer for the mistakes made by managers?
➜ Yes, if those mistakes are big enough to damage the business. If the business is damaged
then most management teams will try to recoup lost profits in the easiest way they know,
which is to cut shop floor staff numbers.
➜ But if the mistakes are relatively small, it is difficult to see why workers should be
affected. A relatively small mistake might even lead to the manager losing their job while
shop floor workers are unaffected.

Practice questions, page 45

Total: 18 marks
1 Define ‘focus group’. (1)
➜ A group of perhaps eight people recruited to represent a particular target group,
e.g. 16–19-year-old males.
2 Outline one possible impact on M&S of its focus groups with shareholders. (2)
➜ It may strengthen their understanding of cardigan-wearing among relatively wealthy
70 year olds (not far off the M&S core customer).
3 Analyse the impact on ASOS of its approach to market research using social media. (6)
➜ Its use of social media is a mixture of research and publicity. By encouraging customers
to upload photos ‘AsSeenOnMe’ it can learn which clothes customers love most and
also see the feedback from others (‘love the cut; hate the colour’). There are risks in this
approach from a research point of view, as you may be getting information about only
your more extrovert customers. But the combination with publicity is very clever and it
could be argued that the views you want most are those from the extroverts, who may
shape the viral/word-of-mouth social media ‘conversation’.
4 M&S must find out how to appeal to clothes-buyers under the age of 40. Financial
restrictions mean it must choose between:
Option 1: Qualitative research.
Option 2: Quantitative research.
Justify which one of these options the company should choose. (9)

29
 Topic 1.2 Spotting a business opportunity

➜ Option 1:
– Qualitative research is needed here because it aims to go beyond the obvious, to probe
into customer psychology. Ask 20 year olds whether they like the clothes at M&S and
they will say no (or laugh). The question is, why do they feel the way they do and how
can their views be overcome? That is the job of in-depth, qualitative research.
– A focus group among young women might reveal serious doubt about ever wanting
to shop for clothes in the same place as granny. If that is the case, the problem is far
greater than ‘let’s get Alexa Chung to design a clothing range’. Perhaps M&S needs to
accept that if it wants to sell clothes to under-30s it needs a completely separate shop,
probably with different branding.
– On the other hand, it could be that a focus group will encourage people to overstate
their views (‘I never shop at M&S, it’s for grannies’) as they show off in the presence
of others. At least questionnaires are filled in individually, ensuring that they show
people’s own opinions.
➜ Option 2:
– The case for quantitative research is that it produces results that can be turned into
definite conclusions, quantified and perhaps used as the basis for a sales forecast. For
example, a survey of 500 30-39 year olds might show that 60% quite like the clothes
on offer but dislike the dullness of the stores. That could be a strong enough finding
to persuade senior management to spend money on redesigning the stores to make
people more willing to come and shop.
– Quantitative research would also be useful when deciding whether to turn a full M&S
store (food and clothes) into a specialist Food Hall. Research among current shoppers
may provide the basis for a forecast of sales if the store became food only. That would
help management in making the decision.

30
10 Market segmentation

Teaching advice
In GCSE exams, despite our best efforts, students tend to over-generalise about business.
They seem to think that all businesses would do better if they cut prices and ran BOGOFs.
So market segmentation is very important. They need to be able to see beyond their personal
circumstances, to understand that the term ‘the car market’ does not mean that Kia competes
with Rolls-Royce.
Nothing works quite as well as physical packs when getting students to think about how
markets are segmented. Snack packs are probably the best, from Kettle-Pringles-Walkers-
Tesco Value to Propercorn-Butterkist or Monster Munch-Skips-Wotsits. It may be a chunk of the
departmental budget, but worth it.

End of chapter exercises, page 48

1 How might a small, Yorkshire-based bakery use segmentation to help boost profits?
➜ Segment the local population by age, to see whether it is worth creating loaves for
different groups (false teeth-friendly ‘extra soft’ may work well).
➜ Once a segment has been targeted successfully, it may be possible to charge slightly
higher prices because those customers are getting just what they want.
2 Look at Figure 10.2 on page 47. How many weekly rugby players are there for an
entrepreneur to target?
➜ 250,000 (0.25 of £1 million)
3 Look at Table 10.1 on page 47, which shows the prices charged by the Accor hotel chain.
Explain how it is possible for customers at Sofitel and Ibis to both consider that their room
for the night was value for money.
➜ Those in the Sofitel may have a bigger room and a better location and therefore feel the
price represents value for money.
➜ Those at the Ibis might think about the low prices at a Paris F1, but they know they have
to stay in London and pay the market price, however high.
4 Outline an age group that might welcome the launch of Scheckter’s Organic Energy.
➜ Perhaps older people, in the region of 30–40 years old, who want (and can afford) a
healthier energy drink.
5 What business problem might arise if a segment such as the one targeted by Charles
Phillips proves to be too small?
➜ If a business targets a segment that is too small it may be hard (or impossible) to make
high enough sales to get beyond the break-even point. Business success requires sales
volume as well as firm pricing.

31
 Topic 1.2 Spotting a business opportunity

6 Calculate Scheckter’s sales if it can achieve 1 per cent of the combined sales of Red Bull
and Monster.
➜ Together Red Bull and Monster have £421 million of sales, so Scheckter would have
£4.21m if it took 1 per cent of their sales.

Practice questions, page 49

Total: 15 marks
1 (a) Calculate the percentage change in home ownership within the 16–24 age group between
1991 and 2013–14. (2)
– The decline is three-quarters (75 per cent) (36.1 – 8.9/36.1 × 100).
(b) Outline one possible reason why this change occurred. (2)
– This dramatic change was probably caused by the fall in wage rates among young
people (the text calls it a ‘significant’ fall).
2 Outline one possible market that may be benefiting from rising incomes among older
people. (2)
➜ Those famous Stannah stairlifts must be doing good business, with far more elderly
people able to afford to have a personal lift in their own home.
3 James Turner Ltd must decide how best to appeal to the over-65s age group. Financial
restrictions mean it must choose between:
Option 1: Television advertising.
Option 2: Advertising in the local Coventry newspaper.
Justify which one of these options the company should choose. (9)
➜ Option 1:
– The great strength of TV advertising is its power to change buyer behaviour. TV
advertising can persuade 65-pluses to go on their first cruise. And TV viewing is
disproportionately an older person’s habit, so the advertising spending is nicely
targeted at James Turner Ltd’s target market.
– However, television advertising is asking a lot from the finances of a relatively small
limited business (private limited company). Even a 50 per cent boost to sales might be
insufficient to boost profit if the cost of the TV advertising adds too much to fi xed costs.
– The company will have to do its maths with care – to be sure that it can afford this
advertising approach.
➜ Option 2:
– It is very unlikely that a small local business would be able to afford television advertising.
Each advertisement would cost thousands of pounds to run and might not be terribly
effective. Often the effect of TV advertising is based on customers seeing the same ad
over and over, over a period of time, something the company wouldn’t be able to afford.
– So advertising in the local paper seems the best idea. Unlike TV, there is the room to
set out quite a few facts about the service (and readers might have the time to consider
them). If the advertisements are written persuasively, they could encourage people to
think about changing their bathroom and/or convince those who have already decided
that James Turner is for them.
– In addition, whereas advertising on TV might cost thousands of pounds, the local
paper is likely to cost hundreds. Saving money will help the business stay profitable.
32
11 Market mapping

Teaching advice
This is one of the easiest concepts to teach and should be fun. The theory is based on 2D, but it’s
nice to give it some 3D life. Focus on the chocolate market. Do a big grid on an A1-sized piece of
paper and use axes such as Everyday – Something special and Filling – Light. Ask the students to
each bring in a sweet wrapper for the next lesson, then get them in pairs or groups to agree which
wrapper goes where on the grid. The wrappers can be Blu-Tacked to the grid and the sheet stuck
on the wall. Invite students to bring in interesting packs/boxes as the year goes on so that eventually
the grid will have some posh boxes of Lindor and others, as well as a Morrisons’ value bar.
The key teaching point about market mapping is that it is about the products/brands/competitors
rather than about the customers. Therefore it is a good way to identify possible market gaps.

End of chapter exercises, page 52

1 Suggest two reasons why it may no longer be enough to produce cheaper copies of product
ideas.
➜ People like to buy the real thing, not a cheap copy.
➜ Every new idea is copied quickly, so it is difficult to establish an image unless you are the
original.
2 Suggest where Lindor might appear in Figure 11.1 on page 50, the chocolate market map.
Explain your reasoning.
➜ Extreme top right-hand corner, i.e. very luxurious; very light rather than filling.
3 (a) Look carefully at Figure 11.1. Identify two possible market opportunities for a new
company entering the market.
– Light chocolate bars that are ‘everyday’ but not too much like Kit Kat.
– Luxury but filling bars, which at present includes Turkish Delight only, suggesting a
possible market gap.
(b) For one of those opportunities, outline a product that you think might appeal to
consumers. Suggest a price that you think would be appropriate.
– Marking should reward creativity and originality, but not foolishness!
– Perhaps a filling luxury product might be a Galaxy coated bar with cookie dough and
caramel.
– The price suggested should fit in with the market positioning, e.g. a small bar for the
under-eights should be 35p, not 70p.
4 Outline one way in which Aliesha might have carried out her market research.
➜ As the results are expressed in percentages, it must have been quantitative research.
➜ She might have written a questionnaire and interviewed 50 people.

33
 Topic 1.2 Spotting a business opportunity

5 Construct a market map for takeaways and fast-food outlets in your local area. Use the
following scales:
(i) expensive–cheap.
(ii) for young people–for older people.
– Make a judgement on the accuracy and logic of the student’s work. No marks for
neatness or coloured pens!

Practice questions, page 52

Total: 15 marks
1 Outline one possible reason why UK sales of Coca-Cola are declining. (2)
➜ Probably the belief that Coca-Cola has more sugar and is less natural than many other drinks.
2 (a) Outline where you think coconut water is positioned on the soft drinks market map. (2)
– Top right: modern/trendy and expensive.
(b) Outline one benefit of that positioning for a business such as Innocent Drinks. (2)
– The high pricing should make it possible to enjoy good profits, even if sales volumes
are relatively low.
3 Innocent Drinks has 10 per cent of the market for coconut water. To build on this, the
managers see two options:
Option 1: Focus on coconut water to build up market share at the expense of rivals.
Option 2: Launch other plant-based waters such as cactus juice and maple water.
Justify which one of these options they should choose. (9)
➜ Option 1:
– A 10 per cent market share is a good base to build on. It makes the brand important
enough for the supermarkets to want you and therefore any new sizes, pack designs or
product extensions should get good distribution. A coconut-based product extension
could include sugar-free coconut water, for example. Backed by the Innocent brand,
such a product would be well displayed in shops and could help the whole coconut
water sector to expand.
– However, coconut water might prove to be a fad – a short-lived craze. If so, doubling
up on this product could end up looking foolish. Businesses with long-term plans like
to be ‘diversified’, in other words have sales spread across several market sectors, so
that downs in one sector can be balanced out by ups elsewhere.
➜ Option 2:
– Coconut water seems to have been around for a while now and therefore may start to
hit its maturity phase. This would make it hard to boost market share, as well as sales.
– Better, perhaps, to be the innovative start of a new trend. Maple water sounds quite
soft, perhaps a bit sweet and certainly worth trying. It also contains the magic word
‘water’ rather than juice.
– Getting in at the start of a new trend can mean you are able to charge high prices at
the start, before competition has arrived, and even when rivals appear Innocent would
have the strength that comes from getting in first.
– Of course, new products have a notoriously high rate of failure, but in this case a
success would yield very high rewards. Maple water it is.
34
12 The competitive environment

Teaching advice
However unloved, controlled assessment gave the opportunity for a more practical look at real
business(es), which revealed some startling weaknesses in students’ understanding. In my
experience they lurch between extreme naivety (‘my new hairdressers will succeed because I’ll
offer good customer service’) and rather sad fatalism (‘you can’t succeed entering a chocolate
market with Cadbury and Mars so well loved’).
Now, without the opportunity to explore the real world, students need more from us to help
them understand the competitive environment (and application in general). I once took a group
of Economics students to Scoop ice cream (Covent Garden, London) to hear the proprietor talk
about competition. Really it was an excuse to buy them an ice cream after they had shone in
mock exams, but I was amazed at how fruitful the visit was. Matteo’s depth of understanding
about his rivals was memorable.
With GCSE Business, group sizes are usually too large to do much that is active, but getting
people in to talk could be a great help. Close to my home are three independent cafes that have
existed in uneasy harmony. Then, a week ago, a Costa opened 100m away. Two of the three
independents would happily come and talk about their new competitive environment. (You may
read about it in Business Review magazine.)

End of chapter exercises, page 56

1 From your own experience, analyse the strengths and weaknesses of two local fast-food
businesses.
➜ To be marked primarily on the basis of how well the answer is related to business issues,
such as whether the customer is getting what they want and is therefore willing to
return.
➜ As an example, an independent pizza takeaway may actually be competing with the
steamroller that is Domino’s Pizza. You would want a student to be reflecting on that
rivalry in their analysis.
2 (a) Explain the possible effect on UK ice cream businesses if a big American chain chose to
open 100 ice cream parlours in the UK.
– Closure is a real possibility. In Central London, at least, there is clear market saturation
for ice cream parlours. A big new competitor with lots of flavours and deep pockets
could easily see the end of one or two independents. Even skimming 5–10 per cent off
the revenues of some of the more marginal ice cream businesses might strip out all
the profit.

35
 Topic 1.2 Spotting a business opportunity

(b) Outline two possible drawbacks to staff at existing ice cream shops if a fierce new
competitor arrived.
– The main issue is the threat to job security. Fierce competition is bound to unsettle
staff and if they choose to go now, before risking losing their jobs, the position of the
existing ice cream shops will get that much worse.
– If sales slip due to extra competition, those at the existing shops might find themselves
getting fewer working hours – no more overtime and perhaps slippage back from 40
towards 30 hours a week, which would pull pay rates down sharply.
3 (a) Why might it be unethical for a bar to run an offer such as ‘drink as much as you like for
£10’?
– It encourages excessive drinking, which can translate into more public violence, more
private violence and risks of drunk-driving: huge potential social damage just for a few
pounds more revenue.
(b) Why might competition force a bar to run such an offer anyway?
– I might not want to run such an offer, but if all my rivals do, what can I do? Taking the
right ethical stance might mean the end of my business, with serious impacts on my
family, so I might respond (justifying it in terms of my family).
– This is why, even though businesses moan about government rules/red tape,
sometimes it is helpful to everyone to have a clearly marked ‘level playing field’.
4 Outline the evidence that Nick Wright understands the role of an entrepreneur.
➜ Willing to work hard; to do what it takes to win and keep customers.
➜ Thinks ahead – thinking about winter for a milkshake business (especially one in the
West Country, near the sea, where there may be half the number of people around in the
winter as there are in the summer).
5 Nick did some market research, but should he have researched the strengths and
weaknesses of ShakeAway?
➜ Yes, certainly. It would be useful to know ShakeAway’s strengths in order to think how
to outperform it and its weaknesses in order to exploit them. For example, if ShakeAway’s
minimum size is far too big for 5–7 year olds, perhaps there is an opportunity for Nick.
6 Outline one approach Nick could take to help Five Shakes survive the winter months.
➜ The main thing will be cost minimisation, in other words expecting sales to be weak
but making sure not too much money is lost in this period. That means just one staff
member on duty Monday–Friday, perhaps in the morning only, with Nick handling the
afternoon. Hopefully Saturday will justify two people. With low sales you would also
have to be careful to avoid wastage, e.g. bananas becoming overripe and unpleasant.

Practice questions, page 56

Total: 15 marks
1 (a) Define the term ‘competition’. (1)
– The existence of other businesses that are trying to win the same customers as you.
(b) Outline one possible reason for Aston & Magill’s ‘difficult period’. (2)
– The new rivals are taking some of Aston & Magill’s customers, therefore hitting their
revenue and, more importantly, profits.

36
 12 The competitive environment

2 State one benefit to Aston & Magill of its current location. (1)
➜ Location by a busy main road must help in capturing a bit of passing trade (from car
drivers or perhaps bus passengers).
3 Outline why the arrival of a Costa might be a bigger worry than the arrival of Waffle Jack’s
and Willow Tea Rooms. (2)
➜ Costa has an established reputation that may not draw away Aston & Magill’s loyal
customers but will tend to attract passers-by who ‘understand’ Costa but do not really
know what they would get at A&M.
➜ Costa is a huge business with very deep pockets. A&M cannot hope to push Costa away
by running a ‘half-price coffee’ offer for a week or two.
4 The owners of Aston & Magill must decide how best to cope with the arrival of a large Costa
coffee shop. They see two main options:
Option 1: Keep prices for their food and soft drinks unchanged, but be aggressive on the
price of coffee, cutting it from £2.20 to £1.50 – far below the price at a Costa.
Option 2: Offer existing customers a powerful loyalty card, giving a 25% discount off all
future purchases.
Justify which one of these options the company should choose. (9)
➜ Option 1:
– Offering a permanently low price for the coffee may be helpful because it is an
attraction for customers without giving away too much profit. By contrast, the 25%-off
loyalty card might threaten the underlying profitability of the whole A&M business.
– Locals will learn relatively soon that coffee is significantly cheaper at A&M than at
Costa, which might not only prevent too many defections to Costa but might also draw
some trade from rivals Waffle Jack’s and the Tea Rooms. This could help A&M survive.
– Furthermore, if the price cut is permanent, there may be more business from locals
who did not bother to buy at £2.20 but might do so at £1.50. In other words, the size of
the market may be expanded by this decision.
– The key is to get the right balance between an attraction for customers and
maintaining reasonable profitability for the business as a whole. A business cliché says
revenue is vanity, profit is sanity. Quite so.
➜ Option 2:
– The problem here is a simple one: the more powerful the card proves, the greater the
impact on revenues and profits from slicing 25% off every regular customer’s bill. This
would be fine if profit margins were very high in the first place, allowing profitable
sales even after a 25% price cut. But that is extremely unlikely. More probable is that
competition had already been holding prices down, so a 25% price cut would turn
profits into losses.
– On the other hand, Aston & Magill’s owners may feel that the big issue is to hold on
to customers during the early weeks. People can be keen to try new things and the
new Costa might have caused a huge cut in customers at A&M. Therefore a short-
term price cut might hold on to customers when competition is toughest, allowing the
company to withdraw its price cuts once the novelty of the new Costa has worn off.

37
 Exam-style questions on
Topic 1.2
Multiple choice questions, page 57
1 (a)
2 (c)
3 (d)
4 (c)
5 (b), (e) (not (c) because of the rival’s free drink offer)
6 (c), (d)

Discussion question, page 58

7 Discuss the importance to a first-time entrepreneur of studying the strengths and
weaknesses of competitors. [6]
➜ Almost every modern market has lots of companies offering lots of slightly different
services to customers. A new business has to stand out – in ways that attract customers.
If most of the competitors have online weaknesses (fiddly online ordering systems,
perhaps), then spending a bit extra to get a slick website will be money well spent. You
base your strength on the place where your rivals are weak.
➜ And if your competitors tend to charge quite low prices (that’s their strength), you
perhaps sidestep this – trying to find a way to attract customers based on your range of
services, not on price.

38
13 Business aims and
objectives
Teaching advice
This dull, dull subject needs livening up– but that’s difficult. The best hope is to hear from real
people, so visiting speakers can help a lot. But just in case that proves impossible, perhaps the
following might help. Get the students to put each of the four businesses’ aims in rank order
from 1–6. Here’s a brief backstory on each business:
1 Victoria Beckham started her fashion design and retail business in 2014. It targeted
wealthy, fashion-conscious women and was funded from the family’s huge wealth.
2 Travis Kalanick started ‘UberCab’ in 2010 after launching one business that went bust
owing $250 million and another that was sold for $25 million. He hopes Uber will stop
people needing to own their own car and is investing hugely in self-drive cars.
3 Cassandra Stavrou and Ryan Kohn saw the huge success of ‘gourmet’ popcorn in America
and started ‘Propercorn’ in 2012 to do the same in the UK. At the time of writing they were
selling the business for £25 million.
4 Lily Barton started Veg Organics in 2016 to bring organic fruit and vegetables to the high
street. She has invested her life savings and hopes the business will pay for itself within
two years.
Victoria Beckham Travis Kalanick Cassandra Stavrou Lily Barton
founds her fashion founds Uber and Ryan Kohn founds Veg
line found Propercorn Organics
Survival
Profit
Financial security
Personal satisfaction
Challenge
Independence

End of chapter exercises, page 62

1 Suggest one aim and one objective for a highly promising 15-year-old high-jumper.
➜ Aim: to become the best I can be.
➜ Objective: represent Team GB at the 2020 Olympics.
2 Suggest one aim and one objective for a 21 year old about to start her first business
(a body-building gym).
➜ Aim: to create a business that is profitable in the long term.
➜ Objective: to become profitable within 12 months.

39
 Topic 1.3 Putting a business idea into practice

3 Explain why Traidcraft can feel happy about its 2014–15 performance, even though it made
no profit.
➜ Its aims are about providing an outlet for goods made by poor workers in developing
countries. If it sold £10 million of product but had £10 million of costs, it still would have
achieved something important.
4 Discuss what financial objectives Johnno should set for the business in its opening year.
➜ With six investors he is probably very keen to be able to produce some profits and
therefore dividend payouts, but he should be cautious as it is probably better to build up a
substantial customer base than focus on profit. Today: establish distribution in Waitrose,
Sainsbury’s and Booths; tomorrow, turn sales into profit.
➜ So the immediate financial objectives might be survival in the first year and moving into
profit in the second year.
5 To what extent can Johnno trust that the quality of his jam will pull him through the difficult
start-up phase of the business?
➜ Sadly, having a great product is only a starting point; there is still lots to do. There is
no mention in the text of branding, but will ‘Johnno’s Jam’ be enough? Surely more is
needed to ensure that people can recognise and therefore repeat-purchase the jams?
➜ It is also unlikely that Johnno will be able to do everything on his own, so he must
employ some staff – perhaps for production, sales and delivery. Managing these people
will require a whole range of new skills from Johnno.
➜ To what extent can you trust in the jam alone? Very little: successful businesses require a
range of skills and talents.

Practice questions, page 63

Total: 20 marks
1 (a) Calculate the percentage growth rate in sales between 2013 and 2014. (2)
– Percentage change = change/original × 100
– 44/21 × 100 = +210%
(b) Outline one reason why it might be hard to manage a business that is growing so fast. (2)
– A business that trebles in size in a year probably needs to treble its workforce – and
that takes time and care and good management. Many businesses come unstuck at
this point (ASOS did and so did SuperGroup/Superdry, as each was growing too fast)
because many bright entrepreneurs prove to be poor at managing people.
2 Use Figure 13.2 to identify the year in which Dollar Shave Club sales rose the most in
millions of dollars. (1)
➜ In 2015 sales were (152 − 65) = $87 million up on 2014.
3 Analyse the benefits to Dubin of using social media to promote his business. (6)
➜ For a $4,000 video to be seen 22.5 million times is extraordinary, and also extraordinarily
good value. To reach that number of people through TV advertising would cost millions
of pounds in the UK. So one benefit of using social media was reaching lots of people at
a very low cost.
➜ A second benefit of social media is that it is disproportionately used by a younger
audience – exactly the people who are most likely to go for an innovative alternative to
Gillette. Older buyers are more likely to stick with what they know.
40
 13 Business aims and objectives

4 Michael Dubin must now decide on his future plans. He sees two options:
Option 1: Stay on as chief executive of Dollar Shave Club, working for new owner Unilever.
Option 2: Walk away and work at starting a brand new business.
Justify which one of these options he should choose. (9)
➜ Option 1:
– He has just made a staggering sum of money – far more than he will ever need – but if
he went straight on to a new start-up, there is a serious risk that he might lose a great
chunk of it. Most new businesses fail within 3–5 years and there is no evidence that
people do better with their second start-up than with their first. It would probably be
better to wait and think than to risk rushing into something.
– And why not spend a year or two perfecting things such as people management, while
all the risks are being absorbed by Unilever? Michael does the learning; Unilever pays.
It’s a good deal.
– Having spent three years or so building the business further, Michael can then start up
something new – if he still has the desire.
➜ Option 2:
– Walking away with $1 billion is an extraordinary thought. He can waste $25 million
a year for the next 40 years. He could also use his experience and his vast wealth to
do interesting and important things. Facebook’s Mark Zuckerberg’s plan to spend $3
billion to ‘end all disease’ has been treated with scepticism by many, but it shows how,
having made a huge fortune, entrepreneurs can look for something more meaningful
than just making more and more money. Michael Dubin’s new business could be a
social enterprise with a serious mission.
– Staying on as chief executive of a Unilever-owned business would mean a continuing
focus on profit. Dubin might want to go out on his own and try to make a difference to
society.

41
 14 Business revenue, costs
and profit
Teaching advice
Get in early; get in often. Inevitably there are many areas of the subject where profit calculations
are helpful. How important is motivation? Let’s work through an example which tests the impact
of higher staff motivation on profit. And so on. The marks available for calculations are hugely
important in terms of grades, but perhaps even more important is the time involved. A really
competent student will calculate a correct answer in half the time it takes the others. In this
Edexcel course, time is at a huge premium. Speed = grades. So start on this section of the course
early on (I would say by week two or three) and keep coming back to it. Among the questions at
the end of the chapter, the one on Toni’s ices is a little gem.
The GCSE worksheets produced by A–Z Business Training (www.a-zbusinesstraining.com) are
hugely helpful for giving students the practice they need. Also note that A–Z is offering a free
monthly email service called eBus17 to provide classroom exercises that will cover the course
widely, but will focus especially on business numeracy.

End of chapter exercises, page 68

1 Explain the difference between fixed costs and variable costs.
➜ Fixed costs do not change when output changes, e.g. rent; variable costs do, e.g. raw
materials.
2 A greengrocer buys punnets of strawberries for 50p and sells them for £1. She must also
pay £120 in weekly rent and £180 for other fixed costs.
(a) What is the total cost of selling 500 punnets per week?
– Fixed costs = £300; variable costs will total: 500 × £0.50p = £250
– Total cost = £550
(b) What is the total cost of selling 1,000 punnets per week?
– Fixed costs = £300; variable costs will total: 1,000 × £0.50p = £500
– Total cost = £800
3 Identify two fixed costs and two variable costs of running:
(a) a secondary school with 1,200 pupils.
– Fixed: teachers’ salaries; lighting and heating.
– Variable: textbooks provided one per pupil; canteen food bill.
(b) a Tesco supermarket.
– Fixed: managers’ salaries; property rental costs.
– Variable: buying supplies of food; maintenance cost on trollies.

42
 14 Business revenue, costs and profit

4 Use the information in Figure 14.1 on page 67 to explain how the business turned things
around from a £800 million loss to a £200 million profit.
➜ Going from minus £800 million to plus £200 million is a profit boost of £1,000 million.
➜ There are only two possible ways to boost profit: increase revenue or cut costs.
➜ The success was entirely down to cutting costs. Revenues actually fell by £700 million
between 2015 and 2016, but an amazing £1,700 million reduction in costs created the
£1,000 turnaround.
5 What is Toni’s profit per day?
➜ Profit is revenue minus total costs.
➜ Daily revenue is 150 × £2 = £300
➜ Daily costs total = (150 × £0.40p) + £100 which is £160
➜ So daily profit is £140
6 Toni’s daughter wants him to put the price up to £2.40; she thinks sales will stay at 150 ice
creams, but Toni is worried that sales will fall to 125.
(a) By how much will Toni’s profit change if his daughter is right?
– Daily revenue will now be 150 × £2.40 = £360
– Daily costs total = (150 × £0.40p) + £100 which is £160
– So daily profit is £200
– Daily profit will change by £60.
(b) What will the new profit be if Toni is right about the effect of a price rise?
– Daily revenue will now be 125 × £2.40 = £300
– Daily costs total = (125 × £0.40p) + £100 which is £150
– So daily profit is £150
(c) Outline one reason why Toni might still want to keep the price at £2.
– Toni may feel that the rise in profit due to a price rise may prove short-lived – for
example, charging £2.40 might encourage a rival to come along offering £2 ice creams
and that might hit his profit hard.

Practice questions, page 69

Total: 25 marks
1 Based on the owners’ plan, calculate the expected weekly: total costs. (2)
– Total costs per week: (£1.80 × 3,000) + £2,000 (1) = £7,400 (1)
2 Based on the owners’ plan, calculate the expected weekly profit. (2)
– Total revenue £4.40 × 3,000 = £13,200, so profit = £13,200 − £7,400 = £5,800
3 Analyse why sales proved lower than expected. (6)
➜ The dishes were poor quality because of the failure to attract and keep good chefs. This
would have affected customer loyalty, leading to a steady reduction in the number of
repeat customers.
➜ For the same reason, word of mouth about the restaurant would have been poor, so
fewer new people would try the restaurant than might have been expected. Years ago
word may have spread slowly, but in an online, social media-dominated world, bad news
travels very quickly indeed.

43
 Topic 1.3 Putting a business idea into practice

4 Actual variable costs were 25 per cent higher than predicted, and the number of dishes sold
was only 1,000. Calculate the weekly actual revenues. (2)
– Actual total revenue: £4.40 × 1,000 (1) = £4,400 (1)
5 Based on the data provided in question 4 calculate the weekly actual total costs. (2)
– Actual total costs: (£2.25* (1) × 1,000) + £2,000 = £4,250 (1)
– *25 per cent increase in variable costs, taking them to £1.80 × 1.25 = £2.25
6 When operating a Chinese restaurant such as Choy Sum:
(a) Identify one likely variable cost. (1)
– Variable: ingredients such as meat and rice; drinks such as beer and Coca-Cola.
(b) Identify one likely fixed cost. (1)
– Fixed: rent; heating and lighting; manager’s salary.
7 To get the business into profit the owners see two options:
Option 1: Focus all efforts on training and motivating the staff.
Option 2: Focus on building customer numbers by advertising in local papers and on social
media.
Justify which one of these options they should choose. (9)
➜ Option 1:
– From the customer’s point of view, it is simple: going out to any restaurant is relatively
expensive and it needs to feel pretty special – the parents want the kids to be hassling
to go back; the girl wants the boy’s eyes to light up when she says: ‘As a treat I’m taking
you to Choy Sum.’ So great food, great service and a great atmosphere are all important.
– Training is therefore vital, both in the kitchen and out front. An enthusiastic welcome
for that (slightly irritating) eight year old will work wonders, as would an extra dish of
prawn crackers, just for the kid. In business, a customer is a precious thing, and every
staff member should know it.
– Better training can also lead to higher motivation. Ensuring the service is special will
generate more smiles from customers, making the job more enjoyable.
– Option 1 is the way to build the business into one where word of mouth brings in the
customers – and social media comments will look after themselves.
➜ Option 2:
– Interestingly, the real Choy Sum has closed down. What its owners actually did
beforehand was spend a lot of time and money on advertising (‘If only people knew
we’re here we’d do so much better’). So the ‘real’ answer is Option 1.
– Nevertheless, it is possible to make a case for Option 2. One of the things customers
like in a restaurant is a buzzy atmosphere – which requires plenty of customers. So
a strong marketing campaign might bring in customers who, in turn, will help the
atmosphere, which in turn will lead to more customer enjoyment.
– The same is true for the staff. They want customers in order to avoid boredom and in
the hope of getting tips. So the busier the restaurant, the higher the staff motivation.
– On the other hand, the classic business phrase ‘revenue is vanity, profit is sanity’
may be relevant. Focusing only on customer numbers may be at the cost of profit.
Advertising is expensive, and so is building and maintaining a website. So there is a
risk that the owners might spend more on advertising than they gain from the extra
sales made.
44
15 Break-even

Teaching advice
What can one say? It’s break-even week – our equivalent of ‘bread week’ on ‘Bake Off’.
Examiners tend to think that break-even is easy and therefore home in on questions about
‘changes in revenue and costs’. So students need plenty of practice at adding in new revenue or
costs lines and interpreting the answers. Do note that although the Specification does not say
so, the appendix of formulae (Specification page 32) shows that calculations of break-even and
safety margin are required.

End of chapter exercises, page 74

1 What are John’s fixed costs if he makes and sells 25 hot dogs?
➜ £20 a day.
2 What would John’s variable costs be if he sold no hot dogs at all?
➜ Zero.
3 What are John’s total costs if he sells 20 hot dogs in an afternoon?
➜ £20 fi xed plus £2 variable = £22.
4 What would be the maximum sales revenue that John could take in one day?
➜ 50 × 75p = £37.50 (I would recommend getting out of this business).
5 Explain what is meant by the term ‘break-even’.
➜ It is the number of sales required to cover all costs but not enough to start making a
profit.
6 Outline two reasons why a business might want to be able to calculate its break-even point.
➜ To save the time involved in drawing a break-even chart.
➜ To calculate the safety margin given the current level of sales.
7 Explain how to find the break-even point on a break-even chart.
➜ Look for where the total costs line cuts the revenue line.
➜ Then draw a vertical dotted line down to the horizontal axis.
➜ Read off the number of units from that axis.
8 Calculate the total costs and total revenue of the business in the extract over the following
outputs: 0, 200, 400.
➜ At zero output, revenue − £0 and total costs = (£0 + £5,000) = £5,000
➜ At 200 units of output, revenue = £5,000; total costs = (£1,000 + £5,000) = £6,000
➜ At 400 units of output, revenue = £10,000; total costs = (£2,000 + £5,000) = £7,000

45
 Topic 1.3 Putting a business idea into practice

9 On a large piece of graph paper, draw a horizontal axis from 0 to 400 and a vertical axis
from £0 to £10,000. Plot the revenue and total cost figures onto the graph and estimate the
break-even output. What is the profit/loss at the following levels of output: 100 and 400?
➜ Here is the break-even chart:

£s
10,000

9,000

8,000 Revenue

7,000

6,000 Fixed costs

5,000
Total costs
4,000

3,000

2,000

1,000

0
0 100 200 300 400

Units

➜ Break-even: 250 units

➜ At 100 units of output: − £3,000
➜ At 400 units of output: +£3,000
10 If the company could not sell more than 150 toys in a month, what might the management do?
➜ If sales couldn’t be boosted above 150 toys, the business would face profits of £3,750 −
£5,750 = minus £2,000. If it seems like a one-off it may not be serious and no response
may be needed. But if it seems the new normal, the management should consider finding
smaller, cheaper premises – and perhaps thinking of cutting a management job.

Practice questions, page 75

Total: 15 marks
1 Using the chart, calculate the profit or loss made by TurkishHolidays.com when
bookings are a) 240 a week and b) 80 a week. (4)
➜ At 240 a week the weekly profit is £12,000 − £10,500 = £1,500
➜ At 80 units sold the figure is £4,000 − £5,000 = minus £1,000
2 Using the chart, calculate the company’s safety margin when bookings are 240 a week. (2)
➜ Break-even seems to be 140 units, so the safety margin is 240 − 140 = 100 units.
3 To get the business back into profit there are two options:
Option 1: Cut costs to lower the break-even point.
Option 2: Rebuild revenues, perhaps by offering new destinations such as Portugal.
Justify which one of these options they should choose. (9)
46
 15 Break-even

➜ Option 1:
– Many things in business are outside management’s control, such as consumer
demand. But costs are definitely an area that managers can act upon. For high street
travel agencies the cost of rent and wages may be hard to adjust, but TurkishHolidays.
com is an online agency, so the £2,000 a week of fi xed costs can surely be tackled. The
location of the office is irrelevant to customer demand, so the business should move to
the smallest, cheapest offices possible. Staff may find it cramped but will understand
that this is necessary to keep the business going in tough times.
– According to the graph, a halving of fi xed costs to £1,000 a week would enable the
business to break even at just 70 sales a week. That must be the objective.
➜ Option 2:
– If sales have fallen to 80 bookings while the break-even point is 140, it is probably
pointless to focus on cost-cutting. Even super-tough cost-cutting would probably still
leave the business making a loss. What is needed are more sales. As far as we know
there is nothing wrong with the service offered, it is just that people are not going to
Turkey.
– Unfortunately, it is not just a matter of getting new holiday destinations, it will also be
necessary to introduce a new brand name. PortugalHoliday.com will do fine.
– In this way the business can recover, hopefully to beyond its break-even point – and in
the longer term it should still be possible to enjoy success in Turkey when the market
recovers.

47
 16 The importance of cash

Teaching advice
Understanding cash flow is a measure of a good business student. Some may struggle to
understand the importance of time sequences and perhaps underestimate the implications of
running out of cash. Why not try filling in this table?

Possible cash flow problems for a business Possible consequences

A bank demands to have its loan repaid by the end of the month
Having to press your customers to pay up as quickly as possible
A hotel hasn’t got the cash to redecorate its rather grubby rooms

Some teachers like the bath analogy for this part of the course – tap inflow and drain outflow –
but I’ve always thought that is a bit abstract. I prefer students to see the problems while playing
with cash flow numbers.

End of chapter exercises, page 79

1 Why do businesses think that money in their bank accounts is part of their cash total?
➜ Because electronic and online banking make money in a bank account as usable as the
cash in your pocket.
2 How might a house-building firm suffer if it lacks the cash to buy supplies of bricks in bulk?
➜ It may have to pay significantly higher costs per brick from the failure to buy in bulk.
That will add to variable costs, which will then push up total costs and therefore eat away
at profit.
3 Outline two cash flow problems a British seaside hotel business might have.
➜ Seasonality will be a problem, with cash inflows being hard to find for perhaps eight
months of the year, making it almost impossible to prevent negative cash flow.
➜ Even in summer the British weather can be bad, perhaps turning August from being the
month that refills the cash coffers to one that does little better than April.
4 Before her first beauty salon opened, Moira Angell’s builders took four months to complete
the work – exactly double what they had promised. Outline two ways this would affect the
cash position of the business.
➜ The worst thing about delays at this stage is that they are delaying the opening date and
therefore postponing when cash inflows will finally start.
➜ In addition, the extra time taken will cost the business in terms of extra rent, extra light
and heat, and probably more for those builders, too.

48
 16 The importance of cash

5 Look at Table 16.2, which shows the cash flow for a women’s clothes shop. Explain two
ways in which the cash position of the business might be improved.
➜ A tough approach would be to say: get all that surplus cash out of the business – if
£75,000 or so was paid out to the shareholders, the managers would have to take far
better care of the monthly cash flow position.
➜ If suppliers were paid a month later, that would delay a chunk of cash outflow and
therefore improve the company’s short-term cash position.

Practice questions, page 79

Total: 20 marks
1 Outline one possible explanation of why Oliver Adams faced such a cash flow crisis. (2)
➜ One of the following (or any other reasonable answer):
– A ‘failed attempt at expansion’ might cause a cash flow crisis. ‘Expansion’ effectively
means spending more in the hope of getting a reward later, e.g. building an extension
to a factory or buying a bakery chain. So expansion requires negative cash flow in the
short term. If the expansion fails, there is no way of getting the cash back.
– A price war pushing bread prices down by 20 per cent is a huge problem because bread
is a necessity rather than an indulgence. Whereas people might buy 20 per cent more
chocolate if the price fell 20 per cent, it is hard to see 20 per cent more volume of bread
being bought. So a price cut will lead to a fall in cash inflow but with no impact on
cash outflow – so cash flow suffers.
2 Outline how the cash problems at Oliver Adams might have been helped if the business had
a large enough overdraft facility. (2)
➜ An overdraft facility allows a company’s bank account to go into the red, up to the limit
of that facility. This would buy time for the company to sort out how to improve its
underlying trading position.
3 Define the term ‘losses’. (1)
➜ When total costs are greater than revenues.
4 Outline one reason why closing more shops might make the company’s problems worse. (2)
➜ If the business has high fi xed overhead costs, closing shops can cut off the cash inflow
needed to cover those heavy head office costs. Closing shops would make sense only if
there were also redundancies at head office. You do not need so many managers if you
have fewer shops in operation.
5 Define the term ‘suppliers’. (1)
➜ Businesses that provide a company with essential inputs such as raw materials.
6 Evaluate whether clearing this cash flow crisis will enable Oliver Adams to become
successful again. You should use the information given as well as your knowledge of
business. (12)
➜ It sounds very difficult. The text makes it clear that the problem is wider than Oliver
Adams Ltd. It says ‘independent bakeries such as Oliver Adams suffered’, showing that
the supermarket price war has put the squeeze on everyone.

49
 Topic 1.3 Putting a business idea into practice

➜ On the other hand, there is an old saying that ‘it’s darkest before the dawn’, meaning
that just when things are looking especially bleak, things sometimes get better. In this
case it is easy to see what could happen. The supermarket bread wars may start to ease
off and if prices started to drift upwards again, perhaps independent bakeries could start
to rebuild their profit levels.
➜ If Oliver Adams is to have a successful future, it needs to plan now for a strategy that
may start to work only when the supermarket price war eases off. It needs to differentiate
itself clearly from ‘ordinary’ bread, focusing instead on special, fancier breads that people
are happy to pay a price premium for. Then it might have a serious chance of becoming
successful again.

50
17 Cash flow forecasts

Teaching advice
The key to success with cash flow forecasts is to keep the numbers as simple as possible. It
sounds silly, but make a conscious effort to work on students’ ability to deal with (‘£000s’) at the
top of a table. Some ignore it completely and others think they have to shove lots of zeros into
every part of the calculation (inevitably making a mistake).
With cash flow forecasts it is important to keep finding a realistic context for the data. Beware
of moving too quickly to abstract scenarios such as ‘the XYZ company has the following cash
flow forecast’. Students need to be able to picture the business context. Here are some useful
scenarios:
➜ Cash flows for a small football club, such as Bury FC, with virtually no inflows during the
period May–July.
➜ Cash flows for a small, local toy shop.
➜ Cash flows for a low-cost airline about to start up.
➜ Cash flows for a small building firm about to construct its first house from scratch.

End of chapter exercises, page 84

1 Give two benefits of cash flow forecasting for a new, small firm.
➜ To give an idea about how much finance it will need to cover negative cash flows until
the business starts paying for itself.
➜ May point to months when excessive cash outflows need to be smoothed out, e.g.
delaying that planned investment in opening a second outlet.
2 Explain how the cash position of a clothes shop would be affected by having a ‘50 per cent
off today!’ sale.
➜ The sale would bring in more customers, perhaps leading to four times the usual level of
business. That would mean cash inflows of perhaps twice the usual level (everything is
half price). Cash outflows would be unaffected in the short term because the items would
be sold from stock. So cash inflow rises while cash outflows stay the same, leading to a
significant boost to cash flow.
3 A small hairdressing business decides to expand by opening up a second salon on the other
side of town. Explain the probable effect of this on the cash flow of the business.
➜ The short-term effect will be to drain cash flow, as money has to be spent on new
premises, decoration, new equipment and recruiting and training staff.
➜ As long as the new salon proves successful, there should be positive cash flows in the
medium–long term.

51
 Topic 1.3 Putting a business idea into practice

4 Explain in your own words why it is sensible to forecast cash flows cautiously.
➜ Forecast cash inflows cautiously, in case an important customer pays late or, worse, slides
into bankruptcy – it is better to have favourable surprises than horrible shocks.
➜ Forecast cash outflows cautiously, in case an unexpected problem requires immediate
cash (a key machine caught on fire, had to be replaced urgently at a cost of £200,000 –
cash). A cautious cash flow builds in an allowance for unplanned outflows.

Practice questions, page 84

Total: 15 marks
1 Define the term ‘cash flow’. (1)
➜ The regular flow of money into and out of a firm’s bank account.
2 Outline one effect of speedier supplier payments on Waitrose’s own cash flow position. (2)
➜ Virtually no effect, given that it is less than 1 per cent of Waitrose purchases. Yes, it will
have a tiny, negative effect on short-term cash flow, but it is hard to think it is a real
problem for such a powerful business.
3 Evaluate whether Waitrose was right to make this gesture to 600 of its smallest suppliers.
You should use the information given as well as your knowledge of business. (12)
➜ The case for this move is that it will help 600 small businesses with their cash flow,
giving them the ability to grow faster, perhaps developing new product ideas that
Waitrose customers will enjoy trying out. Even better, the knowledge that small suppliers
are treated in this way may encourage new small businesses to start up, safe in the
knowledge that their cash flow struggles during the start-up phase will be softened
greatly by speedy cash inflows from Waitrose. The Waitrose publicity machine can feed
stories about all this to an eager press and public, which enhances Waitrose’s image as
the nation’s darling (all it did was copy Tesco, but that will probably be forgotten).
➜ The case against this move is simply to emphasise it as a rather cynical approach to
business. After all, it represents less than 1 per cent of the company’s supplier payments.
And what happens when Oppo delivers its £101,000th ice cream? Do the payments
revert to the more usual 70 days instead of 7 (presumably yes)? So surely Waitrose should
have a more comprehensive scheme, with perhaps micro businesses such as Oppo on
7 days’ credit, small–medium businesses on, say, 30 days’ credit and suppliers delivering
£10 million or more on normal credit terms of perhaps 70 days.
➜ Broadly, ‘making a gesture’ smacks of a cynical public relations initiative. Serious
businesses come up with serious policies. This one will help an Oppo in the short term,
but make it hard for the company to progress from tiny to small.

52
18 Sources of small business
finance
Teaching advice
This is the longest chapter of the book and may prove a bit of a test for students. I suggest
teaching the different sources through activities in class and then getting students to read the
chapter after they have learned most of the material. With all the YouTube clips on Dragon’s Den
and crowdfunding, that shouldn’t be too hard.
Ultimately the test of a student is whether they can suggest the right source of finance for the
right business circumstances, i.e. can they apply what they have learned? The problem is the
quantity of information that needs to be understood. The key themes are:
➜ matching the source to the timescale of the financial need
➜ share capital versus loan capital
➜ overdraft versus loan
➜ start-up finance (excluding profit) versus ongoing finance (where profit is the key).

The practice questions on Baby Suds are a very useful test of understanding and application.

End of chapter exercises, page 88

1 Explain why the founder of a business is likely to care about keeping 51 per cent of the
business’s share capital.
➜ To keep full control of the business, i.e. control over the future direction of the business
as well as the day-to-day management. Shareholders have voting rights and no founder
of a business wants to be voted out.
➜ However much a business needs capital, the founder is likely to want to remain the
single, key person in charge.
2 Identify whether the following situations require short- or long-term finance.
(a) A toy shop buying extra stock for the Christmas period.
– Stock: short-term.
(b) Buying land nearby in case it is needed for expansion.
– Land: long-term.
(c) Redecorating your restaurant.
– Redecoration: short-term.
(d) Buying a new company BMW for the managing director.
– Car: long-term.
3 Why is retained profit the ideal source of capital to finance growth?
➜ Because the business has it and therefore does not need to sacrifice anything to get it
(such as annual interest payments or dividend payments).
➜ It is permanent, so it does not need to be repaid (whereas a loan does).

53
 Topic 1.3 Putting a business idea into practice

4 Outline two possible advantages to an investor of buying shares in a business rather than
lending it money.
➜ You share in the success of the business and therefore could make a great deal from the
investment – if the business is successful, the price of the shares will rise.
➜ Also, if the business makes good profits it can pay out high dividends (to shareholders).
5 Explain the difference between an overdraft and an overdraft facility.
➜ An overdraft facility gives a business the right to overspend on its bank account up to an
agreed maximum, e.g. an overdraft facility of £20,000 means you can allow your bank
balance to go to −£20,000.
➜ An overdraft is the amount of the facility you are actually using. So if your current
account is £5,000 in the red, you have a £5,000 overdraft.

Practice questions, page 89

Total: 20 marks
1 Outline one possible reason why the founders only used share capital to finance the start-
up of Baby Suds. (2)
➜ They may have been worried about getting into debt. Loan capital requires regular
interest payments and the repayment of set sums at set times. As long as they could
afford to finance the start-up through shares only, why would they want to get into debt?
2 The manufacturer who produced the shampoos required to be paid in advance. Outline why
it may not have been willing to give Baby Suds any trade credit. (2)
➜ 30 per cent of new firms fail to survive their first year, so it isn’t surprising that suppliers
only want to provide goods for cash. Giving credit creates the risk of not being paid for
goods that have been supplied.
3 Given the information about the manufacturing costs of producing 200,000 bottles,
calculate the cost per bottle to Baby Suds. (2)
– 200,000 bottles were to cost the company £40,000. Therefore the cost per bottle is
£40,000/200,000 = 20p per bottle.
4 Given the 15p profit per bottle, calculate Baby Suds’ selling price to Waitrose. (2)
– It appears to be 20p + 15p = 35p. Perhaps this fails to capture some of the fi xed costs.
5 Evaluate whether an overdraft would be the best way to finance any further growth for
Baby Suds. You should use your knowledge of the case study as well as your knowledge
of business. (12)
➜ It is hard to say given the limited information. The money may seem to be needed to
finance another big order such as the Waitrose one (which would suggest short-term
finance and therefore an overdraft). However, it would be sensible to think of the
possibility of a series of several big orders, in which case longer-term finance might be
needed.
➜ An overdraft always looks an attractive option, but as the bank can demand to be repaid
within 24 hours, there is a risk that one mistake might cause the bank to lose confidence
and demand its money back, effectively forcing the business to fold.

54
 18 Sources of small business finance

➜ A medium-term loan, however, might tie up the business with high interest charges for
the next two or three years, even though the money might be needed for only a month or
two.
➜ Morgan has already tried once to sell more shares in the business, so that could still be
an option. But perhaps she fears losing control of the business, especially if she needed to
sell more than 50 per cent of the shares.
➜ Morgan needs to decide mainly in relation to timescales: if she needs the finance for the
short term only, an overdraft is a realistic option. But if it is longer term, she can decide
between a bank loan and raising equity capital – though she may feel that the huge
potential of the business makes it a silly time to sell off shares in the future profits of the
business.

55
 Exam-style questions on
Topic 1.3
Multiple choice questions, page 90
1 A £2,800, B £3,200
2 (£80,000 + £120,000) / 1,000 units = £200 per unit
3 (b)
4 (a), (c) (not (e); why would a socially-minded club want cash ‘as high as possible’?)
5 (c)
6 (b), (d)
7 (a)
8 + £80,000

Discussion question, page 91

9 Discuss the importance of cash flow to a growing young business. [6]
➜ When businesses are new (young), suppliers can be reluctant to supply goods on credit
– so cash outflows are high; and if the business is growing, the quantities of supplies
needed will be rising all the time – worsening the problem of cash outflows.
➜ At the same time, customers of young firms feel they have a strong position and may
negotiate for generous credit terms – this delays the cash inflows.
➜ High outflows and low inflows can put a huge squeeze on a growing young business.

56
19 Ownership and liability

Teaching advice
There has rarely been a GCSE Business exam without a question on this topic. Yet students
are surprisingly weak at it. For some strange reason a lot of students think that private limited
companies have unlimited liability. So, of all the topics in the course, this one bears careful
teaching and obsessive revision.
I think it would be nice if students had the opportunity to discuss in class:
1 What might be the result if a sole trader’s business closed down owing £100,000?
2 Why are more businesses unlimited than limited in their liability?
3 What would be the effect on the economy of a decision to scrap the legal protection of
‘limited liability’?

End of chapter exercises, page 94

1 Why might an entrepreneur be reluctant to sell more than 50 per cent of the shares in their
business?
➜ The loss of control of key decisions such as who can be a director and whether the
business should be sold to a bidder, as happened when Cadbury was bought by Kraft.
2 Use Figure 19.1 on page 92 to calculate the percentage of businesses in England and Wales
that had unlimited liability in 2015.
➜ 3,736,000/5,336,000 × 100 = 70%
3 (a) Use Figure 19.1 on page 92 to calculate the percentage growth in limited companies
between 2008 and 2015.
– Percentage change = change/original × 100
– 730,000/870,000 × 100 = +83.9%
(b) Outline one possible reason for this growth in the number of companies in England and
Wales.
– Given that the number of unlimited liability businesses also rose, it suggests a broad
and rapid increase in the numbers wanting to start a business. This might be due to
the inspiration of Dragon’s Den-type programmes making entrepreneurship seem
exciting.
4 Explain why it is easier to make bold business decisions if your business is a limited
company than if it is a sole trader with unlimited liability.
➜ Protected by limited liability it is possible to take significant risks knowing that if all goes
well there may be a fortune to be made but if it goes wrong your losses are restricted to
your investment – there are no further impacts on your personal or family finances.

57
 Topic 1.4 Making the business effective

5 K.V. Builders and Sons is an unlimited liability business that builds houses. It employs five
people and borrows up to £150,000 to finance each job. Explain two reasons why it should
form a company and therefore provide limited liability to its owners.
➜ Building is a naturally risky business, first operationally, in that things can go drastically
wrong. A job priced at £75,000 may overrun dreadfully because of unexpected issues
such as rot under the floorboards. So a £75,000 job may end up costing K.V. Builders
£150,000.
➜ Any business that involves borrowings should really have limited liability. If K.V. Builders
borrows £150,000 to build an extension but the householder dies without paying, things
may become very difficult with the bank. Limited liability makes sense, so they should
form a company.

Practice questions, page 95

Total: 20 marks
1 Outline what ‘Ltd’ means in Jamie Oliver Holdings Ltd. (2)
➜ The business is incorporated as a private limited company and therefore has limited
liability.
2 Outline why it makes sense for a business such as Jamie Oliver Holdings Ltd to have limited
liability. (2)
➜ His business is restaurants, which are hard to start and even harder to keep going.
Famous chefs such as Raymond Blanc and Gordon Ramsay have had some spectacular
flops and closures. Because it is a risky business, limited liability makes huge sense.
➜ It is also vital for Jamie because other projects (such as a TV series) must make it
impossible to keep on top of his restaurant business all the time, so things could slip
without him knowing, making it very important to avoid unlimited liability.
3 Calculate total costs for Jamie Oliver Holdings Ltd in 2014. (2)
➜ Profit = Revenue − Total costs
➜ minus £12.8m = £39.7m − ?? (1) (to find the answer, just add £12.8m and £39.7m)
➜ Answer £39.7m − £52.5m = minus £12.8m
➜ So the answer = £52.5m (1)
4 Outline one way in which Jamie Oliver Holdings Ltd might be affected by the collapse of
the owner of the Jamie’s Italian brand in Australia. (2)
➜ It should not be affected too badly financially in the short term, but there is a risk of
future deals coming unstuck. Someone thinking of paying for the Jamie’s Kitchen name
in China, say, might decide it is too risky on the basis of the Australian failure.
5 Evaluate the importance to a business such as Jamie’s Italian of online customer ratings.
You should use the information given as well as your knowledge of business. (12)
➜ As an established business, the customer ratings will not matter day by day. In other
words, one awful review added today will not empty the restaurants tonight. When
a restaurant business starts, however, it is fair to assume that each review is crucial.
A stinker of a review might halt a recently started restaurant in its tracks.

58
 19 Ownership and liability

➜ The value of high online ratings is to bring in new customers and to reassure those who
have not been for a while. If the ratings slip (and 191st in Aberdeen doesn’t impress
me much) it will have a steady downward influence on customer numbers. And in the
restaurant trade, that is important. Fewer customers means less in tips for the waiting
staff, so the good ones leave to find a busier restaurant elsewhere. With the best staff
gone, service levels slip further, pulling the ratings down further. And so on.
➜ On the other hand, in a city like London it may not matter hugely. Lots of tourists and
office workers are finding something to eat without careful research. As long as the sign
says Jamie and there are some ‘pukkas’ in the window and on the menu, customers may
keep coming. As long as they are talking (and perhaps drinking) enough, they may not
notice that the food is a bit ordinary. Jamie is a brand – and brands sell.

59
 20 Franchising

Teaching advice
With franchise businesses in almost every high street it should be easy to make this section
relevant and interesting. If you have a McDonald’s locally, check whether it is franchised or
managed. Other chains such as Subway, Shakeaway and BSM (driving school) are all franchised.
The franchise/halfway house to entrepreneurship seems to work well for some but frustrates
others. This depends partly on their personal objectives (e.g. be my own boss) but also on the
quality of help from the franchise owner.
Buying a franchise is often presented as a low-risk start-up option. Students should be
encouraged to be sceptical of this view. The failure rate does seem to be lower among franchise
start-ups, but that does not mean all franchises succeed. A local franchisee may welcome an
invite to come in and talk – well worth a try.

End of chapter exercises, page 98

1 Give two reasons why it is hard to develop a business rapidly.
➜ Hard to find enough capital.
➜ Difficult to recruit enough good managers.
2 Look at Figure 20.1 on page 97. Domino’s UK is growing rapidly, but from a low base. By how
many times must it increase its number of outlets to catch up with Subway?
➜ 46,000/800 = 57.5 times
3 Explain one advantage and one disadvantage of running a local Subway franchise compared
with running an independent sandwich shop.
➜ Advantage: the international name recognition makes the Subway brand worth a lot –
especially in tourist areas.
➜ Disadvantage: Subway makes a series of charges that can drain the profit from the business.
4 Explain why a bank might be more willing to lend money to someone opening a franchise
outlet than someone opening a fully independent business.
➜ There is evidence that opening a franchise carries a lower risk of outright failure than
starting up something new. It is a tried-and-tested business model. Because banks see
their own risks as lower, they are happier to lend money.
5 Outline two reasons for and two reasons against Ian deciding to buy a franchise.
➜ He is putting his house – owned jointly with his wife – at risk so if he ‘must’ open a
business, it would be sensible to opt for the lower-risk approach, which is franchising.
➜ He has a maximum of £145,000 of start-up capital. He should be able to identify a
franchise that will need no more than that to get going, whereas the amount required to
start a brand new business will be subject to more uncertainty.

60
 20 Franchising

➜ Against a franchise is that after ‘ten years of frustration’ he may find being a franchisee
restricting because of the relative lack of independence.
➜ Also against a franchise is his personal objective and ‘desire to prove’ something to his
wife and parents. Perhaps only a brand new business will achieve that.
6 Recommend whether he should buy a franchise or go independent. Explain your answer.
➜ Given the financial risk involving his house, it would be reckless to start something
completely independently. In effect, there would be a 50/50 chance of it failing within
three years, leaving the couple badly exposed financially.
➜ In this case, the lower risk level means a franchise makes more sense.

Practice questions, page 99

Total: 20 marks
1 Outline one way in which an investment of £110,000 might be funded. (2)
➜ If break-even can be achieved in six months, it would be fine to fund much of the start-
up on the basis of a relatively short-dated loan – perhaps two years. That would provide
plenty of time beyond the break-even point to make the profit to repay the loan.
2 Discuss the difference to a new franchise business of breaking even in 18 months compared
with six months. (6)
➜ The difference would be huge. Taking three times longer to break even means three
times longer with an underlying position that is likely to drain the cash from your bank
account. Profit and cash flow are not the same, but they do overlap in many ways. So an
18-month period until break-even would require a much larger capital sum to get started.
➜ On the other hand, a franchise is likely to be an agreement covering a 10–20-year period,
so you could argue that in the longer term the difference between 6 and 18 months is not
that important. Fifteen years on, as long as the franchise is fundamentally profitable, the
start-up difficulties will be a distant memory.
3 Evaluate the risks and rewards that might be involved in buying a Snap Fitness franchise.
You should use the information given as well as your knowledge of business. (12)
➜ From the text the risks look considerable. This is a highly competitive market and so
what is needed is a really distinctive proposition – to make Snap Fitness stand out and
preferably get talked about. There is nothing there to suggest that it is anything special.
Indeed, the comment in the text about no one knowing the brand name is very important.
If customers do not know the Snap Fitness brand, then what is the value in the franchise?
➜ Furthermore, there are clear doubts about whether Snap Fitness really does what it
claims to support its franchisees. For a ‘minimum’ investment of £110,000, this sounds a
really poor deal.
➜ On the other hand, the Milton Keynes franchisee’s statement might indicate a more
positive outcome. If Snap Fitness really is helpful with equipment and training, perhaps
it is possible to quickly make the business profitable. It may depend a lot on location –
if there is an area with relatively few gyms, succeeding with Snap Fitness might be a
realistic prospect.
➜ Overall, though, the evidence presented makes it seem a relatively unattractive way of
risking £110,000-plus.

61
 21 Business location

Teaching advice
Location is an interesting topic for students and an irresistible one for examiners. It shouts
9- or 12-mark questions. With the 9-marker, would you recommend location A or B? For the
12-marker, evaluate the strengths of the station entrance location for the XYZ company. So
take care to prepare students well. The practice question on Square Root soda is a perfect
preparation for the 9-marker.
The fundamental questions involved in location decisions and judgements are:
➜ Is it a customer-facing service business or a manufacturer?
➜ If it is a service, is it rooted in impulse (a sweetshop?) or a planned purchase?
➜ What is the right balance between high footfall/high cost and lower footfall/lower cost?
➜ How important are ancillary factors such as parking and the need to cluster
(e.g. antique shops)?

End of chapter exercises, page 104

1 Explain what the text means by the trade-off ‘between rental cost and value’ on page 100.
➜ As the location table shows, rental costs of shops can vary enormously depending upon
location. The value of a location comes from the type of customer the area attracts
(e.g. New Cathedral Street in Manchester attracts wealthy shoppers) and the footfall,
i.e. the number of people walking past. The greater the value of a location, the more you
can afford to pay in rent.
2 The text covers four important location factors: proximity to customers, materials,
employees and competitors. Explain which one you believe to be the most important of the
four in the case of locating:
(a) an ice cream parlour, with all ice cream made on the premises.
– Proximity to customers may be the most important, not only for the direct reason
(more people to sell to) but also because there is nothing like seeing someone licking
an ice cream to get the ice cream juices flowing.
(b) a new waste landfill site.
– Proximity to materials in a very specific way, that is, nearness to where the rubbish
is being produced that needs to go into landfill (if it is not conveniently near, builders
may be tempted to fly-tip).

62
 21 Business location

3 Explain in your own words why it might be worth paying £1,010 per square foot to be located
in London’s Oxford Street.
➜ This is probably the busiest shopping street in Britain and possibly the whole of Europe.
So there are thousands of potential customers every day, including many tourists as well
as locals. If you are selling high profit margin products to a mass market, Oxford Street is
the place for you. Sales and profits could be so huge as to cover the rental cost in comfort
– and still make plenty of profit.
4 (a) Copy the figures for the Arndale Centre and work out its profit if sales revenue doubles
to £1,200,000.

Arndale Centre, Manchester

with doubled sales
Total
Annual sales revenue £1,200,000 £1,200,000
Annual rent on 950 sq ft shop £102,000
Other fixed costs £56,000
Variable costs £720,000
Total costs £878,000 £878,000
Profit £322,000

(b) Explain why the doubling of sales has such a huge effect on profit at the Arndale location.
– Because fi xed costs are a relatively high proportion of total costs. So, as sales double,
variable costs also double but the fi xed costs are unaffected. That is why the rise in
total costs is much less than double, allowing profit to jump up.

Practice questions, page 105

Total: 15 marks
1 Analyse the probable reasons why Robyn and Ed located production in a railway arch in
Dalston. (6)
➜ Dalston, it seems, is at the heart of the trendy resurgence of East London, so the railway
arch would give quick delivery times (and low delivery cost) and it would be quick and
easy for trendy drinkers to visit the Square Root premises.
➜ The railway arch may also add a trendy mystique to the business, making it seem quirky
and small – a far cry from Coca-Cola. This could add value and perhaps make it possible
to charge a slightly higher price.
2 Ed and Robyn are getting concerned about keeping up with demand. They see two options:
Option 1: Follow the example of big competitor Fever-Tree and get an established soft
drinks producer to manufacture Square Root sodas for them.
Option 2: Rent a second railway arch and hire more staff to double the rate of production.
Justify which one of these options they should choose. (9)

63
 Topic 1.4 Making the business effective

➜ Option 1:
– Fever-Tree’s global success shows that people do not necessarily care where something
is made, and in what way. Probably it matters that Fever-Tree is made in Britain,
but the fact that its product is outsourced does not seem to worry anyone. Therefore
Option 1 is a viable idea. It may be that the product is made far from London. So what,
if the trendy Dalston drinkers are willing to let the matter go. Perhaps they are happy
with a veneer of authenticity from a local company.
– The benefit of outsourcing would be huge. It would enable Ed and Robyn to increase
sales and profits without risking a big capital investment. And in truth, a second
railway arch’s physical capacity may soon be used up if things start to grow, forcing
them to open yet another, or move the whole production side of the business to a
bigger factory.
– There is a risk in business in being too sentimental and therefore hanging on to old
ideas when future profitability may call for change.
➜ Option 2:
– Fever-Tree could be seen as the exception to a general rule. It swept to global success
without having much history or ‘provenance’. Square Root might be right in keeping
things fully authentic by holding on to the image of ‘local, artisan production’. Renting
a second railway arch and hiring more staff (as opposed to more machinery) is the
exact story local customers would love to hear. And as long as the demand is there, Ed
and Robyn should be able to double profits in this way.
– Having true local roots can become a huge advantage in the long term – it adds value
to pasties to be ‘Cornish’ and to pork pies to be from Melton Mowbray (Leicestershire).
Eventually it may be that cafe-goers in Paris or New York are demanding a Dalston
soda. All helped by the image of real people working in a railway arch.

64
22 Marketing mix

Teaching advice
The temptation here will be to over-teach. We are so familiar with terms like ‘skimming’ and
‘penetration’ that we will be inclined to put in more terminology than necessary. Beware of doing
so. What students need is practice at applying elements of the mix (and the mix as a whole) to
different business situations.
For elements of the mix, launching the next iPhone is always an option, perhaps especially
in relation to pricing. At the time of writing, Apple’s UK market share of smartphones was
15 per cent by volume but 45 per cent by value. Given this situation, should the company consider
bringing down the price for its next iPhone launch?
Then, to get a feel for the mix as a whole, emphasise the need for co-ordination and coherence.
In exams, students reduce everything to price cuts and promotions, even when the marketing
mix is directed towards an upmarket image. It is more important to get students to see why that
is wrong than to teach them extra terminology.

End of chapter exercises, page 109

1 Why is it important for a business to target a specific customer need?
➜ As Marks & Spencer proves so effectively, it is almost impossible to be all things to
everyone. I don’t just want to buy ‘a car’, I want one that suits me. So car manufacturers
end up producing lots of different models, to suit different types of people. They are
targeting specific customer needs.
2 Outline the marketing mix used by one of the following:
(a) Cadbury’s Creme Eggs
– Cadbury has done a lot in relation to the product, including new launches (Creme Egg
bar and Twisted) and the shocking switch from Cadbury milk chocolate to a general
chocolate mix.
– Price: quite high per egg, but discounts for bulk buys, e.g. pack of six.
– Promotion: TV advertising from January to Easter.
– Place: sweetshops, supermarkets and wherever chocolates are bought on impulse.
(b) Tesco stores
– Product: stores to meet different needs, e.g. Tesco Express and Tesco Extra
(superstores).
– Price: huge range, but generally aiming to be highly competitive.
– Promotion: TV advertising plugging the message: Every Little Helps.
– Place: everywhere you turn!

65
 Topic 1.4 Making the business effective

(c) Ryanair.
– Product: no-frills flights (though with half a smile these days).
– Price: the lowest.
– Place: online.
– Promotion: press and poster advertisements designed to look economical (all giving a
clear focus on ‘no frills’).
3 Why might ‘buy one get one free’ be a poor way to boost the long-term image and sales of
a brand?
➜ It undermines the perceived value of a brand when customers are slinging it into the
shopping trolley by the handful. Lindt would hate to see Lindor on a BOGOF deal, and
what about a Mercedes sports car – buy one get one free? To boost long-term image and
sales the key is a consistent brand image, backed by consistent advertising.
4 Explain one argument for, and one against, Chanel’s attempt to stop Superdrug from
stocking its Chanel No. 5 perfume.
➜ For the attempt to stop Superdrug: clearly it is an elitist approach towards Superdrug
and its customers, but perhaps necessary to keep a prestigious brand away from a
retail environment based on low prices. Chanel surely has the right to protect the image
of its brands.
➜ Against the attempt to stop Superdrug: Chanel’s reputation that is cultivated in shops
such as Harrods and Harvey Nichols will surely not be damaged just because the brand is
in Superdrug. If Chanel had enough confidence in the brand’s image, it would not worry.

Practice questions, page 109

Total: 20 marks
1 Define the term ‘marketing mix’. (1)
➜ How a business uses the 4P variables (product, price, promotion, place) within its
marketing strategy.
2 Calculate Sainsbury’s price per tea bag for Twinings and for Tetley. (2)
– Tetley: £2.30/80 = 2.9p
– Twinings: £3.50/100 = 3.5p
3 Calculate the percentage extra that Twinings charges per bag compared with Tetley. (2)
– 20 per cent, or 20.7 per cent to be precise (0.6/2.9 × 100 = +20.7%).
4 Outline one way in which a business such as Twinings benefits from charging a price
premium. (2)
➜ With a price premium almost certainly comes a higher level of profit per pack sold.
That could provide the funds for a higher level of spending on promotion in general
and advertising in particular. TV advertising is what Twinings does to further enhance
its image.
5 Use Figure 22.2 to identify the year in which sales of Twinings Tea overtook sales
of Tetley. (1)
➜ 2014.

66
 22 Marketing mix

6 From the data provided, evaluate the effectiveness of the marketing mix used for the launch
of Twinings Everyday Tea. You should use the information given as well as your knowledge
of business. (12)
➜ Judging by the table of sales figures, it is hard not to conclude that Twinings Everyday Tea
has been a fabulous success. Sales of Twinings teas have nearly doubled since the 2005
launch date, largely at the expense of Tetley, based on the limited data available to us.
➜ The mix used by Twinings offered a similar product but a posher image. So the 20
per cent price premium must have generated higher profits than Tetley because there
is no suggestion that Twinings was buying in better/more expensive tea. Given that
there is no plausible difference in ‘place’ (you sell tea in supermarkets and grocers, end
of), the product was no different and the price was a 20 per cent premium, the only
plausible explanation for the sales success was successful promotion. Stephen Fry was
‘the face of the brand’ and this, plus the sums of money used to support it, helped to
achieve this success.
➜ New products have a famously high probability of failure. Twinings did brilliantly well to
make its Everyday Tea such a success – and to humble the once-big Tetley brand.

67
 23 Business plans

Teaching advice
An early 2016 research report by Statistic Brain Research Institute showed that half of new
business start-ups close within four years. The main reason for failure is said to be ‘incompetence’,
within which come a number of interesting points:
➜ ‘emotional pricing’ (unexplained, but brilliantly evocative)
➜ living too high for the business (proprietor extravagance)
➜ non-payment of taxes
➜ no knowledge of pricing
➜ lack of planning
➜ no knowledge of financing
➜ no experience in record keeping.

This is a wonderful indication of the value of business planning, especially making sure to have
a methodical approach to the start-up process. The Specification focuses on the business plan
as if it is a thing, a document. Well, of course it can be, but the reality is that most businesses
start without one. What matters is planning, i.e. thinking everything through. The one document
you really have to have is a cash flow forecast.

End of chapter exercises, page 113

1 Explain in your own words the meaning of the term ‘business plan’.
➜ A document setting out the concept, the opportunity, the objectives and the functional
plans needed to turn a good idea into a successful business.
2 Why may young entrepreneurs need a business plan more than middle-aged ones? Briefly
explain your answer.
➜ Most entrepreneurs write a business plan only if they are looking for external financing.
Young entrepreneurs are especially likely to be short of cash and therefore need to borrow,
and external investors are likely to be more cautious about a young entrepreneur than an
older one.
3 Some people think that a business plan aimed at investors should be different from one
aimed at bankers. Outline two ways in which a plan aimed at investors may be different
from one aimed at a banker.
➜ Bankers care about the downside, i.e. the risk that things will go wrong (and therefore
the bank’s money is not returned), so to appeal to a banker the business plan would
focus on cautious thoughts such as ‘What if sales turn out to be 20 per cent lower than
our forecasts?’ Investors care more about the upside – they are hoping for huge riches as
the business turns into the next Fever-Tree or Uber.

68
 23 Business plans

➜ Along the same lines, with bankers the main focus would be on cash flow and other
financial plans; with investors the focus is on marketing initiatives on how the idea could
become a global success.
4 Why may an entrepreneur find it easier to write a business plan for a second business
start-up than for their first?
➜ Learning from your mistakes is a critical skill for entrepreneurs. Everyone will make mistakes
in their first business plan; they should then make fewer mistakes second time round.
5 If you were to open your own business after leaving school, do you think you would complete
a business plan? Explain your answer with reference to your own strengths and weaknesses.
➜ In the hands of a thoughtful student this should be an interesting question. Broadly,
the more organised the student, the less they need a detailed plan – what they need is
an outline plan plus a detailed cash flow forecast. A disorganised student needs a plan
setting out what needs to be achieved by the end of each week.

Practice questions, page 113

Total: 18 marks
1 Outline one benefit to Kirsty of having her business set up as a private limited company. (2)
➜ It was easy for her to raise extra capital (£65,000) by selling a 30 per cent stake in her
business (to the Dragons).
2 (a) Calculate Kirsty’s 2015 profit as a percentage of her sales revenue. (2)
– £72,000 profit as a percentage of £3,600,000 (1) = 2% (1)
(b) Outline one way in which she might be able to boost that profit percentage in future. (2)
– Increase prices, given that her allergen-free meals probably have little or no direct
competition.
3 From the data provided, evaluate the possible reasons why Kirsty was able to start her
business successfully despite having no business plan. You should use the information
given as well as your knowledge of business. (12)
➜ It sounds like she started her business from her home, meaning that there would have
been no fi xed costs such as rent to pay. This would have given her the opportunity to
experiment and to make mistakes without serious damage to cash flow.
➜ Clearly she had the skill to make something that was targeted precisely at a niche market
(allergen sufferers), yet it was delicious enough to be enjoyed by her neighbours. The
quality of the product would have helped her overcome glitches. Most importantly, if you
can price your product high enough (because of its uniqueness), it is easier to overcome
cost overruns due to poor management.
➜ And of course she was talented enough and lucky enough to get two experienced
businesspeople on board after just one year, plus their £65,000 of investment. They (and
their staff) would have asked the detailed questions that would be the equivalent of a
detailed business plan, such as ‘If you’re doing so well in allergen-free desserts, why not
also move into ready meals?’
➜ Looking back, Kirsty was probably quite lucky that everything went so well – she stumbled
into a new but soon to be fast-growing market, and found the Dragons. A business plan is
especially helpful if things start to go wrong, but she did not really need that safety cushion.

69
 Exam-style questions on
Topic 1.4
Multiple choice questions, page 114
1 (d)
2 (a), (c) (not (d), because it’s too generic; they’d need training on the actual booking system
anyway)
3 (d)
4 (a), (d)
5 (c)
6 (c), (e)

Discussion question, page 115

7 Discuss the value to a first-time entrepreneur of buying into a franchise instead of
starting up independently. [6]
➜ There are a huge number of things to master when starting a business for the first time
– but no time or money to get things right. So a franchise is a way of easing yourself into
this new world. It takes marketing plus some aspects of finance and operations off the
hands of the entrepreneur – giving time to get HR right, especially training, to make
sure that customers are getting the exact, superior service that will keep them coming
back.
➜ On the other hand, some entrepreneurs who particularly want to be their own boss, or
to have outlets for their creativity and initiative, may find being a franchisee a frustrating
experience.

70
24 Stakeholders

Teaching advice
Stakeholders are difficult at A-level and a real problem at GCSE. It is hard for a student to do much
more than learn some platitudes and play them back. The typical statement is that ‘companies
try to look after all their stakeholders equally’. Yeah, right. Perhaps that would be true in an
ideal world, but it is hard to see much evidence of it in the real world. My view of Waitrose is
that it prioritises staff (the owners) over customers by overcharging grossly for items from
fresh orange juice to cabbage. Volkswagen clearly prioritised its shareholders, managers and
staff over its customers and society generally in its disgraceful cheating on diesel emissions.
When talking about cases such as these one might be able to stir a wee bit of passion among the
students – and show them that stakeholders can be an interesting topic. The practice questions
might help in this process.

End of chapter exercises, page 119

1 What is the difference between a shareholder and a stakeholder?
➜ A shareholder is a part-owner of the business with an interest in the profit the company
makes. A stakeholder is anyone with an interest in the company’s actions, successes and
failures, such as a householder downwind of a smelly factory.
2 Which three stakeholder groups do you think are the most important for:
(a) your school/college.
– Pupils (and their families); staff; neighbours.
(b) your nearest sweetshop or grocers.
– Customers, suppliers and staff.
3 Outline two possible disadvantages for staff who work for a business that only focuses on
the needs of shareholders, not stakeholders.
➜ Arguably this is Sports Direct, with Mike Ashley trying to maximise shareholder
dividends. Staff may suffer from borderline-illegal employment practices. Smaller
suppliers may suffer from bullying tactics from a big customer, e.g. not paying the bills
for three months.
4 (a) Examine how the work of Human Rights Watch might affect the activities of a business
such as Marks & Spencer.
– It is possible that the reports made public by Human Rights Watch (HRW) might
affect customers sufficiently to force a business such as Marks & Spencer to change
its purchasing policies. Perhaps in future Marks & Spencer will audit its whole supply
chain, including subcontractors.

71
 Topic 1.5 Understanding the external influences on business

– But on the other hand, these reports may have little effect. After one of the most
humiliating scandals ever in Autumn 2015, Volkswagen went from being the world’s
number two carmaker in 2015 to number one in the first half of 2016. People don’t
‘care’ for long. Consumers make poor policemen of companies.
(b) Based on this evidence from Cambodia, what conflicts might there be between a company’s
responsibilities towards its shareholders compared with its responsibilities to society?
– Shareholders want steady dividends from the company’s profits and to see the share
price go up. Although some shareholders may be rich and greedy, others may be
elderly and needy, perhaps needing that income to keep the heating on at home. So it
is not heartless for a management to care about profit.
– Unfortunately, there are many cases where high profits may require some pretty tough
decisions, e.g. to pay no more than the average wage in Bangladesh, even though that
wage is below 30p per hour. Another conflict between shareholders and society is seen
in the UK in companies’ attitudes to waste disposal. Companies should take waste to
council tips and pay the ‘landfill tax’, set at a rate high enough to encourage recycling
instead of dumping. In fact, in 2014/15 there were 900,000 incidences of fly-tipping in
Britain, i.e. just dumping the waste by the side of the road to save paying the landfill
tax. Large companies would not do that, but many small firms do, to save money to
boost annual profits.

Practice questions, page 120

Total: 15 marks
1 Analyse which stakeholder groups Reckitt Benckiser seems to have been prioritising in
recent years. (6)
➜ Where to begin? Certainly the priority seems to have been to maximise the company’s
profits. Usually that is for the sake of the shareholders, but Mr Kapoor’s remuneration
suggests that directors’ bonuses are probably also based on short-term profit targets.
➜ In the Australian case (also true in the UK), Reckitt was willing to trick customers into
thinking they had a tailored painkiller when they did not; that smacks of cynicism. In
Korea, the willingness to go on for more than five years selling a life-threatening product
is something far worse: complete immorality in pursuit of short-term profit. In truth, this
was probably more to do with prioritising middle managers’ jobs over customer health.
➜ But Mr Kapoor seems happy to prioritise himself over shareholders and every other
stakeholder group. Of course, this has become the norm for directors of plcs in
recent years.
2 Rakesh Kapoor is thinking about how best to rebuild Reckitt Benckiser’s reputation in South
Korea. He sees two options:
Option 1: Turn Reckitt Benckiser Korea into an employee co-operative along the lines of
John Lewis/Waitrose.
Option 2: Sack the existing senior management team in Korea and replace with UK
managers who had nothing to do with the lung injury scandal.
Justify which one of these options he should choose. (9)

72
 24 Stakeholders

➜ Option 1:
– The problem with sacking ‘the existing’ management team in Korea is that some or
many will not have been in place when the fateful decisions were made. So the employee
co-operative may be a better idea. It will only work, though, if staff are clear from the
start that morality should be at the heart of all decision-making. If it is morally wrong,
don’t do it!
– If that moral approach can be accepted, an employee co-operative might work. It
would need to keep focused on the customer, though, rather than risking a new
selfishness based on the employee group bonus instead of the directors’ bonus.
Certainly an employee group would quickly hear about customer complaints and
as long as it had enough power the group should be able to correct them. Often in
business the people at the top keep their eyes closed to the problems at the bottom.
– Overall, an employee co-operative would be a worthwhile experiment for a business
that is big enough to be able to try out a new idea in one part of the world, knowing
that even if it does not work there will not be lasting damage to such a huge business
as Reckitt Benckiser.
➜ Option 2:
– When something truly awful has happened within a business, there is a fair argument
for clearing out the senior managers and starting again. The remaining staff in Korea
would understand why it has been done and might see the fresh start as a healthy
way to proceed. Acting this way would also send a message throughout the global
organisation that serious mistakes have serious consequences.
– Unfortunately, replacing the Korean managers with fresh staff from the UK threatens
to strip away the company’s understanding of the Korean market. If there was no
need for local knowledge, why have a Korean operation at all? Why not just make the
decisions in London? So although bringing in fresh staff makes sense, having them all
from the UK does not. Surely there should be a mix of UK and Korean staff appointed
to the senior positions.

73
 25 Technology and business

Teaching advice
Students naturally love money being created from nothing, especially fabulous quantities of it.
Economics students love Bitcoin and Business students love a $50 billion valuation placed on a
loss-making minicab business. Technology in that modern way is hugely attractive.
But doe-eyed love is a poor basis for writing an exam answer. Students need to remain clear
that the genius behind Uber was not the technology, it was understanding people well enough
to know what the technology needed to do. In other words, understanding customer needs is at
the heart of any digital success. From that point of view, it is business as usual.

End of chapter exercises, page 125

1 Moore’s Law still seems to work 50 years on. Why might that be important to a business
such as Sainsbury’s?
➜ Because it suggests that however amazing new technology may be, there is a lot more to
come. In 2023 the technology of 2017 will look fairly primitive. So Sainsbury’s must keep
working on super-clever apps, perhaps to make shopping a more enjoyable experience.
2 As of the second half of 2016, Primark still had no plans to move towards e-commerce. Is it
making a mistake?
➜ Since this question was written, the latest Primark financial data has been published,
showing a fall in like-for-like sales, so it may be that Primark may have to change its
mind. As at 2016 the move to online clothing sales still seems unstoppable. Primark
perhaps cannot afford not to do anything.
3 (a) Look back at Figure 25.2 on page 121 of the textbook. In the first half of 2014, Domino’s
total sales revenue was £292.68 million. What were its total e-commerce sales?
– 69.7% of £292.68m = £204m
(b) In the first half of 2016, the company’s e-commerce sales came to £311.5 million. What
might explain the huge increase since 2014?
– The percentage increase since 2014 is 52.7 per cent – in just two years (£311.5m –
£204m = £107.5m; £107.5m/£204m x 100 = +52.7%).
– The reason for the huge rise in e-commerce sales was probably the rise of
m-commerce, i.e. the use of an app to order while on the move. Domino’s was faster to
spot the potential of this than its rivals.

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 25 Technology and business

4 (a) Look back at Figure 25.3 on page 123 of the textbook. By what percentage did
accumulated sales of PS4s outstrip those of Xbox Ones in April to June 2016?
– By 94.2% (43.5 − 22.4 = 21.1; 21.1/22.4 × 100 = 94.2%)
(b) Explain two possible reasons why PS4 achieved this position.
– The single most probable explanation is product superiority (or, at least, consumers’
perception of product superiority).
– This is a market where viral networks are hugely important. If the general view is that
PS4 is better, that would quickly spread and be very influential.

Practice questions, page 125

Total: 15 marks
1 Analyse the necessary qualities of an app to make an online delivery business stand out
from the competition. (6)
➜ It must attract attention in the first place, to encourage customers to download it. This
may require a fun element, especially if the product/service is brand new.
➜ It needs to be simple to use, not only to make it easy to use for the first time but also so
that it is a convenient ‘friend’ rather than a technology enemy (tap the Uber app and the
cab appears).
2 Deliveroo wants to create a far stronger social media presence than Just Eat. Will Shu sees
two options:
Option 1: Make a series of links with celebrities providing free food and other incentives
linked to tweets and other favourable mentions of Deliveroo online.
Option 2: Hire a social media advertising agency to create fun viral video clips of Deliveroo,
its customers and its delivery riders.
Justify which one of these options he should choose. (9)
➜ Option 1:
– Incentivising (bribing?) celebrities in this way has become a normal approach to
social media. Many former sportspeople tweet to their followers about their love of
this or that brand without saying that they are being paid for these mentions. So this
approach should work, even if it seems a bit cynical. Once you have started a business
as big as Deliveroo, with $200 million of external finance, you have to be pretty
ruthless in doing what it takes to succeed, even if that is not always very pretty.
– On the other hand, it could be that the Option 1 approach blows up in Deliveroo’s face.
Perhaps a journalist might check up on the activities of D-list celebrities and expose
their ways of making money. Deliveroo might end up embarrassed. The ‘endorsement’
by Jack Whitehall was an important part of the Deliveroo story in its early stages; that
seems to have been entirely genuine. The greedier approach of other ‘celebs’ might
dent the Deliveroo image.
– Despite the downside risk, Deliveroo is trying to grow rapidly to reach a large enough
scale to be safe from competition. Celeb endorsement is a cheap and effective way to
achieve just that.

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 Topic 1.5 Understanding the external influences on business

➜ Option 2:
– All that ‘fun clips’ can do is to bring the brand name Deliveroo to the attention of more
people. That may be of some value, but it still leaves a big gap between knowing the
name and actually ordering food from the company. So the brief to the social media
agency surely needs to emphasise ‘fun food clips’ in which there is some element
of explanation of what Deliveroo is about. After all, there are many people who are
content with Domino’s and Just Eat and will look no further.
– But the idea of a focus on customers and the delivery riders seems good. Stories about
the delivery riders should automatically help communicate what Deliveroo is and does.
And focus on happy, messy customers could communicate food enjoyment, helping to
bring in new customers and to help maintain customer loyalty.

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26 Legislation and business

Teaching advice
Your first job is to become familiar with www.healthandsafetyatwork.com, a wonderful website
with no end of grisly stories. At the time of writing there was an £800,000 fine for Crest Nicholson
for safety failings in an employee becoming trapped under a 32-tonne truck and a director jailed
when a second employee was killed on his watch. Health and safety is only one part of the
legislation detailed on the Specification, but it is by far the most provocative. It can be used as
the basis for covering the bigger questions such as ‘the impact of legislation on businesses’.
In the same way that Business examiners feel compelled to write questions on environment and
ethics (quite rightly), they tend to ask about legislation rather more often than one might expect,
looking at the Specification. So some careful teaching is required here. However, do not get
bogged down in details about this law and that law. The fundamental question here is something
more general, such as: ‘Evaluate the possible consequences for the XYZ company of ignoring
the principles of employment law.’

End of chapter exercises, page 129

1 Real China was sold off by the owners before the court gave its verdict on the restaurant.
(a) Outline two possible reasons why those owners ran the business so carelessly.
– They may have been in a greedy pursuit of short-term profits in which hygiene took
second place to getting food in front of customers.
– They may have become lazy, bored even, with the business and allowed standards to
slip (Gordon Ramsay once had a TV series called ‘Kitchen Nightmares’ which showed
many examples of this).
(b) Explain one reason why it may be possible to rebuild the reputation of Real China in future.
– With new owners and probably new kitchen staff, it may be possible to start afresh
– with locals willing to give the business a second chance. It will be important to
communicate the new ownership, though.
2 State whether the following incidents are covered by the Consumer Rights Act, the Trade
Descriptions Act, or neither:
(a) A shop puts up a ‘Trade Descriptions Act sale’ sign but doubles the prices before
‘slashing them by 50 per cent’.
– This is more like the Trade Descriptions Act than the Consumer Rights Act.
(b) A pair of running shoes splits open when the wearer is running fast, eight weeks after
buying them.
– Consumer Rights Act (not fit for purpose).
(c) An advertisement promises that ‘L’Oréal For Men will cure baldness in a week’.
– Trade Descriptions Act (can it be proved to be true? I don’t think so).

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(d) A ‘Kate Moss’ dress, bought last month, is condemned by The Sun as being ‘more like
last year’s cast-offs than this year’s fashion’.
– Neither.
3 Explain why a well-run business would want to avoid employment discrimination of any kind.
➜ Because talent is a precious resource, so wherever you can find it, you want to grab it,
nurture it and keep it. Discrimination on grounds of race or gender may mean that your
business ends up dominated by duller, weaker people.

Practice questions, page 130

Total: 18 marks
1 Outline one example of a possible ‘employment law’ issue. (2)
➜ One possibility is discrimination in the workplace, on grounds of race, gender, religion
or age. This can be shown at the recruitment and promotion stages of employment, and
also in factors such as selection (or non-selection) for developmental training courses.
2 Outline one example from the article of an administrative task created by legislation. (2)
➜ I suspect that the correct answer is none; in other words, there is nothing in the article
other than vague assertion.
➜ All the article really says is ‘tackling issues’ such as employment law issues or health
and safety issues. Perhaps the single most probable task is having to keep records on the
health of every employee.
3 From the article, outline one example of a business administration task that isn’t really to
do with legal ‘red tape’. (2)
➜ ‘Accounting tasks’ are lumped in with employment law, but plainly accounting tasks are
needed by the business for internal reasons – it must want to know whether profits are
being made and to make finance-aided management decisions such as pricing.
4 Evaluate whether the Federation of Small Businesses has made a strong enough case to
justify a headline about ‘battling red tape’. You should use the information given as well
as your knowledge of business. (12)
➜ Case for:
– The last paragraph makes a point about ‘business compliance’, suggesting that 76 per
cent of businesses spend longer on that than they would like. The term compliance
does suggest actions required to meet externally set rules and so, if true, the figure of
76 per cent would be striking. Especially so if it contributes to the other figure of 55 per
cent saying the growth of their business is held back by a business admin overload.
➜ Case against:
– The article starts with a focus on the time taken up on ‘business administration’. But
internal administration is inevitable and – in some ways – desirable. Staff need to be
paid, as do suppliers; customers need to be sent invoices and so on. Later in the article
there’s an impression given that too much time is spent on ‘compliance’ (working
to government rules); but no evidence is given to separate essential administration
from compliance. So the article gives an impression that is not supported by its
own evidence.

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 26 Legislation and business

➜ Conclusion:
– The job of the Federation of Small Businesses is not to provide objective research data
but to lobby on behalf of its members. It will make its members happy if it can make
a case for less legislation, as all laws affecting business place some restriction on the
directors’ freedom to do what they like. Others may feel ‘and a good job too’.

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 27 Introduction to the economy

Teaching advice
I once spent the whole autumn term teaching A2 students the macro economy. Some time in
December a student said: ‘Excuse me, what exactly is the economy?’ Hence the importance of
this chapter.
In the Specification the section on the economy is notably shorter than on the previous one, but it
will remain the case that successful teaching in this area has two benefits: to enable students to
answer direct questions, and to help them understand the implications of an economic context
built into exam stimulus material, e.g. what is implied by a phrase such as ‘the early stage of a
recession’.

End of chapter exercises, page 134

1 Give two examples of transactions where one business would sell to another business.
➜ A farmer sells wheat to a flour mill.
➜ Ford sells a Transit van to a builder.
2 Explain what the text means by ‘an upward spiral’.
➜ ‘Greater prosperity feeds on itself’, in other words, if consumers are more confident
they will spend more, providing more revenue for companies, which hire more people,
boosting incomes and confidence.
3 If a small British firm wanted to start exporting for the first time, would it prefer the pound
to be high and rising, or weak and falling? Briefly explain your answer.
➜ Weak and falling, as that would help the UK exporter keep prices low in overseas
markets, yet still receive plenty of pounds for each sale. As I write, sterling = $1.30
compared with $1.55 a year ago. So a year ago a UK exporter of a £100 coat needed to
charge $155 in America. Today it can cut the US price to $130 yet still receive £100 for the
sale. Surely more coats will be sold at $130 than $155, so this must be good news for that
exporter.
4 Outline two possible benefits to small firms of finding export markets for their goods.
➜ It gives the companies scope to boost their overall revenues, which would help them
achieve growth objectives.
➜ All economies have their ups and downs, so it would be great to spread sales across four
countries instead of one. If the UK enters a recession, sales may be okay overall if Ireland,
France and Germany are doing better.

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 27 Introduction to the economy

5 Small firms usually charge higher prices in export markets than in Britain. Explain why that
might be necessary in order to make exporting profitable.
➜ The most obvious reason is transport costs, perhaps combined with the extra risks
involved in sending goods abroad (a hold-up at Dover might mean a truck-full of
yoghurts going beyond the sell-by date).
➜ Also, if/when the UK leaves the European Single Market, there are likely to be forms to
be completed for UK exports to be accepted into the EU – the admin costs have to be
paid for somehow.

Practice questions, page 134

Total: 18 marks
1 Define the term ‘recession’. (1)
➜ Two successive quarters of negative economic growth.
2 Outline one challenge for entrepreneurs in opening a successful restaurant. (2)
➜ Handling the cash flow in the difficult early days of pure cash outflow before the doors
open and then uncertain cash flows in the early weeks after opening.
3 Given the boom outlined in the article, analyse why there are still restaurant closures. (6)
➜ With hundreds of new restaurants opening each year, it is virtually inevitable that some
will be forced to close. There are two factors at play. The first is that more restaurants
means more demand for good locations, for example in London’s Soho restaurant district.
That enables landlords to put up rents, which would increase the break-even point for
existing restaurants as well as new ones. As costs are pushed up, the threat is that the
new restaurants will take sales from older ones. The combination of revenues down and
costs up squeezes the older restaurants and the least profitable are forced to close.
4 Shortly after opening, a new restaurant finds that a rise in interest rates is pushing up its
costs. The boss sees two options:
Option 1: Push up menu prices to make up for the rising costs.
Option 2: Accept lower profits and therefore wait longer to recover the £200,000 spent on
opening the restaurant.
Justify which one of these options they should choose. (9)
➜ Option 1:
– If menu prices are increased, there will be some impact on customer demand –
regulars may come less often or spend slightly less and potential customers may be put
off by the prices. But price rises can still be successful as long as the impact on sales
is relatively small. For example, a 6 per cent price rise may lead to a 2 per cent fall in
customer numbers. That’s a shame, but the business will still be approximately 4 per
cent better off in terms of revenue.
– The reality of business life is that price rises are needed from time to time, so it is not a
bad thing to get customers used to the idea. Customers have no idea about the level of
cost increases faced by a business, so it might be better to push up prices by 6 per cent
for two years running than to leave it a long time, then suddenly bump up prices by
12 per cent.

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 Topic 1.5 Understanding the external influences on business

– On balance, a price increase is a logical response to rising costs. To accept lower profits
may be unnecessarily timid a response.
➜ Option 2:
– The key word here is ‘new’. Whereas an established restaurant can explain the price
rise to regular customers and probably get away with only a small fall-off in trade,
a new restaurant does not have that luxury. By definition it has no regulars, so there
is a finer line between success and failure. A price rise at the wrong time may lead
customers to look elsewhere – and not return. So even though the £200,000 may be
burning a hole in the entrepreneur’s pocket, the wise thing is to wait a bit longer to get
the cash in. A chat with the bank manager would be a wise move.
– The only block on this approach would be if the bank insisted that delayed repayments
were unacceptable. This might force the business to look for a different approach. The
worst options would be ones that harm food quality or the quality of service – virtually
condemning the business to inevitable failure.

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28 The economy and business

Teaching advice
This chapter is a bit of a mad rush through the main macro-economic variables, but it is very
worthwhile stuff. Within all our students’ adult lifetimes they will face substantial upward
movements in interest rates and it is important to know what this can mean to those with an
overblown mortgage or a newly started business.
The key is to focus on data rather than abstract theory. The graph on retail sales volume is a
gem for this (if you want an updated copy, email me at marcouse@btopenworld.com and I will
send one through). The 2008–13 income squeeze gives great scope for discussion about the
impact on families and on businesses.
The great thing about the macro-economy is that it is always changing and that is a reason
examiners love it.

End of chapter exercises, page 140

1 Outline how a general fall in UK consumer spending might affect:
(a) Rococo, a small business making and selling luxury chocolates.
– Because Rococo is selling a luxury product, demand might fall quite sharply when
income falls. Though it could be argued that luxury chocolates are a trivial proportion
of the average person’s spending, so demand may not change significantly.
(b) T. Hughes, a small bakery with loyal, local customers.
– As bread is a necessity, people will still need and buy it even if consumer spending
falls. Therefore T. Hughes may not be hugely affected. Furthermore, as customers are
loyal, the price wars that tend to start when consumer spending falls may not have
much effect on T. Hughes. However, if its bread is much more expensive than that in
supermarkets, some customers might switch away if the downward trend continues.
2 Explain why a strong pound is bad for manufacturers based in the UK.
➜ A strong pound makes exports from the UK more expensive overseas, so demand will fall.
➜ It makes imports cheaper in the UK, creating tougher competition in the UK.
3 Briefly explain the likely impact of a sharp rise in interest rates on:
(a) Tesco plc.
– Unlikely to be hugely important because few people are buying from Tesco ‘on credit’
(though some would be using credit cards).

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 Topic 1.5 Understanding the external influences on business

(b) A car sales business specialising in new Porsche cars.

– Although some Porsches will be bought by the super-rich for cash, most are likely to
be bought with a chunk of credit. Google tells me a Porsche Cayenne can be mine
for £60,000. I would need a bit of help with that from credit finance, but the higher
the interest rates, the more unaffordable the monthly payments will be. I may have to
cancel.
(c) A house-building firm specialising in starter homes for young families.
– This would be far worse even than the effect on Porsche sales. The mortgage
repayments on a starter home could be pushed up hugely; the house-builder may find
it a struggle to sell the houses.
4 What price could be charged in London for $175 Nike trainers when £1 = $1.25?
➜ $175/$1.25 = £140
5 (a) If £1 equalled €1.30 last month but €1.20 this month, has the pound risen in value or
fallen in value?
– The pound is now buying fewer euros, so the pound has fallen in value.
(b) What would be the effect of this change on the export price to Europe of a £200
UK-made coat?
– Last month it would have been priced at £200 × €1.30 = €260
– This month it would be priced at £200 × €1.20 = €240
6 Suggest one approach that could be taken by British Airways to ensure that it does not
suffer too severely when the next recession arrives.
➜ British Airways cannot prevent a recession causing businesspeople to cut back on
business class travel and ordinary holidaymakers cutting back to a UK holiday, or
switching from Thailand to Spain. In other words, revenue will fall.
➜ What it should try to avoid, though, is a bunch of brand new planes turning up that were
ordered five years before and now need to be paid for. It should either make sure that
deliveries are made steadily each year rather than bunched, or avoid this risk by leasing
all its planes (effectively rent them rather than buy them).

Practice questions, page 141

Total: 13 marks
1 (a) Calculate the percentage decline in sales between 2007 and 2009. (2)
– The decline is 50 per cent (36,000/72,000 × 100).
(b) Outline one way in which JCB may have responded to this decline in sales. (2)
– It may have cut back on jobs (which is what JCB actually did) in order to reduce
the break-even point of the business, to enable it to cope financially with the poor
sales level.
2 After the 10 per cent fall in the pound in 2016, JCB has two options:
Option 1: Cut the overseas prices of its excavators by 10 per cent.
Option 2: Keep the overseas prices of the excavators the same.
Justify which one of these options it should choose. (9)

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 28 The economy and business

➜ Option 1:
– Cutting prices by 10 per cent makes sense for a business that was selling less in 2015
than 2007. It probably still has spare factory capacity and the extra sales achieved by
the price cut would enable the factory to be used more efficiently. Higher production
rates could bring down the cost of producing each unit. Staff would feel much greater
job security if the factory was busier. And, of course, if the pound has fallen by 10 per
cent, a 10 per cent price cut in foreign currency terms provides the same UK revenue
that the business enjoyed before. So it is a win-win situation for JCB: higher sales
volume yet at the same UK ‘price’ as before.
– The only downside of this approach would be if the pound starts to rise again, forcing
the company to push its overseas prices back up. Customers might react more actively
to the price rise than to the earlier price fall, which would cut JCB’s sales volumes.
➜ Option 2:
– Keeping the overseas prices constant would mean no benefits from the pound’s fall
in terms of sales and market share, but those benefits are probably not that great for
a business such as this. A lower price on Cadbury’s might persuade you to buy two
bars instead of one; in excavators, that is hardly plausible. Builders buy a JCB when
they need one, not on impulse. So a 10 per cent cut in the price of JCBs will help the
company win market share from others but cannot trigger huge extra, impulsive sales.
– Another important factor is that customers expect prices to be broadly stable over time,
perhaps with some element of inflation over the years. JCB wants a German builder
to think that one of its excavators is ‘worth’ €70,000, not that it is €63,000 one month
and €77,000 the next. So most companies hold price constant in cases such as this,
expecting that in a year or two the pound will have recovered.
– So keeping the overseas price the same seems the best approach for JCB.

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 29 External influences on
business
Teaching advice
This section can feel a bit repetitive. It relates to a part of the Specification that seems determined
to summarise the impact of external change, even though the basic material has already been
covered. There is a strong case for setting this chapter for homework and getting students to
answer the questions rather than going through it in class. After all, you have already covered
the content: on legislation, technology and the external economy.

End of chapter exercises, page 144

1 Outline how a dramatic improvement in technology might affect:
(a) the market for games consoles, currently dominated by the Sony PS4.
– If Microsoft or Nintendo produced a new, superfast games console before Sony, it
might have a huge impact on market shares.
(b) the market for takeaway pizza, currently dominated by Domino’s.
– It is hard to think that the market would change that much. If Domino’s got caught on
its heels it might lose some market share, but the market is already dominated by pizza
delivery services based on apps – it is difficult to see a huge change on the way.
– 3D pizza printing, perhaps? That is, print your own pizza, then it gets cooked and
delivered to you.
2 Explain how a UK manufacturer and exporter of cars might respond to a strong pound.
➜ If the pound was strong for a sustained period, the exporter might be tempted to
spread its operations across more countries. If, for example, half of its sales are to the
USA, it would make sense to produce half its output there. That would ensure that any
strengthening in the pound would be cancelled out by the weakening of the dollar.
3 The government brings in a new law that all babysitters must pass a test of competence.
Outline the possible effect on:
(a) businesses.
– It would probably reduce the supply of lawful babysitters. That would make it harder
for parents to go out in the evening. Restaurants, bars and cinemas might suffer a bit
from lower demand.
(b) parents.
– Lack of lawful babysitter supply might lead to new networks being built on swopping
babysitting instead of having to pay for it.

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 29 External influences on business

4 Suggest one approach that could be taken by discount grocer Lidl to ensure that it does well
even when the economy is booming.
➜ It must make sure that the quality of the customer experience is satisfactory, e.g. car
parks, wide-enough aisles and speedy checkouts. People will still want good value food
when the economy is booming, but they will not put up with poor shopping experiences.

Practice questions, page 145

Total: 15 marks
1 Outline one reason why inflation of ‘more than 3 per cent’ might be a worry for UK
businesses. (2)
➜ The main concern would probably be over its impact on competitiveness. In other words,
businesses would worry if they were increasing prices by 3+ per cent while companies
located in other countries were keeping their prices unchanged. They would worry about
losing market share.
2 Outline one way in which a UK food manufacturer such as Cadbury might respond to a weak
pound. (2)
➜ One or other from:
– It might increase its prices to cover the increase in the cost of its imported materials.
– It might shrink the size of its chocolate bars (again!) to cover the increase in the cost of
ingredients.
3 Outline one way in which a business such as Costa Coffee might respond to rising
unemployment. (2)
➜ It might stop providing staff with annual pay rises, realising that at a time of growing
unemployment there are not the jobs for its staff to move to.
➜ It might slow down its coffee shop expansion programme in the UK, especially
in regions where unemployment increases are high. This would not help the
unemployment position but would stop Costa from opening unprofitable stores.
4 If the UK economy falls into recession, a construction company such as Costain has two
options:
Option 1: Cut its workforce, perhaps by making ten per cent of staff redundant.
Option 2: Risk making a loss by keeping all staff employed.
Justify which one of these options it should choose. (9)
➜ Option 1:
– Redundancy, if it focuses on new recruits, is not very expensive for companies. Those
employed for less than two years get no compensation at all. If a recession is likely to
dampen demand for 2–3 years, it would be understandable for Costain to cut its costs
to keep them below its (lower) revenues.
– But there is a big downside to this approach. Those staff members employed for less
than two years are likely to be the younger ones, many of whom are still learning
on the job. Many will be disgusted at their treatment and look for jobs in other, safer
industries. Others will want to carry on in the construction business but struggle to

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 Topic 1.5 Understanding the external influences on business

find work elsewhere; slowly their training will slip away as they start to forget what
they have learned. So when the recovery comes, Costain and other companies will be
scrabbling around trying to find enough skilled staff. While Britain was in the EU, the
solution was to find skilled staff from within the Union. After Brexit this will become
a much more damaging problem (but might force companies to be more long-sighted
about training and keeping staff).
➜ Option 2:
– For an established business there should be no problem with making a loss for one
year or even two. In the construction business there is every reason to expect that
booms will be fantastic but recessions will be very difficult. (In 2008 house prices in
the UK fell by 16.2 per cent according to the Halifax Building Society.)
– However, to enable the company to enjoy a fantastic boom it must have enough people
with the right skills to enable it to complete jobs in sufficient quantity and of good
enough quality. So why not hold on to staff in the downturn so that you have them for
the upturn? This should build staff loyalty and help the business become better and
better at what it does.
– But what would staff do during the recession if business is bad? This would be a great
time for staff to spend time retraining to gain new skills and/or to spend time working
in groups to consider new, more innovative ways to build houses or hospitals.
– British business productivity lags behind that of Germany by about 30 per cent. A huge
amount of that is to do with superior training in Germany. This would be a good way
to start to boost long-term efficiency and productivity in the UK.

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Exam-style questions on
Topic 1.5
Multiple choice questions, page 146
1 (b), (d)
2 (c)
3 (d)
4 (b), (e)
5 (d), (e), (f)
6 (a)

Discussion question, page 146

7 Discuss what an entrepreneur could consider when deciding whether to open a new
business when unemployment is high. [6]
➜ One thing to consider is the short-term opportunities that arise as a result of the
economic situation. High unemployment would mean that many families are having
to make cutbacks – perhaps from hotel holidays to caravans or camping. So are there
opportunities in these sectors?
➜ On the other hand it might be reckless to start a new business based on a factor that is
likely to fade away. High unemployment is usually at a time of recession – and recessions
tend to last for two or three years, but no longer. So perhaps it would be better to start a
business based on good times, not bad. High unemployment means there will be plenty
of skilled labour available, so perhaps now is the time to build a complex factory using
skilled labour, for example, for making parts for aircraft engines.

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 30 Methods of growth

Teaching advice
This topic is far removed from the experience of a GCSE student and will have to be tackled
carefully. The word ‘organic’ will inevitably cause big problems in the exam, but obviously it has
to be covered. Then there is the problem of scale. The companies students have heard of, such
as Twitter, are bought for figures in the multi-billions of dollars.
So try to keep it as low-key as possible. Poundland buying 99p stores was perfect, though of
course Poundland itself has been bought since then. The exercises at the end of the chapter
should help, with the practice exercise on Genius Foods giving good examples of organic and
external growth.

End of chapter exercises, page 152

1 Outline two significant risks that might be faced if Sainsbury’s decided to expand by opening
a chain of stores in France.
➜ This form of organic growth would be risky because Sainsbury could not possibly
know the French grocery market as well as its French competitors. The lack of market
knowledge is the first risk.
➜ The second is that Tesco’s disastrous experience in America (where it lost £2 billion on a
failed grocery chain) showed how focusing on a problem overseas can lead management
to take its eye off the main UK business. Sainsbury might do the same.
2 Outline two things that might go wrong for Poundland after its successful 2015 purchase of
250 99p Stores.
➜ The Poundland takeover was ‘successful’ in that 99p Stores was bought, but it never
proved successful from a business point of view. It almost immediately led to losses that
in turn led to Poundland being bought up.
➜ Buying up and converting 99p Stores into Poundlands might not give the hoped-for
boost to trade. Indeed, sales might decline if 99p loyalists now go to Poundworld or
another competitor.
3 What is the difference between research and development and market research?
➜ Market research means looking into consumer behaviour and attitudes.
➜ Research and development is looking at the scientific and technical challenges and
opportunities surrounding new product ideas.
4 Why did Tricia decide on inorganic growth?
➜ Tricia was ‘too busy managing the two shops to find time to open a third’.

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5 Explain why Tricia might struggle to manage her new purchase of eight stores.
➜ Clearly, if she is struggling with two, then to have a total of ten looks set to be a disaster.
Certainly she will struggle unless she finds the time to recruit managers for each shop.
Then she could supervise the ten, popping into a different one each day, perhaps, to
make sure that standards are kept high. If she carries on as she is, she (and the business)
will suffer.

Practice questions, page 152

Total: 15 marks
1 Define the term ‘organic growth’. (1)
➜ Growth from within, such as selling more of your existing products, or launching new
products/opening new branches.
2 Outline one reason why innovation can be important when growing organically. (2)
➜ Without innovation you are relying on selling more and more of the same things. That is
not likely to carry on for long. Innovation increases the chance that you will attract new
customers and therefore help the growth rate.
3 Calculate Genius sales in 2016 if the ‘market experts’ were right. (2)
➜ £40m + 50% = £40m + £20m = £60m
4 Define the term ‘aim’. (1)
➜ A general statement of direction. For example: ‘to be number one in gluten-free foods.’
5 To keep growing, Genius may have to choose between:
Option 1: Organic growth.
Option 2: Inorganic (external) growth.
Justify which one of these options Genius should choose. (9)
➜ Option 1:
– Choosing to launch in Germany, France and Holland is an example of organic growth.
As long as those developments prove successful, there are many other countries
to tackle. At present the biggest market by far for free-from foods is the USA, so
Genius must aim there in order to achieve the objective of being the world’s number
one. Genius should tackle the USA only once it has built up a lot of cash in its bank
accounts – launching into the USA could be massively successful but will definitely be
massively expensive.
– Because Bruce-Gardyne wants to be the global number one, cracking the US market
is critical. Realistically it may be very hard to achieve this organically. Gluten-free is a
market worth nearly $2 billion a year in the USA, implying that there must be some
well-established brands. Even if the Genius strategy is largely organic, there may be a
need for inorganic growth in the USA.
➜ Option 2:
– Bruce-Gardyne has signalled the desire to become the world’s leading ‘free-from’
bakery business. This is very unlikely on the basis of organic growth. That would
require Genius to launch its products in lots of foreign markets and keep succeeding.

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This has proved impossible for many businesses in the past. At the moment the online
takeaway business Just Eat is a good example of growing inorganically, as it has
bought out comparable operations in various European cities (and Australia) to make it
easier than starting from scratch.
– Genius could never become the world’s leading ‘free-from’ bakery without cracking the
USA. Doing that organically (i.e. building a bakery in America and trying to sell into a
highly developed market) would be daunting. There are probably 50 free-from breads
available in the average US hypermarket and no one in America would associate the
British with great bread-making (rightly or wrongly, they would believe that bread
from France is better). Realistically, Genius will crack the USA only by buying an
existing free-from bakery with established brands. That would open up possibilities
for distributing Genius bread on the back of the distribution arrangements for the
established brands.
– There is no such thing as ‘no chance’, but the risks here of relying on organic growth
are huge. If the aim is a serious one, inorganic is the serious option for achieving it.

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31 Finance for growth

Teaching advice
Examiners love ‘sources of finance’ as an exam topic, and finance for growth will be no different.
Students think that getting cash into a business is a wonderful thing (as does the BBC) without
considering the type of cash and the terms of the deal. With all sources of finance there are
significant downsides, bar one: reinvested profit. Broadly, that is what students need to know.
As I’m writing this the BBC is reporting a cash crisis at Monarch Airways. The airline has put out
a statement: ‘To weather tougher market conditions and to fund its ongoing growth, Monarch
expects to announce a significant investment from its stakeholders in the coming days.’ As this
situation implies, ‘to fund ongoing growth’ can be a difficult process.

End of chapter exercises, page 156

1 A 20 year old wants to start an aerobics gym. It will cost £60,000 to set up, but she has only
£16,000. Outline two suitable ways of raising the rest of the capital.
➜ Simply going to the bank will not be enough. Banks would never lend such a high
proportion of the start-up capital, especially to a 20 year old. So the starting point has to
be to get more owners’ capital invested first: borrowing from parents/relatives/friends, or
persuading a business contact to become part-owner.
➜ If investors could put in £40,000, it would then be relatively easy to get a bank to lend the
remaining £20,000.
2 A local double-glazing company is considering expanding its product range to include
conservatories – it needs £300,000 to do this. Discuss the external options available to the
company to raise this amount of cash and make a recommendation about what it should do.
➜ It is a company and therefore has shares and limited liability. This would make it
easy to bring in an outside shareholder. Venture capital houses are very unlikely to be
interested in ‘a local double-glazing company’ because they will not see enough upside
profit potential. But a local business contact or friend of the family might be interested in
investing in exchange for perhaps 5 per cent of the company’s share capital.
➜ The alternative is to look for a bank loan for perhaps 3–5 years, which might cost around
8 per cent in annual interest charges (which is a lot if inflation is 1 per cent). However,
the bank will lend only if there is a plot of land that can be held as security. Banks
demand their cake and eat it too.
➜ If the business already has some debt-based finance, it should be wary of taking on
more loans – high levels of indebtedness can become painful. Better, in that case, to look
for an outside investor willing to buy into the company’s share capital.

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3 A local hairdresser has the opportunity to buy a second shop. Her family has offered to buy
a 60 per cent share in her business – this will give her the money she needs for expansion.
Alternatively, she could take out a loan. What should she do?
➜ This is an interesting question but difficult to answer because it all depends. For lots
of entrepreneurs it would be unacceptable to sell more than 50 per cent of the shares,
especially, perhaps, to family: the risks of family disagreements are perhaps too great.
Many would prefer to forget about the second shop than to allow the loss of control
implied by selling 60 per cent of the shares.
➜ The alternative of a bank loan may also seem unattractive if it requires a large lump of
debt and therefore heavy interest payments. The bank’s inevitable demand for security
will also verge on unacceptable, as it probably means the bank taking the freehold or
leasehold on the first shop as its security.
➜ If the business is highly profitable, then the bank loan and its interest payments may not
be a concern, in which case it is probably better than risking family disharmony.
4 Outline one reason for and one against moving from private to public limited liability status.
➜ For: gives access to the stock market as a way to raise significant amounts of extra share
capital – perfect for financing expansion.
➜ Against: public limited companies have small outside shareholders who may care little
about the business, they simply want big profits to boost the share price. This can put
pressure on the chief executive to make decisions that are focused solely on the short term.
5 A rapidly growing computer games business is planning to finance expansion using three
large bank loans. It is a private limited company, 75 per cent-owned by the founder/boss.
Explain why the business should consider floating as a plc.
➜ Floating as a plc can bring in new share capital that saves the business tying itself up in
too many loans – this makes expansion far easier to achieve. As the company is 75 per
cent owned by the boss, there must be scope for selling shares to new shareholders, but
without falling below the 50.1 per cent threshold needed to keep control of the business.
Best of both worlds.

Practice questions, page 156

Total: 20 marks
1 Outline one reason why Deborah Meaden might have been willing to invest £50,000 in
Yee Kwan ice creams. (2)
➜ Meaden must have seen the upside potential for a range of East Asian ice creams, given
the recent boom in Thai and Japanese restaurants in the UK. Investors like her are happy
to take a risk as long as the upside is exciting enough.
2 Analyse why Yee may have chosen to appear on Dragons’ Den rather than take a loan from
the bank. (6)
➜ Probably in the hope that what happened would happen. In other words, the Dragons’
Den/Meaden ‘brand’ was probably what unlocked distribution deals at Ocado and other
places. Distributors have the comfort of seeing the Meaden endorsement and also the
knowledge that the TV exposure on Dragons’ Den will help push sales of the products.

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 31 Finance for growth

➜ Nevertheless, there are strengths in getting share capital rather than loan capital when
expanding. Share capital requires a payout (a dividend) only when the business is
profitable. Loan capital requires interest payments in good times and bad. So share
capital is safer.
3 Evaluate whether this form of venture capital investment was the right way to finance
Yee Kwan ice creams. You should use the information given as well as your knowledge
of business. (12)
➜ The case for venture capital investment such as this is that it avoids the fi xed interest
payments that banks demand, giving Yee a little flexibility. She can pursue a long-term
plan without having to worry about this month’s interest payments – dividends need
to be paid to shareholders only when the company makes a profit. A further feature of
venture capital is that the shareholder takes an interest in the business, usually being
given at least one seat on the board of directors. Often that is a huge worry for the
business, but in this case Yee is probably looking forward to the support she expects to
get from Meaden.
➜ The case against lies with the nature of external finance. Yee had a flop at a Sheffield
market and was struggling to generate the profit needed to push the business forward.
Surely the real business answer was that she needed to spend more time with buyers at
Ocado and elsewhere to agree a really exciting range of oriental ice cream flavours and
then sell them into restaurants and posher shops such as Waitrose and Booths. Selling
30 per cent of her business was a fantastic deal for her, as she had come to a dead end.
The ‘right way’ to finance the business should really have been through reinvested profit,
but she had lost sight of how to make it.
➜ The question asks about venture capital investment and there is no doubt that it was
hugely preferable to bank debt. It may be that Meaden’s staff have advised Yee on how to
run her business more effectively, in which case she has benefited many times over.

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 32 Changes in aims and
objectives
Teaching advice
Material such as this is too abstract to be inherently interesting. So it becomes especially
important to keep alert to the stories that are out there. As I write this, there is a story online
about Nike developing the world’s first self-lacing shoes, which apparently it has done to
promote awareness of Parkinson’s disease. I’m sceptical of that apparent change in Nike’s
business aims (as students would be) but know it would be a great story to bring this topic to
life. By the time you read this the story may seem old hat, but just in case it is still of interest,
try: www.usatoday.com.

End of chapter exercises, page 160

1 Why might a business change its objectives in response to a boom in demand for its
products?
➜ It may have prioritised profits in the past but is now focusing on growth (seizing the
opportunity created by a change in customer tastes).
2 Why might the managers of a British retail chain such as Topshop decide to enter the
clothing market in China?
➜ They may believe it will give the company a safer future if sales are split between the UK
and China because a bad year in the UK may be compensated for by success in China, or
vice versa.
3 (a) Using Figure 32.1 on page 159, calculate the percentage increase in sales of cosmetics in
China between 2010 and 2015.
– Percentage change is change/original × 100
– Change = 204.9 − 88.9 = 116
– Percentage change = 116/88.9 × 100 = +130%
(b) Between 2010 and 2015 prices rose in China by 20 per cent. Explain how that is relevant
when thinking about sales figures.
– If the value of sales had risen by 10 per cent but prices by 20 per cent, in effect the
volume of sales must be down by 10 per cent.
– In this case, though, the 130 per cent increase in money sales exaggerates the volume
growth by the 20 per cent price rise. Actual volume sales must still have been up by
100–110 per cent.

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4 Explain how leadership changes might affect the aims and objectives of a business such as
AG Foods.
➜ A newly appointed company boss has the power to alter the direction of the business.
Therefore the aims and objectives may change. In this case the determination to ‘focus
on brands we can be proud of’ may threaten the short-term prospects for jobs and profits
in the business. So the leadership change stands to make a huge difference to the aims,
objectives and actions of the business.
5 Discuss how AG Foods’ stakeholders might feel about the change in the aims and objectives
proposed by the new boss.
➜ Many staff are likely to be worried about this approach because the loss of two product
lines implies fewer jobs. If new, ethically-sound products can be launched, that may be
okay, but the probability is a period when there is less work and therefore the possibility
of redundancies. Also, staff may worry about whether this approach will be successful in
the longer term. We all ‘want’ to eat healthily but also want chocolate.
➜ Shareholders may be concerned, largely for the same reasons. The proposed actions
appear to be a threat to short-term and long-term profits.

Practice questions, page 161

Total: 20 marks
1 Outline one way in which the £50,000 of extra investment could have been financed. (2)
➜ Could be by a medium-term bank loan, perhaps secured against the new, bigger
premises. As the business has recently invested £40,000, it seems reasonable to assume
that it has used up all of its internal capital.
2 Outline one reason why Salt’s Catering has had to evolve so quickly. (2)
➜ It seems likely that the move into new areas of business such as weddings has gone
better than the company could have dreamed, so favourable external circumstances have
forced the business to expand rapidly in order to keep up with booming demand.
3 State the sum of money Salt’s Catering plans to spend on new equipment and building
improvements. (1)
➜ £50,000
4 Analyse how Bruce Salt’s aims and objectives have changed over time. (6)
➜ The business began in 2012, apparently focused on a business market for catering. In its
early days the company was probably trying to get on its feet, so survival may have been
the main aim (as with most start-ups). But the recent boom in demand has made Bruce
Salt eager to pursue the growth opportunities. There is no mention of profit in the article,
but probably his expectation is that if growth is handled well today, higher profits will
flow tomorrow. His ambition is stated clearly in the sentence: ‘The new unit gives us the
scope to grow by another 500 per cent.’
5 Bruce Salt’s next big question is whether to expand into new markets in European Union
countries. He sees two options:
Option 1: Open new sales outlets in France and Germany, relying on the good English
spoken widely by French and German businesspeople.

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 Topic 2.1 Growing the business

Option 2: Hire a new team of French- and German-speaking sales staff.

Justify which one of these options he should choose. (9)
➜ Option 1:
– The most important thing that Salt must get right is to serve customers accurately. A
new team of French- or German-speaking sales staff may promise things the company
cannot deliver; better, then, to have experienced Salt sales people, whose language
skills may be poor but who truly understand the business and what its staff are capable
of. It may mean that Salt only wins contracts where locals speak good English, but at
least the company can build on satisfied customers who get exactly what they wanted.
– Of course, the real solution here would be to send all of the English sales team on
language skills courses. However, that might take years to pay off and the business
needs to win the contracts now.
➜ Option 2:
– Salt’s business is in corporate and personal ‘event’ catering, such as wedding meals.
This type of catering is not as simple as producing fish and chips every day; you need
meals that are exactly to the bride and groom’s specifications. This requires Salt’s to
be able to communicate perfectly with customers. It is no good mishearing that the
bride has a prawn allergy – and serving prawns at the wedding. So English sales staff
working in France and Germany is not a realistic option. What is needed is a team of
French- and German-speaking staff whose English is strong enough to explain what is
needed to Salt’s UK production staff.
– However, there are downsides with this option. English staff would be more likely to
understand the limitations of the catering teams in Leeds. They would gently nudge
a French customer away from ordering crab if the Leeds unit is weak at cooking crab
(and Leeds is a bit far from the coast). So hiring French and German teams would be
good at the outset with customers, but might lead to problems in practice.
– Bruce Salt should think about the risks involved with German/French teams and
address them by giving plenty of training in and around the Leeds production centre.
As long as that potential problem has been dealt with, there is no reason not to
proceed with this, preferable, option.

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Teaching advice
With Britain leaving the EU and with a substantial change of heart in the USA about trading
blocs and free trade, this could become a huge area in coming years. Examiners take their cue
from real events, so tariffs and trading blocs may feature regularly in exams. The IMF produces
its ‘World Economic Outlook’ every spring and autumn, which provides a huge, free resource
to dip into. In October 2016 the IMF used the launch of the latest edition to warn that ‘economic
stagnation could fuel protectionist calls’.
Of course, all this is far from the experience and knowledge of the average GCSE student, so this
area will be challenging to teach. But at least it is fascinating stuff, especially if you emphasise
the differences that exist in the world.
My standard introduction to this area is to get students thinking about these differences. Just
based on data from the CIA World Factbook I can use the kind of activity below.
Look at this information and pick out three points you think are particularly important.

UK Nigeria Bangladesh Sierra Leone USA

Average income per person per year* $41,200 $6,100 $3,600 $1,600 $55,800
% of economic output coming from agriculture 0.6% 20.0% 16.0% 66.8% 1.6%
Mothers dying at childbirth (per 100,000) 9 814 176 1,360 14
Infant mortality (per 1,000 babies under 1) 4.3 71.2 32.9 70.0 5.8
Adult literacy (can read and write) 100 59.6 61.5 48.1 100
*GDP per capita at PPP. All figures from CIA World Factbook, October 2016

End of chapter exercises, page 166

1 What point is being made in the text on page 162 about The Beatles and Adele?
➜ Globalisation has meant that today Adele’s music can be sold globally in English;
50 years ago the music was tailored to different countries/languages.
2 The EU is unusual for making free movement of labour a key part of the trade bloc. Explain
why businesses may favour the free movement of labour.
➜ Businesses want to hire the best people at the lowest wage rates. Free movement of
labour creates a big pool for employers to draw from, which helps make businesses more
competitive.

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 Topic 2.1 Growing the business

3 Look at Figure 33.1 on page 165. Compare the figures for Asia-Pacific with those for
Western Europe.
➜ In 2015 about 10 per cent of retail sales were e-commerce in Asia-Pacific versus 7 per
cent in Western Europe. Between now and 2020 the figure for Asia-Pacific is forecast to
double, while in Western Europe it should reach 10.2 per cent. Clearly e-commerce is a
more powerful force in the East than the West.
4 Explain how Cadbury has changed its marketing mix to compete internationally.
➜ It has pushed the price up to £1, to try to help boost the brand’s credibility (presumably
as a luxury).
➜ But it has deliberately kept the product, the packaging and the advertising (promotion)
approach unchanged.
➜ Its approach to place (distribution) is not mentioned in the text.
5 Discuss whether the globalisation of Halloween/Screme Eggs is a good or bad thing for
chocolate producers such as Cadbury.
➜ Naturally a company is delighted if products that sell well in one country are bought
enthusiastically in other countries as well. Lindor and Kinder Eggs are examples of that
in the UK. So Cadbury would be thrilled if the Screme Egg succeeds globally without
making any changes to the original product. It would give Cadbury higher production
levels of the identical product, which should make it easy to boost profits (especially if
the overseas egg sells for £1).
➜ Chocolate has always been quite a national taste, though. The British tend to dislike US
chocolate. So even though globalisation of chocolate brands may be great for producers,
it may be less great for consumers.

Practice questions, page 167

Total: 20 marks
1 Outline one reason why a government might set a minimum legal wage. (2)
➜ To help set a floor under the level of poverty that may be faced by those with low-paid
jobs, i.e. to make society slightly fairer.
2 State the minimum hourly wage for a garment worker in Bangladesh. (1)
➜ 23p per hour.
3 Outline one reason why Lidl might want to offer jeans at £5.99 a pair. (2)
➜ If Tesco is selling jeans at £17.99 it is easy to see why Lidl would like a pricing point
of £5.99. While such an offer would make the company a small profit, it might attract
people into Lidl who then would end up buying far more than they had planned. So
small profits on jeans might be compensated for by bigger profits elsewhere in the store.
4 Analyse how the case of Lidl’s £5.99 jeans could be used to criticise globalisation. (6)
➜ Many people see globalisation as a race to the bottom, i.e. a competitive struggle to find
the world’s cheapest suppliers and give them the work that might otherwise be done by
far better-paid westerners. Producing a pair of jeans that can be sold in the UK for £5.99
requires incredibly tight cost control. Wage payments have to be tiny and all costs have
to be kept low.

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 33 Business and globalisation

➜ Globalisation increases the level of competition for goods and services globally, including
the service of supplying low-cost jeans material and buttons to make the garments. This
is great for customers who love buying new, cheap clothes. But it may be worrying for
workers who want a secure, reasonable income, not a fight to survive.
5 Lidl enjoyed huge sales of its £5.99 jeans, but is wondering what to do now that sales have
slipped back. Management sees two options:
Option 1: Push to get a new supplier in Bangladesh to make jeans that can be sold for £4.99.
Option 2: Make slightly better jeans and charge the Primark price of £8.
Justify which one of these options the management should choose. (9)
➜ Option 1:
– This option fits in with the Lidl instinct. The business is built on low prices that are
pushed lower, so the switch to a £4.99 pricing point is logical. It would make particular
sense if the Bangladesh supplier has an impressive plan for cutting another £1 from the
price, such as a plan for cutting the material more cleverly, to save time and money.
– A worry would be if the only plan is to threaten staff with lower wages or more job
uncertainty. This might work in the short term but would risk being revealed in a
TV exposé that would drag down the Lidl name. So Lidl must take care to consider
whether £4.99 jeans can be made in a relatively safe, ethical manner. If so, it should
make its customers happy by going for the £4.99 option.
➜ Option 2:
– Making jeans that are ‘slightly better’ and charging £8 sounds a poor plan, unless
there is a way to make them seem different/special. If they are branded as Lidl, it is
hard to see why anyone would pay more than £5.99, but if a new brand name can be
found, there could be a better chance. There is surely a segment of the market willing
to pay extra for better quality, so Lidl might be successful by targeting those people.
– It is also important for Lidl to realise that its own brand name on a pair of jeans
will not add value. So if there are two pairs of jeans, each at £8, Primark will almost
certainly win against Lidl, if for no reason other than that Primark is a fashion clothes
store. Image matters with lots of products, but especially when it comes to fashion
clothing.

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 34 Ethics and business

Teaching advice
This is the topic that is hardest to teach directly. It makes us sound a combination of evangelist
and naive. Stories are the answer. Real ones. And the business world keeps on presenting them
gift-wrapped. Just when you think VW emissions is the biggest ethical failure ever, the story is
trumped by the pharmaceuticals industry. GlaxoSmithKline plc has been a generous donor to
the ethics storybook (bribing doctors in the USA, China and Romania, and suppressing clinical
trial results that gave negative messages about GSK drugs).
Generation after generation of students writes as if ethical problems are in the past. It is vital to
keep alert to up-to-date material.

End of chapter exercises, page 170

1 Explain in your own words what is meant by a firm being ‘ethical’.
➜ It must be willing to sacrifice profit if there is a conflict with the accepted principles
within the business. This is a tough criterion but it is the only one that really matters.
2 Briefly explain the possible impact on its profit if:
(a) SuperGroup put all its prices up by 10 per cent ‘to ensure that workers making Superdry
clothes are better paid’.
– Profit might fall if customers are sceptical about the claim and decide to shop
elsewhere, or if they simply don’t care enough to pay the extra.
– Or profit might rise if SuperGroup manages to attract new, ethically-minded
customers without putting off too many of its older customers.
(b) a car manufacturer stopped producing 4×4 (petrol-hungry) cars.
– This could be massive. In the world’s two biggest car markets (China and the USA)
4×4s have a huge chunk of the market (between a third and a half). So this might
devastate sales, leave the factory half-unused and hit profit badly, possibly turning
the business from profit to loss. Clearly the degree of pain would depend on the
proportion of 4×4s accounting for the sales of the company in question.
3 Use the internet to research one of the three pressure groups listed on page 169. Outline
one activity it has been involved in recently.
➜ In judging the student’s answer the most important thing would be that the answer
‘outlines’ the activity rather than copying and pasting.
4 Explain two potential benefits to a retailer of selling fair trade items.
➜ One benefit could be the ‘reflected glory’ that comes from stocking a product that has a
strong ethical story. The Co-op seems very keen to do this. It may improve the retailer’s
image and therefore encourage more customer loyalty.

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 34 Ethics and business

➜ A second (ironically) could be the profit margins involved. Just as organic foods
command a price premium, so too do fair trade items. So the shopkeeper may be able to
get a higher profit per unit from selling fair trade coffee than from ordinary coffee.
5 Give two possible reasons for the Co-op making the decision to sell such a large range of
fair trade products.
➜ The Co-op may think that promoting fair trade products serves as one of its main aims
as a business.
➜ Or it may have found that it is a useful way to appeal to an important market segment:
those interested in ethics in business.
6 How might receiving awards for corporate social responsibility help the Co-op achieve its
aims and objectives?
➜ If the Co-op’s aim is still ‘social responsibility’ then its tricky task is to achieve that aim
while making enough profit to keep going or even to grow. An award may help turn
sound principles into more customers.
7 Should Tesco follow the Co-op’s example? Explain your reasoning.
➜ Tesco is Britain’s biggest supermarket and is clearly positioned in the centre of the
market. Focusing too closely on fair trade products would risk making the business seem
less relevant to the many people who shop on the basis of value for money – nothing
else. The Co-op can afford to position itself within a specific niche; Tesco can’t.

Practice questions, page 171

Total: 20 marks
1 Outline one reason why a business such as Byron should look after the interests of
its staff. (2)
➜ Self-interest: if you want to hire and keep the best staff, you must always be seen to be
on their side. Most businesses make a point of telling staff that ‘we’re all in this together’.
Not Byron, perhaps.
2 Analyse why the owners of a business might feel justified in paying no tax on their profits. (6)
➜ Businesses are hard to start up, even tougher to build up and perhaps tougher still to
run smoothly and successfully. So it is easy to see why entrepreneurs believe they have
earned every penny they have made. They may also count up the number of staff they
employ, the national insurance payments they make, plus their local business rates and
say, we’re contributing hugely to society. And so they are.
➜ Companies that buy established businesses, though, and find loopholes to eliminate
tax bills are perhaps in a different category. They feel entitled; others may not feel the
same way.
3 Evaluate whether Byron will be able to recover from these knocks to its reputation. You
should use the information provided as well as your knowledge of business. (12)
➜ The case for saying yes is that people seem to have short memories. Following VW’s
humiliation over exhaust emissions in 2015, the company went on to win the crown as
the world’s number one car producer in the first half of 2016. In the UK, VW had three
cars in the top ten sellers in January–September 2016. So perhaps after a few months
new staff will look for Byron work and customers will return to buy burgers.

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➜ But Byron’s target market has largely been young, trendy urbanites who are the most
likely to care about injustice – and act on it. There is rarely a Byron on its own; there
would normally be many other eating places nearby, including plenty of burgers. So
perhaps Byron will find it a lot tougher than expected.
➜ It will be interesting to see what happens, but a fair bet remains that after a difficult year
or two, Byron will resume its growth and image.

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35 Environment and business

Teaching advice
The main issue with this topic is the risk that Business questions get Geography answers.
That wouldn’t matter with a 2-mark question, but it could be crucial for a 6-, 9- or 12-marker.
A Business student needs, above all, to see the issue as the potential trade-off between the
environment and profit. And perhaps to see that this trade-off is good, healthy. The most
questionable thing is when businesses claim to have their business strategy aligned with their
environmental one. This can be as manipulative as Marks & Spencer’s ‘Plan A’, which aims to
put the business on the side of the angels – the same business that frames its check-out queues
with sweets and puts ‘mini-biscuits’ by the cash till. Far better is to have a business that does
its best, even though it knows it is not enough. The trade-off means that it is impossible to do
all that could be done.

End of chapter exercises, page 175

1 (a) Use Figure 35.1 on page 172 to calculate the percentage increase in energy from wind,
solar and hydro sources between 2012 and 2015.
– +104.4% (4.66 − 2.28 = 2.38; 2.38/2.28 × 100 = +104.4%)
(b) Explain the environmental benefit that should result from this increase.
– The only benefit that can come from this is if it allows other sources to be cut down.
If this increase in renewable allowed the use of coal to be halved, that is a vast
achievement in terms of reducing CO2 emissions.
2 Explain why ‘sustainability’ is important to businesses and society.
➜ Environmental sustainability is crucial because it means making decisions that encourage
the use of ‘infinite’ resources such as water or wind instead of ‘finite’ resources such as oil.
A great example of sustainability is with the many toilet paper brands that advertise that
they plant two trees for every one cut down to make paper. Here, a business is making
sure that future generations have toilet paper and that the suppliers stay in business.
3 Outline how two different UK businesses might benefit from warmer temperatures in
Britain.
➜ Wall’s ice cream would benefit from longer summers and therefore a longer period of ice
cream eating/purchasing.
➜ A manufacturer of sunscreen might enjoy a far better summertime trade if more people
are worried about sunburn.
4 Explain how your school can change to become more environmentally friendly.
➜ Hard to anticipate student responses, but the key to a good mark will be the student’s
acumen in applying the question to the school’s situation.

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 Topic 2.1 Growing the business

➜ Examples of environmentally friendly actions include reduction in paper usage, a rise in

the percentage of paper recycling, use of solar power and moving to motion-sensitive
lighting.
5 Explain two possible reasons why Marks & Spencer is pursuing its Plan A.
➜ It may be simply to gain favourable publicity among its relatively wealthy shoppers. That
is, a point of marketing differentiation.
➜ It may be a way to help cement relationships between management and staff. Employees
may not care about the company’s profits, but care a lot about the Plan A environmental
targets.
6 How might consumers respond to information about Marks & Spencer’s sense of
environmental responsibility?
➜ It may help customers identify more positively with Marks & Spencer and feel happier to
pay the relatively high prices.
7 Marks & Spencer is closing stores at a likely cost of hundreds of jobs in the UK. Should it
rethink its focus on Plan A?
➜ The wording of the question only means something if Plan A is expensive to implement.
In fact, solar panels can pay for themselves through lower energy usage. So stopping
Plan A might not provide the cash to avoid the job losses. There is no logical link
between Plan A and workers’ jobs.

Practice questions, page 175

Total: 20 marks
1 Outline one reason why the court decided on such a high fine for Powerday. (2)
➜ It seems to be in line with the scale of the offence (17,000 tonnes) and the size of the
company. If big companies are given small fines, there is no real deterrent effect.
2 Analyse why the government pays for an agency to check that businesses stick to
environmental laws. (6)
➜ Clearly the government does not believe that all companies can be trusted to dispose of
hazardous waste safely and cleanly and therefore there is a need for an environmental
watchdog.
➜ The money spent could alternatively have been used for the NHS, so the government
must believe that the benefits from the Environment Agency are considerable (to health
as well as to quality of life).
3 Evaluate the possible trade-offs within Powerday between the environment and profit. You
should use the information provided as well as your knowledge of business. (12)
➜ In the ‘waste management’ business there must be a constant conflict between the
environment and profit. At the worst end of the business there are people taking away
vans full of rubbish and fly-tipping them, i.e. dumping the rubbish somewhere that is
free but illegal.

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 35 Environment and business

➜ But Powerday is ‘one of the biggest waste-management companies in the South East’,
with a string of major clients. Ideally it would provide the best possible service, with full
use of sorting and recycling, and therefore taking the minimum of materials to landfill
(and paying its landfill tax bills). But it may be very hard to make a profit by doing things
perfectly. Competitors may keep winning contracts by putting in low bids, forcing
Powerday to bid low as well. If it keeps spending £1,100 on contracts that bring in £1,000,
it will go out of business. So the pressure to cut corners may always be there.
➜ Free and fierce competition is great for consumers but risks forcing suppliers to push
down to the lowest common denominator. That is why regulation can be a help – setting
a common minimum level of behaviour to help companies get the right balance between
the environment and profit.

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 Exam-style questions on
Topic 2.1
Multiple choice questions, page 176
1 (a)
2 (c)
3 (c)
4 (d)
5 (b), (d)
6 (d)

Discussion question, page 176

7 Discuss whether a growing business could benefit from spending on environmental
considerations. [6]
➜ Yes, perhaps it could benefit if the spending proved to be the glue that bound together
the company’s customers, staff and perhaps suppliers. Staff may feel much more
positively towards a ‘green’ company, feeling happy to be part of the business in the
long term (instead of shuffling through the job ads every Friday). And customers might
be happy to pay a slight price premium to feel that the company is working to make the
world a (very slightly) better place.
➜ On the other hand, you could argue that money spent by a business on environmental
considerations may diminish its ability to finance its growth, or even to finance everyday
improvements in customer service. At the time of writing, environmentally-conscious
John Lewis Partnership has just cut its staff annual bonus to its lowest level since the
1950s. Perhaps the business has struck the wrong balance between ‘green’ and profitable.

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36 Product

Teaching advice
There are three main parts to this: the design mix, the product life cycle and product
differentiation. That’s a lot! The risk is that product differentiation will get squeezed out because
of the time taken over the other two (nicely visual) theories. That would be a great shame
because differentiation is just the kind of concept that can turn a ho-hum answer to a 9- or
12-mark question into a pretty good one.
I like to emphasise that there are two aspects to product differentiation: real product
characteristics that distinguish one brand from another (a Tesla compared with a Prius) and
image-based factors such as branding, that make us feel different about wearing designer
jeans, from Primark ones, even if they are identical apart from the logo.

End of chapter exercises, page 180

1 Describe what happens during the introduction stage of a product’s life.
➜ All the market research and product development expenditure has to occur, followed by
a launch, probably backed by heavy marketing spending.
2 Outline what could happen to profits for a product that is at its maturity stage.
➜ This could be a hugely profitable period, as sales are at their peak. So the factory may be
operating flat out and the business may slow down its expenditure on marketing now
that sales have flattened out (no more growth to go for). Again that will help with profits.
3 Explain one possible reason why some products have much longer life cycles than others.
Use examples to illustrate your answer.
➜ Some products are technology dependent and therefore change is inevitable, e.g. games
consoles. If Sony had carried on with the PS3 despite the launch of the Microsoft Xbox
One, it would no longer have any share of the console market. Other products are not
technology dependent, such as Cadbury’s Dairy Milk (born 1905 and sales have not
peaked yet).
4 Look at the examples in Figure 36.2 and match up the statement to the life cycle.
(i) (ii) (iii) (iv)
Sales

Sales
Sales

Sales

Time Time Time Time

Figure 36.2 Sales/time graphs

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 Topic 2.2 Making marketing decisions

(a) A product that is very popular but which after a time loses its popularity.
– Number iv.
(b) A new product that flops.
– Number iii.
(c) A product that becomes popular very quickly and continues to have good sales.
– Number ii.
(d) A product for which sales vary, season by season.
– Number i.

Practice questions, page 180

Total: 20 marks
1 Define the term ‘product life cycle’. (1)
➜ The theory that the sales of every product go through the same stages: introduction,
growth, maturity and decline.
2 (a) Use Figure 36.3 to estimate the average sales boost achieved by the iPad in its fourth
(Christmas) quarter. (2)
– An average boost of about 60% (accept between +50% and +75%)
(b) Outline one disadvantage to Apple of having such high seasonal variations in sales. (2)
– It must make it hard to control stock levels in the second half of the year – needing
big enough stocks in the autumn to cope with the sales boom pre-Christmas but not
wanting to be left with too much stock in January.
3 Identify the time period when actual iPad sales were at their peak. (1)
➜ Fourth quarter 2013.
4 Outline why a business might like it best when its product is a must-have item. (2)
➜ If your product is a ‘must-have’, you can place a high price on it but customers will still
pay. This enables the producer to boost its profits hugely, as costs per item may be falling
as production levels increase, yet the price may be pushed up and up (no wonder Apple
has $200 billion in the bank).
5 From the data provided, evaluate the effectiveness of the extension strategies used by Apple
for its iPad. You should use the information given as well as your knowledge of business. (12)
➜ The most striking thing is what happened in 2013. The sales trend line peaks in the first
quarter of 2013 and then slips back in what looks like the start of the decline stage of the
life cycle. Yet in the fourth quarter there is a clear recovery that delays the sales decline
by about a year. That looks like an extension strategy. The text confirms that the iPad Air
was launched in 2013 – clearly it had an effect.
➜ Another launch/extension strategy came in 2015 with the iPad Pro and there it is difficult
to see much of an effect on the sales figures. By this time the iPad was in serious decline
and although there might have been a slight effect in Q3 2015, the overall effect of this
extension strategy seems to have been minimal.
➜ So the product life cycle has a grip on technology products, even for Apple. The company
has used extension strategies – and with some effect, especially in 2013 – but the main
story told by the graph is that the 2010 launch was followed by maturity in 2013 and
decline since. The life cycle even affects Apple products.
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37 Price

Teaching advice
Price is one of the topics where there is a huge disconnect between students and real
businesspeople. And that can hurt the quality of answers. Students latch on to price and a)
overplay its importance and b) ignore its impact on profit. Too many exam answers see price
cuts as a brilliant strategy, without recognising the likelihood that rivals will follow and the
inevitability that a lower price will have a severe impact on profit.
If your students are reasonably okay with numbers, try the following with them:

The question: Revenue Profit

A baker makes doughnuts that have Revenue = Price × Quantity Profit = Revenue − Total costs
a variable cost per unit of 80p, fixed Original = £1.50 × 100 = £150 Original = £150 − (£80 + £50) = £20
costs of £50 a day and sell for £1.50. New revenue = £1.10p × 200 = £220 New = £220 − (£160 + £50) = £10
100 are sold each day. Change = revenue rises by £70 Change = profit halves to £10
The baker’s daughter suggests cutting
the price to £1.10p, predicting that
sales will double to 200. And they do!
Calculate the effect on revenue and
on profit.

End of chapter exercises, page 184

1 Explain the importance to a business such as the Daily Mail of charging 10p more per paper
than the Daily Express.
➜ If it costs 40p to produce each newspaper and one company charges customers 60p while
the other prices the newspaper at 50p, then the company charging 60p is getting twice
the profit per paper (20p) as the one priced at 50p. That is important.
2 Explain one possible reason why Apple might change the price of its latest iPhone when
sales move from growth to maturity.
➜ During the growth phase of a technology product, customers are coming to you, so
companies tend to feel confident about pricing boldly. Once maturity sets in, there is a
greater sense of need to trip prices back, to compete more fiercely with rivals.
3 (a) Use Table 37.2 on page 182 to calculate the saving a Currie’s customer can make by
going to Cars2Buy.
– What matters is the real savings, i.e. comparing quoted prices.
– They can make a saving of £19,010 − £15,176 = £3,834
(b) Explain one possible reason why the online car dealers were able to offer lower prices
for the Toyota than the high street dealer.

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– The high street dealer has to be in the high street, in other words pay the rent and
council taxes placed on a consumer-facing, large site where there are plenty of people.
Such a site is vital for a Primark, but not for a car dealer. If someone can save £3,834
they will be willing to forget about high street service and convenience. So the online
sites can find cheap locations and pass on the cost savings to the customer.

Practice questions, page 184

Total: 15 marks
1 Use the data to outline how Tyrrells achieved its 19.9 per cent increase in sales revenue in
2015–16. (2)
➜ It appears to have been able to boost sales volume dramatically by cutting the price.
The 5.2 per cent price cut seems to have boosted demand by five times that amount
(26.4 per cent), leading revenue to rise by 19.9 per cent.
2 Define what is meant by the term ‘brand’. (1)
➜ A product or service that has been given a ‘personality’ through its name and logo.
3 Calculate what McCoy’s sales value will be in 2016–17 if it suffers the same percentage
decline as in 2015–16. (2)
➜ If McCoy’s revenue falls by another 14.4 per cent in 2016–17, its sales will be £102.8m ×
0.856 = £88m (or calculate 14.4 per cent of £102.8m = £14.8m; £102.8m − £14.8m = £88m).
4 Identify the highest-priced crisps. (1)
➜ Tyrrells.
5 The boss of McCoy’s crisps is considering two options for rebuilding sales revenue:
Option 1: Cutting prices.
Option 2: Increasing the sales team to work at improving distribution.
Justify which one of these two options the McCoy’s boss should choose. (9)
➜ Option 1:
– The table of data provides strong evidence to suggest that the brands that cut price
boosted sales and the one and only price rise (on McCoy’s) hit sales hard. This should
not surprise anyone, though the degree of sensitivity to price is quite a shock. For a
brand such as McCoy’s, a 6.8 per cent price rise would always hit demand, but a hit
of 19.9 per cent is surprising. Sales of these brands were all highly sensitive to price
changes in 2015–16. So a McCoy’s price cut of, say, 5 per cent in 2016–17 might push
sales volumes up by perhaps 15 per cent – recovering some of the brand’s lost sales
revenue.
– But of course the boss has to think about profit as well as sales revenue. And here
there may be difficulties if McCoy’s cuts its price too much. A price cut closes the gap
between price and unit costs, and if it is cut to the point where there is no gap left, it is
impossible to make a profit.
– So yes, the McCoy’s boss should use price because it clearly works at the moment in
this market, but the price cut must be calculated with care so that the profit is not
stripped away.

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 37 Price

➜ Option 2:
– The case for working hard on distribution is that for an impulse buy such as crisps,
the better the distribution (and display), the more product you are going to sell. This
is especially so in places such as petrol stations, cinemas and corner shops, where
impulse is a huge driving force.
– However, McCoy’s is a long-established brand, so its distribution level is likely to be
very high (it is likely to be in at least 80 per cent of the shops selling crisps). Therefore
there may not be much of an upside from spending more on distribution. Though it
may be that the real need is to fight to keep distribution from falling back, which risks
being the start of a downward spiral for the brand.

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 38 Promotion

Teaching advice
It is madly confusing to have the term ‘promotion’ as a heading that covers long-term image-
building advertising through to quick fixes such as BOGOFs. Students, of course, think that the
BOGOF is the product of the finest marketing minds, but it would be right to consider them as a
last resort. Apple, Mercedes and Rolls-Royce do not seem so keen on them, so perhaps other
approaches should take precedence.
We want students to realise that the most successful type of ‘promotion’ is low-cost, yet effective
in the long term. Perhaps the best ever example was the original headphone leads for the
Apple iPod. Most people were listening to MP3 players through headphones with black wires;
iPod ones were bright white. You could see who had the (far more expensive and prestigious)
iPod from quite a distance away. The modern equivalent is a true viral media storm about, say,
Rihanna wearing a pair of New Balance trainers.
Most promotion is paid-for (expensively), whether old-style or modern digital media. Therefore
a key thing is whether it generates enough extra sales to pay for itself.

End of chapter exercises, page 189

1 Would clothing company G-Star RAW be better off promoting their product through online
media or traditional media such as TV or cinema? Explain your thinking.
➜ Focused on under-25s, TV is probably not a suitable medium (the average age of viewers
is pretty old), but online versus cinema is a fair contest. Cinema is a young medium
and benefits from the enclosed focus of dark room/giant screen. Online, though, would
probably be better if some element of the campaign went viral.
➜ Online can be hugely successful if it goes viral, but can otherwise disappear amidst
all the other digital campaigns. To be sure of success in reaching young adults, cinema
might be a better bet.
2 Explain why promotions such as ‘buy one get one free’ may be a mistake for some brands.
➜ If the brand is frothy and fun, a BOGOF is no problem. But if the brand has a weighty,
perhaps posh, image and a weighty price tag, a BOGOF would undermine that image.
Chanel No 5 cannot be Chanel No 5 if it is BOGOF at Morrisons. But that raises the
more interesting question: what about brands like Haagen-Dazs ice cream or Fever-Tree
(posh) tonic: isn’t a BOGOF a threat to their long-term image too?
3 Look at Figure 38.1 on page 186. Outline two possible reasons why sales growth of Red Bull
slipped in 2009.
➜ It may have been due to the launch of Monster plus the growth of ‘Relentless’ (as a
matter of fact, between them they took £19 million more in sales in 2009 than in 2008).
Red Bull had been growing at about £20 million a year.

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➜ No less important was that 2009 was the biggest recession since 1929 and Red Bull
may be the sort of drink people can do without if they are not going out on a Friday or
Saturday.
➜ (As pupils are unlikely to know about the recession) a further possibility is that the
company may have struggled with supply, e.g. a fire at a big warehouse, so the dent in
the sales graph may be more to do with supply shortages than lack of demand.
4 Explain one reason why it makes more sense to use television advertising for big, mass-
market brands than for brands that appeal to a small segment of the market.
➜ TV is in nearly every home in the UK and watched by nearly everyone. It is the ultimate
mass medium. Therefore TV advertisements are very expensive, easily reaching
£100,000 for a single 30-second spot at prime evening viewing times. So it is not viable
as a medium to support small segmental brands because the promotional cost could
outweigh all the revenue.
5 Look at the pie chart in Figure 38.2, then answer the questions.
Other:
£1.5 billion
Magazines:
£0.7 billion

Direct mail:
£1.9 billion

Digital: £8.6 billion

Newspapers:
£2.1 billion

TV: £5.3 billion

Figure 38.2 Money spent on advertising in the UK, 2015

(a) What percentage of all advertising spending was digital in 2015?

– £8.6bn/£20.1bn × 100 = 42.8%
(b) The total spent on digital rose by 17.3 per cent in 2015, whereas for newspapers it fell by
11 per cent. Explain why this change might have happened.
– It probably reflected consumer usage of these media. As people switched away from
newspapers towards online news and entertainment sources, the advertisers followed
them. So ad revenues dropped for the newspapers but grew for digital media.
(c) Total UK advertising spending rose by 7.3 per cent in 2015. What might lead the amount
spent on advertising to fall in a future year?
– Advertising spending is most likely to fall in a year when companies are desperately
trying to cut their cash spending. This is most likely to happen in a recession, in other
words when the economy is going backwards.

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Practice questions, page 190

Total: 15 marks
1 Define what is meant by the term ‘online survey’. (1)
➜ A series of questions that people are invited to answer ‘online’, in other words through a
computer, tablet or smartphone.
2 Outline why there may have been a surge in time spent online by 5–15 year olds. (2)
➜ Probably mainly because of the increasing availability of content that appeals to that
age group. Much of this growth is focused on social rather than isolated activities. From
playing PS4 alone, so many more people are now playing against others.
3 Evaluate whether Cadbury should change from its traditional focus on TV advertising to the
use of digital advertising media. You should use the information provided as well as your
knowledge of business. (12)
➜ It depends on what Cadbury is trying to do, that is, its objectives. If it wants to promote
its products across all age groups, TV may still be the best medium to use because it will
be cost effective and is excellent for building strong brand images. But if the plan is to
focus more on younger people, say aged 10–25, digital advertising and the use of social
media may be more cost effective. In other words, per pound spent, you can reach more
10–25s online than through TV advertising.
➜ There is a big ethical aspect to this, though. Cadbury can claim to the world that a
decision to switch to digital is based on the overall trend from old to new media. On
the quiet, though, it may be thrilled to be aiming promotional activity at 5–15 year olds
whom the text says spend more time online than in front of the TV. If Cadbury publicly
said it was targeting 5–15 year olds there would be an outcry, with people accusing the
company of trying to shape young minds in favour of five-a-day chocolate instead of fruit.
➜ So, should Cadbury switch to digital media? Definitely no on an ethical and social basis.
But from the company’s point of view, if it honestly feels the need to target young adults,
a switch to online would make sense. In which case the business should make every
effort to avoid promotion designed to appeal to kids.

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39 Place

Teaching advice
A long time ago I wrote a Business Review article called ‘Place: the silent p’. It made the point
that students underestimate the difficulties associated with distribution. They seem to think that
all you need to do is take new products to Tesco and the company will stack them on its shelves.
Needless to say, getting distribution has always been a major challenge, and never more so than
today, given that all the supermarket chains are trying to ‘rationalise’ their ranges, i.e. cut the
number of product lines they offer.
In economic terms, ‘place’ is probably the biggest barrier to entry for a brand new business
compared with an established one. This morning, when buying milk at my Co-op, I saw that the
new PepsiCo launch ‘Pop Works’ popcorn has a big display. To my mind, it is a ‘me-too’ brand
launched late into the recent popcorn boom. It has no right to achieve distribution, but there it
is. Big is best when it comes to place. It would be great if students saw the topic as a serious
business challenge for newcomers – a challenge that needs to be overcome by clever marketing.

End of chapter exercises, page 193

1 Which type of product are you most likely to buy online? Explain why.
➜ Answers should be judged on a) whether it is a product, not a service, and b) whether the
explanation relates effectively to the product chosen.
2 Which type of product or service are you most likely to buy offline, in other words from a
shop?
➜ Answers should be judged on a) whether it identifies the chosen factor as a product or a
service, and b) whether the explanation relates effectively to the product chosen.
3 Look at Figure 39.2 on page 193 and answer the following.
(a) Calculate the percentage sales increase between 2005 and 2011.
– % increase = change/original × 100
– Change = £339.7m − £13.5m = £326.2m
– % change = £326.2m/£13.5m × 100 = +2,416%
(b) Calculate the percentage sales increase between 2011 and 2016.
– % increase = change/original × 100
– Change = £1,432m − £339.7m = £1092.3m
– % change = £1,092.3m/£339.7m × 100 = +321.5%
(c) Outline why sales may have followed this growth path.
– Growth in money terms has continued to be remarkable for ASOS, but just as it is easy
to get a huge percentage increase in homework marks if you scored 1/10 last time (but
hard, or even impossible, if you got a high mark last time), big percentage increases get
harder, the higher the numbers involved.

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4 Outline two possible reasons why customers may increase their grocery e-tail purchases
in future.
– If petrol prices rise sharply, people will be reluctant to spend their money getting to and
from the shops.
– The population is ageing – it seems likely that older people will increase their e-tail
shopping as their mobility worsens.
5 Discuss how a supermarket such as Sainsbury’s might solve its e-tail profitability in future.
– If picking and delivery cost £15 per order and people will not pay that, Sainsbury’s has to
work hard to get that figure down. That is not easy, but perhaps ‘picking’ could be done
by robots and happen only when the shops are shut at night. That might get the costs
down.
– The alternative is to try to get the cost down by spreading the fi xed cost elements over
more purchases/customers. In other words, if there were twice as many customers for
online, the delivery cost might be reduced to, say, £12 per person.

Practice questions, page 194

Total: 18 marks
1 (a) From Figure 39.3 on page 194, identify which product category has the highest rate of
customer returns. (1)
– Fashion.
(b) Outline one possible problem to retailers about encouraging customers to buy online. (2)
– Returns are clearly a problem. In other words, the retailer has all the costs involved in
picking, packing and posting, and then the product comes back. The customer gets all
their money back but the supplier has significant uncovered costs.
2 Use the text to help analyse whether customer returns are mainly an online, e-retailing
problem. (6)
➜ One element of the online returns problem cannot really affect physical shop purchases.
The text mentions ‘multiple items of a similar size, shape or colour’ that are ‘intentional
returns’, e.g. ordering shoes size 5.5, 6 and 6.5 with the intention of sending back two.
The costs involved in this process are real but are not borne by the direct customer (it
seems that shop customers are probably subsidising online ones). In this case, then, the
customer returns are mainly (or even exclusively) an e-tailing problem.
➜ Of course, shop customers may bring things back (returns) and the text does not give
figures for the percentages involved. But when a customer brings an item back, as long as
it is still in perfect condition it can be put back on the shelf with no direct costs involved.
Online, though, there are the costs of picking, packing and postage, plus the costs
perhaps of collection and further postage, all creating significant costs, on an item that
has not been sold.
3 Companies such as John Lewis worry about the increasing cost of customer returns. They
see two main options:
Option 1: Charge customers the cost of delivery, as would happen if items were posted.
Option 2: Continue with free delivery, forcing shop customers to subsidise online ones.
Justify which one of these two options a business such as John Lewis should choose. (9)

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➜ Option 1:
– The case for Option 1 is simple: the costs that relate to a specific customer’s purchase
should be related to that customer, not spread around everyone. It is equivalent to the
old days and plastic shopping bags. Supermarkets gave them away free, so customers
used plenty. People who came with their ‘bag for life’ were having to pay for the free
shopping bags used by others. Originally, only Lidl and Aldi charged for bags. Their
customers were willing to pay because the groceries were so cheap that 2p or 5p for
a bag was trivial. Surely that is what John Lewis should be doing: making online
purchases so attractive that people will accept paying for postage/delivery.
– The case against this is that customers will look away, heading for wherever delivery is
‘free’. And a drop in online sales turnover could mean that sales slip below the break-
even point, leading to losses.
– But in the long run, if a solution cannot be found, online will never make any money
for the suppliers, and there is a clear risk that retail shoppers may have to pay higher
prices to subsidise online buyers. John Lewis should make more effort to make online
purchases such a good deal that people do not mind paying a delivery charge.
➜ Option 2:
– Ultimately, if shop customers are having to subsidise online shoppers due to high and
expensive online returns, businesses with purely physical stores will become more
profitable than those which combine physical shops and online ones. This will attract
new businesses set up to only sell physically. Of course, this is counter-intuitive in a
retail world hurtling towards online. But it is possible that certain types of retailing
(especially clothing) may never prove profitable online, in which case retailers will
cut back.
– Possibly the returns problem will never be too bad at John Lewis and a few other
aspirational stores. But in other cases customers are exploiting loopholes in the online
offer. No wonder Primark is staying physical.

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 40 Marketing mix and business
decisions
Teaching advice
The key concept in this section is ‘competitive advantage’. It is an easy fall-back exam question
for a tired paper-setter (as are questions about stakeholders). Students not only need to link the
marketing mix to competitive advantage but also see how almost every part of the course can
have that same link. For example:
➜ Analyse how XYZ Ltd could use market mapping to achieve a competitive advantage.
➜ Analyse how XYZ Ltd could use the design mix to provide a competitive advantage.
➜ Analyse how improved quality management might provide a competitive advantage for
XYZ Ltd.
Purely in terms of the ‘marketing mix and business decisions’, the key statements are ‘how
each element of the mix can influence other elements’ and ‘an integrated marketing mix’.
The starting point here is the notion of an integrated mix, e.g. Chanel No 5, with each of the
Ps needing to communicate style. Once this idea has been fully established, it is easy to see
how ‘each element of the mix can influence other elements’ because if the Chanel salesforce
gets the product stocked at Superdrug and Lidl, the other elements of the mix/image come
crashing down.

End of chapter exercises, page 197

1 Explain briefly why all business decision-making is rooted in uncertainty.
➜ Decision-making is about the future and no one can know the future.
2 Take one of the two ‘good’ marketing decisions from Table 40.1 on page 195. Explain in your
own words why the decision was a good one.
➜ With Yoyo fruit rolls, the decision to build consumer awareness of the product through
advertising was justified by a 72 per cent rise in sales and further growth to £22.5 million
in 2015.
3 Take one of the two ‘bad’ marketing decisions from Table 40.1 on page 195. Explain in your
own words what went wrong.
➜ The Ice Co. launched into a declining market (sales decline of 29 per cent), making it
hugely difficult, for example, to achieve distribution if retailers are seeing sales decline
within the category. Launch into growth, not decline.
4 Use the ‘three-part process’ to imagine how one of the following plans might be put into
action:
(a) Lidl decides to start up a chain of better-value pizza delivery outlets across the UK.
– Objective: presumably growth, to use Lidl’s name and expertise to develop new
business.
– Plan the mix, deciding how much money will need to be spent to launch the new
business.
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 40 Marketing mix and business decisions

– Use the 4Ps: get the right ‘value’ product range, choose everyday low prices (£5 for all
large pizzas?), find locations with keen value buyers (e.g. university student areas) and
promote well to build awareness.
(b) Primark decides to start up a chain of better-value cinemas across the UK.
– Objective: presumably growth, to use Primark’s name and expertise to develop new
business.
– Plan the mix, deciding how much money will need to be spent to launch the new
business.
– Use the 4Ps: get the right ‘value’ product range, choose everyday low prices (£5 for
all tickets?), find locations with keen value buyers (e.g. university student areas) and
promote well to build awareness.

Practice questions, page 198

Total: 20 marks
1 Define the term ‘multinational company’. (1)
➜ A company with a base in one country but operating units in many others.
2 (a) Calculate Cadbury’s sales (in pounds) in India. (2)
➜ 55.5% of £1bn = £555m
(b) Outline one way in which they may have achieved such high sales. (2)
– It may be a historic issue, dating back to when India was colonised by Britain within
the British Empire (local companies were largely prevented from manufacturing; India
was allowed to produce primary goods only). So Cadbury probably had 80–90 per cent
of the market, back in the day.
3 Analyse how Ferrero is using the marketing mix to boost its sales in India. (6)
➜ The text emphasises that Ferrero has boosted its market share by focusing on the market
for kids’ treats. Its pricing seems quite bold, at 12p compared with 10p for KitKat Senses
and 7p for a standard chocolate bar. But it is presumably pushing sales through thanks to
its TV advertising aimed at children. So it is investing in promotion in order to help keep
prices high.
➜ It is noticeable that Ferrero has made no attempt to tailor its products to the Indian
market. The text talks of Kinder Joy, which is an established European product line.
Although no mention is made of distribution, India is famous for being especially hard
to enter, because of its millions of small shops. To get a 5 per cent market share Ferrero
must have addressed this problem.
4 Mars is considering two options for boosting its market share in India:
Option 1: Focus solely on the market for adult chocolate gifts.
Option 2: Attack Cadbury’s Dairy Milk by launching Galaxy.
Justify which one of these two options Mars should choose. (9)
➜ Option 1:
– As the text makes clear, in the mass market the price of chocolate bars is extremely
low, at around 7p, whereas gifts are around £2, nearly 30 times higher. In the UK
the equivalent might be 70p for the small bar of Cadbury’s and £5 for a gift, which
is only seven times higher. So Mars might feel attracted to the sector where there is
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 Topic 2.2 Making marketing decisions

hugely greater scope for profit: adult chocolate gifts such as nicely boxed chocolates.
Furthermore, the text gives no evidence that Cadbury is as dominant at the top end of
the market as it clearly is in the mass market, which would also make chocolate gifts
attractive to Mars.
– On the other hand, chocolate gifts represent only 12 per cent of the whole market.
Mars is a global giant in chocolate and it seems unlikely that it would be satisfied with
targeting just 12 per cent of the market. Perhaps it should not attack Cadbury head-
on with Galaxy, but it should surely tackle the mass market, perhaps using its global
super-brand M&Ms, or brands such as Snickers or Maltesers.
➜ Option 2:
– Willie Sutton, bank robber, explained that he robbed banks ‘because that’s where
the money is’. Similarly, Mars might take on Cadbury’s Dairy Milk (CDM) because
that is where the sales are. CDM accounted for more than 30 per cent of the total
chocolate market in India (in the UK it is about 15 per cent), so it makes sense to try
to take a slice of that share. It is also likely that CDM produces a high proportion of
all Cadbury’s profits in the region, so by attacking it Mars may be able to weaken
Cadbury’s grip on the whole market.
– On the other hand, it could be argued that to take on CDM is to underestimate the
power of a great brand. Middle-class Indian children have probably grown up with
the taste of Cadbury just as British children have. It may be very difficult to prise
customers away from their favourite.

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Exam-style questions on
Topic 2.2
Multiple choice questions, page 199
1 (b)
2 Product, promotion
3 (b)
4 (a)
5 (a), (e)
6 (a)
7 (b), (e)
8 (b)
9 (c)

Discussion question, page 200

10 Discuss whether a growing e-commerce business could benefit from opening its own
shops. [6]
➜ Possibly yes, because shops allow face-to-face contact with customers, who may make
suggestions that are taken up for online sales (‘Why not blue suede shoes?’). In this way,
a physical presence may more than pay for itself.
➜ On the other hand, companies such as John Lewis emphasise the financial strain caused
by ‘multi-channel marketing’, meaning the need to spend money keeping both online
and physical distribution channels going. So an e-commerce business may find that the
increase in the bill for fi xed overhead costs proves higher than expected – stripping the
profit from the business.

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 41 Business operations

Teaching advice
Many of us see this as the driest part of the subject. It cries out for activity: factory visits, visits
to local retailers or pizza places, to see how a process works from customer order through to
fulfilment. But getting students out can be as bureaucratic a hurdle as getting a visa to Russia.
So it is important to have a reasonable stock of short films about how things are made.
Sadly, both these clips come from across the water, but they pack a lot of great information into
4 minutes – the ideal time. The first is a Texan ice cream factory, put together by a fan but still
showing enough to give a clear idea about what happens. It would be a great starter for business
operations in general, or the wonderful topic of procurement (Chapter 44).
www.youtube.com/watch?v=9qJbSz-eCq0
The second is a remarkably well-crafted film on making crisps. It is Canadian, but could
have been made anywhere in the western world. Above all else it gives a stark reminder that
a) automation is a startling, brilliant but scary force, and b) automation can mean consistency
and therefore effectively standardised quality.
www.youtube.com/watch?v=PdyDlMqcRUs
Enjoy.

End of chapter exercises, page 205

1 Tata can sell a car in India for £5,000 that costs Renault £6,000 to make. In this situation,
how might productivity improvements help Renault?
➜ Higher productivity would mean more cars per worker and therefore lower labour costs
per car. That would help Renault cut its costs per car from £6,000 down towards £5,000.
2 (a) Bartex Ltd, a small lighting factory, employs 150 staff and has a monthly output of
180,000 lamps. What is the factory’s monthly productivity?
➜ Monthly productivity is 180,000/150 = 1,200 lamps per person per month.
(b) A rival based in Hull pays similar wages and has monthly productivity of 1,500 lamps.
Outline two ways this might affect Bartex.
– If a rival pays similar wages but has a 25 per cent higher level of productivity (1,500
compared with 1,200), its labour costs per lamp will be significantly lower. It might use
this to price its lamps below those of Bartex.
– Or it might absorb the labour cost advantage by charging the same price but making
higher profits per lamp. In the long run this will also hit Bartex if the rival uses its
higher profits to invest more in labour-saving machinery.
3 In the section on measuring productivity on page 204, Gavin is twice as productive as John.
Give three possible reasons why this may be the case.
➜ Gavin may have higher skill levels and is therefore more effective.
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 41 Business operations

➜ Gavin may be more motivated and therefore try much harder.

➜ Gavin may be working on a modern, efficient production line while John is working with
40-year-old machines.
4 Outline two ways that Renault could have improved productivity at Dacia.
➜ For productivity to rise from 4 to 32 (8 times) it seems overwhelmingly likely that Renault
invested heavily in new technology (such as robotics) to enable the production process to
be hugely more efficient.
➜ Training can also make a huge difference to productivity. If Renault gave its Dacia
workers regular training sessions they may have been able to see ways to steadily
improve efficiency.

Practice questions, page 206

Total: 20 marks
1 Define the term ‘competitive advantage’. (1)
➜ One or more factors that make a company able to compete effectively against rivals.
2 Outline whether it would be best to produce a vaccine using job, batch or flow production. (2)
➜ With a vaccine, every pill should be identical to every other, so flow production makes
the most sense: continuous production of an identical product.
3 Outline one way in which a big producer such as Pfizer might benefit from efficient
manufacturing. (2)
➜ Its large scale of production and deep pockets will enable it to buy and make cost-
effective use of new, high-technology equipment.
4 Analyse whether ImmBio should set up a factory for producing its vaccine in the UK or
somewhere where labour costs are lower. (6)
➜ Prevenar (the rival drug) costs £100 per course of treatment, which gives plenty of scope
for relatively high labour costs per pill as the revenue generated is so high (20 pills might
have a production cost of 20p, yet sell for £100). So there is no great pressure to set up
where labour costs are lower.
➜ There is a risk in moving production overseas. ImmBio wants to persuade British
doctors to choose its drug in preference to Pfizer’s. Doctors will be reassured about the
production safety standards of a UK factory, but may be worried about one in a low
labour-cost country.
5 ImmBio is considering two options for taking on Pfizer:
Option 1: Raise finance from venture capital providers.
Option 2: Float the business as a plc on the London stock market.
Justify which one of these two options ImmBio should choose. (9)
➜ Option 1:
– Venture capital (VC) providers expect influence, even a degree of control, in return for
their cash. So the VC will probably expect one – sometimes two – representatives on

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the board of directors. For a relatively new business such as ImmBio, this could be seen
as an advantage, with experienced people involved in boardroom decision-making. Or
it could be regarded as unwanted interference that is probably based on finance rather
than science.
– Another issue with VCs is that they usually want share ownership for a limited period;
in essence they are thinking of selling at the time they are buying the shares. They
might have a two- or three-year view, perhaps hoping to buy today and sell when
the business floats in three years’ time. In which case they will be pushing the chief
executive to get the business ready for flotation. What ImmBio boss Graham Clarke
wants, of course, is to focus on beating Pfizer.
➜ Option 2:
– Floating a public limited company is a hugely positive step for the founders of a
business, especially if they manage to hold on to 50.1 per cent of the share capital
and therefore still have control. Flotation enables founders to sell some of their own
shares (raising some personal cash) but more importantly issue new shares that can
be bought by the investing public. This can bring in substantial sums of cash that
will then stay within the business for ever, allowing investments into expanding the
business without having to worry about paying interest (as with bank loans). When
facing such a huge rival as Pfizer, it would be reassuring to have a substantial cash pile
in the bank account.
– On the other hand, some would worry that being on the stock exchange means being
vulnerable to takeovers and subject to huge pressure to take decisions in order to
maximise short-term profits.
– Overall, though, the huge upward potential of flotation makes it a sensible approach
when faced with competing against a giant like Pfizer.

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42 Technology, productivity and
production
Teacher advice
Technology is tough to write about largely because it is important simultaneously to sales and
to production. It is the source of consumer wonders such as smartphones as well as producer
wonders such as robots. So when an examiner writes a question with production in their head, it
is not surprising that many students misjudge it and write about consumers. Consequently this
needs some classroom time.
This chapter is clearly about production, but there may be questions that allow for an answer
relating to consumption as well as those that are purely production-focused.
It would be worth getting students to draft out their broad answers to:
➜ discuss the impact of technology on product quality (will students write about whizzy PS4
games or about consistency of output?)
➜ discuss the impact of new technology on production at Jaguar Land Rover (again, will the
student focus on the factory or the customer?).
The impact on the consumer is an important side issue; the heart of the matter is what happens
in the factory.

End of chapter exercises, page 209

1 Look at Figure 42.1 on page 207 and explain the difference between ‘trend’ and ‘actual’
data.
➜ Actual data means the correctly measured data for productivity. Trend data uses an
average over time to show what the figure would have been without any fluctuations.
2 Why may ‘consistency’ in production be a useful benefit of automation?
➜ Many things have to be consistent, e.g. the size of wheels that will be fitted to cars, and
in other cases people may want them to be consistent, e.g. a Big Mac to taste the same,
no matter which McDonald’s you go to.
3 Explain the ups and downs for staff if managers decide to talk to them more about how
production could be improved.
➜ Up: people like to be taken seriously, e.g. managers talking to staff and taking their
opinions seriously.
➜ Up: many people feel stuck in dead-end jobs, with no clear way to show managers their
extra skills/brainpower; this could make quite a difference.
➜ Down: if managers ask, get feedback but then do nothing about it, that is annoying.
Good ideas have to be tested in practice.
➜ Down: staff ideas on how to boost efficiency could rebound badly if they lead to higher
productivity but fewer jobs.

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4 In the future, technology may allow buses to be self-driven, with no human involvement.
Outline one benefit and one drawback to passengers and to bus companies.
➜ Benefit: removing labour input/cost might lead to lower ticket prices yet higher profits.
➜ Drawback: passengers might feel more vulnerable, cutting ticket sales – and profits.

Practice questions, page 210

Total: 15 marks
1 Outline the problem for a business such as Morrisons when ‘backstock has doubled but
we’ve more gaps than ever’. (2)
➜ For a retailer, the only point of holding stock is to avoid empty shelves (and lost sales/
grumpy customers).
➜ The worst of all worlds is lots of cash tied up in ‘backstock’ but gaps on the shelves.
➜ This would mean weak revenues but high costs (and therefore awful profits).
2 Outline one reason why implementing new technology in the workplace can be
disappointing. (2)
➜ Over the years staff build up a huge amount of expertise in whatever system they are
working with. They learn to bypass weaknesses and work on the strengths. A new
system requires huge investment in training and then time for staff to bed it in.
3 Outline one reason why Morrisons might have benefited from more flexibility from its staff. (2)
➜ Flexibility would make it easier for staff to adapt to the change in process represented by
the new stock-ordering system. This might have helped staff cope better, even without
extra training.
4 Morrisons is considering what to do next about the ordering problem. It is considering two
options:
Option 1: Scrap the new system and return to order pads operated by individuals at work.
Option 2: Keep going with the new system but spend more on staff training.
Justify which one of these two options Morrisons should choose. (9)
➜ Option 1:
– The combination of gaps on shelves and lots of stock in the back room is a retailer’s
nightmare. Customers expect to find what they want and hate to be told ‘we’re out of
stock’. If the botched introduction of the new software drags on, there is a real risk that
shoppers will start going elsewhere. A lot of what we do is habit, so getting shoppers
used to going to Asda or Tesco would be crazy from Morrisons’ point of view. So scrap
the new system for now and reintroduce it once full training has been given to all staff.
– On the other hand, Morrisons’ management may see the problems as temporary
hiccups that can be worked through. Staff often complain about changes, especially
to software. It may be better for managers to hold their nerve, keep gently explaining
the new system to staff, and make sure that store managers are walking the shop
floor, talking to customers and apologising where necessary. (As a matter of fact,
by December 2016 store managers at Morrisons were praising the new software for
improving their stock availability and controls.)

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 42 Technology, productivity and production

➜ Option 2:
– However awful the new system seems to be, it was probably decided on after a huge
amount of thought and discussion, and probably cost a lot of money. So it would be
wrong to ‘scrap’ it. At the moment there is no reason to suppose the system is weak –
it is just that staff are struggling to get used to it.
– Therefore the suggestion of more staff training is invaluable, especially if that training
takes place in stores where the new system is working successfully (though, from the
text, it is not clear that there are any). Based on the intranet staff comments, there
is not only a problem with the new system, there is also an issue of staff trust and
therefore morale. It is hard to work a new system if you don’t believe in it.
– The upside of the training route is that it could address both issues: morale and
effectiveness. The downside is that it will take time, and a supermarket with chaotic
stock control systems cannot afford to wait long before sorting out the problems.

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Teaching advice
Phew, the first straightforward topic for a while. Students can easily understand the need for
stock and that it costs money. So it is easy to understand why managers need to control it
with care.
A few numbers might help give a sense of scale. At the end of its 2016 financial year Marks &
Spencer had £800 million tied up in stock. So if it could find a way to halve its stock level, it could
free up £400 million in cash.
On the same day Jaguar Land Rover had £2,685 million tied up in stock. Interestingly, JLR split
that huge total into the three key types of stock:
➜ Raw materials £92 million
➜ Work-in-progress: £379 million
➜ Finished goods: £2,214 million

So if the company could find a way to halve the time taken to get finished cars to customers, it
could generate £1,107m in cash.

End of chapter exercises, page 213

1 Explain the meaning of the term ‘stock levels’.
➜ The quantity of different goods held by a business for when they are needed to be used
or sold.
2 Outline one reason why a small grocer’s shop might set:
(a) a low buffer stock for fresh grapes.
– You don’t want many held in stock because they can easily go past their best (and
therefore be worth less).
(b) a high buffer stock for Cadbury’s Creme Eggs.
– The managers may worry that there will be a rush, perhaps because they know the TV
advertising campaign is about to start.
3 Look at the bar gate stock graph in Figure 43.1 on page 212 and answer these questions:
(a) In what way does the graph show that Bob wants to keep ten cans in stock at all times?
– By the horizontal line that shows he has a ten-can buffer stock.
(b) What is the maximum number of cans of beans held in stock?
– 90
(c) Explain what the graph would show if Bob’s supplier forgot to deliver the 80 tins of beans.
– The diagonal downward line would go to zero and stay there until the stock arrived.

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 43 Managing stock

4 Give two reasons why a factory owner might be worried about ordering raw materials on a
JIT basis.
➜ If a supplier fails to deliver (crash on the M6?) the whole factory might grind to a halt,
meaning wages must be paid even though no product is being made.
5 Take one of the disadvantages of JIT shown in Table 43.1 on page 212. Explain how it might
affect sales at:
(a) a shoe shop in a busy shopping centre.
– If size six of a fashionable shoe sells out on Saturday morning there will be no
buffer stock and therefore no possible sales until the next delivery comes, but the
disappointed customer(s) may not return.
(b) the Manchester United Club Shop, Old Trafford.
– In the huge bulk of sales at Old Trafford, failing to take advantage of bulk buying
discounts could mean a significant shortfall in profit because of the decision to buy
JIT – little but often.
6 (a) Draw the firm’s buffer stock level on the graph below.
(b) Plot the shop’s stocks of Samsung phones. The shop starts with 400 units at the start of
the month.
(c) Label the graph carefully.
Units
400

350

300

250

200

150

100

50

0
0 2 4 6 8

Practice questions, page 214

Total: 13 marks
1 Calculate the percentage increase in PS4 sales between August and October 2015. (2)
➜ October 2015 figure is about 1,050,000 (accept anything between 1,000,000 and
1,100,000). Student must then calculate based on the figure they have estimated, for
example, 1,050,000 – 705,536 = 344,464
➜ % increase = 344,464/705,536 x 100 = +48.8%
2 Outline one reason why big variations in sales make it hard to manage stocks. (2)
➜ Because suppliers need notice (‘lead time’) before delivering, it is difficult to order when
sales are erratic and therefore unpredictable. Yes, you know what has happened to sales/
stock in the recent past, but you can’t be sure what is going to happen tomorrow. So you
may order 150 units because 150 were sold in the past 4 days, but if tomorrow’s sales
prove to be 200, the order will not be enough.
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 Topic 2.3 Making operational decisions

3 Sony is considering what to do about the huge increase in sales before Christmas. It is
considering two options:
Option 1: Take a JIT approach, producing 705,000 units in August and 4,445,000 in December.
Option 2: Produce more in September and October to build up a PS4 stockpile.
Justify which one of these two options Sony should choose. (9)
➜ Option 1:
– The great thing about a JIT approach is that it keeps stock levels low, especially stocks
of finished goods. This makes sure that the company’s cash is not tied up in unsold
stock.
– However, producing six times as much in December as in August can be done only
if the factory (and staff) can cope with making 4,445,000 in a single month. In which
case producing 705,000 leaves the factory (and staff) underused. In other words, if the
factory is big enough to make 4,445,000 in December it will be horribly underused in
August.
➜ Option 2:
– The JIT approach implies producing six times the volume in December than in August.
For that to be possible, there has to be enough factory space and equipment for the
December peak, meaning that the factory would be 5/6th underused in August. That
would add hugely to the August costs per unit and therefore hit profit. Far better,
surely, to build up stocks in the run-up to Christmas. In other words, over-produce
by perhaps 1 million a month in August, September and October so that there are 3
million units in the warehouse for when the Christmas orders arrive in November and
December.
– This does put a strain on warehouse space, but as long as there is enough for a 3
million stockpile, this plan should work. Then the factory size and staff levels do not
need to be so high as to make 4.5 million units in a single month. JIT is a super idea
but can work only if staff are flexible enough to work very long hours when needed but
earn little or nothing when production rates are low.

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44 Procurement: working with
suppliers
Teaching advice
Apparently ‘procurement’ ended up on the mandatory specification because the government
sent out the draft document to consultation among representative industry bodies – and the
only one to reply was the Chartered Institute of Procurement & Supply. Hence these pretty alien
terms such as procurement and logistics.
But the area is perhaps to become a more important one as Britain leaves the European Union.
Over the past 30 years a series of trading relationships has built up between the UK and other EU
businesses. GKN, for example, is a major supplier to German car manufacturers. JLR buys in a
substantial proportion of its components and sub-assemblies from EU countries such as Spain,
Germany and Belgium. All of these agreements will be put under strain by the threat of more
paperwork and perhaps import tariffs that disrupt the trade. So procurement departments will
have to look elsewhere for supplies, and make new deals that stick.
There should be plenty of stories out there about this part of the subject.

End of chapter exercises, page 217

1 Explain why the cheapest supplier may not be the best choice.
➜ For a business, buying in parts or components introduces quite a high level of risk into
the operation. Supplies that are cheap but of variable quality could end up disappointing
or even harming customers.
2 Identify two businesses for which daily deliveries may be absolutely crucial.
➜ A dairy, producing cream or butter.
➜ A fishmonger or a fish and chip shop.
3 Briefly explain two problems that may arise when a firm uses a supplier with poor levels of
quality.
➜ If the business has good quality systems it should spot the faulty supplies and send them
back. This might mean running low or running out of stock while waiting for the new
supplies to arrive.
➜ If the business does not spot the poor supplies coming into the process, the quality
weaknesses may come to light during quality control inspections at the end of the
production line. This would force lots of production to be redone and therefore add to
production costs (perhaps significantly).

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 Topic 2.3 Making operational decisions

4 Describe how a car manufacturer such as Volkswagen may benefit from including its
component suppliers in the development process when designing a new car.
➜ No one will understand gearboxes better than a gearbox supplier, so it makes huge sense
for VW to use that expertise when thinking of an innovative feature of a car that might
require a new type of gearbox. The supplier would know straight away whether the new
idea would involve a very expensive modification to existing gearboxes.

Practice questions, page 218

Total: 20 marks
1 Identify which supplier offers the best:
(a) quality. (1)
– C has the lowest reject rate.
(b) speed of response. (1)
– B has the lowest lead time.
2 Analyse why lead time would be important to a business such as BJK. (6)
➜ ‘Toys for pets’ sounds like a product for which sales might prove to be erratic, with sallow
sales punctuated by an upsurge if BJK gets a lucky mention on a TV show or a celeb blog.
If regular sales are quite low it makes sense to have a low buffer stock. If a big order
arrives unexpectedly, short supplier lead times will be essential to make up for the low
buffer.
➜ The same logic applies to Christmas sales (which could easily be half the year’s sales),
though perhaps the need is even more urgent. If a big order arrives on 18 December
but there is a one-week supplier lead time, supplying the customer before Christmas
becomes impossible.
3 Evaluate which supplier BJK should choose, and why. You should use your knowledge of the
case study above as well as your knowledge of business. (12)
➜ Dolls for dogs may be a price-sensitive market. If so, the fact that Supplier C is nearly
80p more expensive than A seems significant. Companies often ‘mark up’ prices by
perhaps a factor of three, so £4.20 becomes £12.60 and £4.99 becomes £14.97. This might
be the price BJK charges pet shops such as Pets At Home, which in turn may mark up by
100 per cent, making the ‘retail price’ £25.20 or £29.94. The extra £4.74 might affect sales
volumes, so Supplier C should be avoided if possible.
➜ Although A is the cheapest, it is also the worst on quality and delivery lead times. A’s
reject rate is five times that of C’s. This would be the number one factor if the product
was a part for an aircraft (i.e. a threat to life), but should still be important to a pet’s doll.
If the doll’s head comes off and the dog swallows it …
➜ B is the best by far on lead time. This would enable BJK to keep its stock levels low and
therefore save money. This balances nicely against the relatively high price of £4.80.
Unfortunately, the reject rate is significantly higher than C’s.
➜ There is no clear-cut winner on the basis of the numerical data. But one can conclude
that if the pet doll is to be presented as a special gift carrying a high price tag, C should
be the chosen supplier. But if the toy is to be an everyday, relatively cheap item, B would
probably be the best, as its higher price is compensated for by the speed of supply.

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45 Managing quality

Teaching advice
Teaching this topic effectively is a challenge in itself. Understandably, pupils will quickly think:
‘Yes, of course quality matters to businesses, I get that, let’s move on.’
We need students to master two things. First, to be able to build effectively from ‘quality matters’
to an analytic sequence of becauses and therefores. Something like: Quality matters … because
it affects reputation, customer loyalty and therefore both sales volume and the ability to control
price (think Mercedes) … and it also affects production costs because high-quality work has a
low or zero reject rate and therefore the work needs to be done once only, cutting out re-work
costs. So high quality can boost revenue while cutting costs, allowing profit to jump ahead and
giving the business a significant competitive advantage.
The second issue for students is quality control versus quality assurance. At its simplest this
comes down to: QA happens along the line, QC happens at the end.

End of chapter exercises, page 222

1 Explain how ‘customer delight’ might affect a firm’s sales.
➜ It should mean a much higher level of repeat business, which will boost customer numbers
in itself and might lead to word-of-mouth or viral benefits in terms of new customers.
2 Outline one possible weakness in a quality-control system based on factory inspectors
checking a sample of the finished product before it is sent to customers.
➜ If the quality control is based on sampling, many faults may get through to customers
(because not everything is checked).
3 BHS went out of business in 2016, after years of a worsening reputation for the quality of its
goods and service. How might that reputation have affected the business?
➜ Poor quality of goods means that people will visit only when price is the overwhelming
priority and prices are believed to be low (in the annual sales or in a flash sale). If service
is poor, customers might walk out in frustration or anger. So poor quality means falling
sales and falling profits.
4 At school, you and your parents are ‘customers’. Outline one example of good and one
example of poor quality service that you or your parents experience from the school.
➜ I thought this question might yield some interesting answers!
5 Explain why highly motivated staff are more likely to deliver high-quality service.
➜ Good service is a combination of efficiency and pleasantness. Well-motivated staff are
more likely to concentrate and therefore get things right (efficiency) and also more likely
to do so with a smile rather than a scowl.

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 Topic 2.3 Making operational decisions

6 Would a system of quality control or quality assurance be better for:

(a) Boeing, which manufactures passenger aeroplanes?
– Both should be in place, but if you had to choose one it would be quality control, as
long as it was checking every aircraft rather than a sample.
(b) Mars, which produces chocolate bars?
– Quality assurance should work well, as long as everyone in the supply chain knows
that they have to make quality their personal responsibility.

Practice questions, page 222

Total: 20 marks
1 Define the term ‘quality control’. (1)
➜ Checking quality through an inspection system at the end of the production line.
2 State one way in which Toyota is ensuring high-quality output. (1)
➜ One from:
– Designing quality into the car, i.e. making it a priority within the design process
(rather than focusing too much on the car’s appearance).
– Emphasising the staff’s role in kaizen, i.e. the value of coming up with small, marginal
improvements to quality that may add up to a lot in the long term.
– Through the installation of the andon cord, which emphasises every staff member’s
importance in controlling quality.
3 Analyse how Toyota may benefit from the high-quality standards it achieves. (6)
➜ The most obvious benefit comes from customer loyalty based on reliability and quality.
Loyalty means high levels of repeat purchase, which helps keep pricing pressures at bay.
Therefore, whereas some car brands have to offer big price discounts in order to sell cars,
Toyota will not need to take this approach.
➜ As a matter of fact, Toyota was the world’s number one car producer in 2015. No one
thinks the company is outstanding at car design and innovation, so a lot of that success
is probably down to loyal customers coming back for more. Much of that must be down
to reliability and quality.
➜ A further benefit from high-quality standards is the impact on staff. People like to take
pride in a job well done. Producing more units seems like something you are doing for
the company and its shareholders; producing top-quality cars is something for every
individual worker to enjoy.
4 Evaluate whether Toyota’s quality management at Georgetown is based on quality control
or a quality culture. (12)
➜ Broadly, what Toyota calls ‘quality control’ at Georgetown is a mix of quality control and
quality assurance because it is about inspection at every stage on the line. But it seems
more about the mindset of staff than the systems the company uses, so it is really about
attitudes to quality, meaning the way people think and speak in the workplace.

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 45 Managing quality

➜ Staff at Toyota Georgetown have caught on to the idea that quality is their top priority
(rather than output/production). Quality checks are fine as a part of that process, but
the top priority is how staff think and feel about quality. By using staff ideas to make
improvements the company has cleverly made staff feel part of a joint project to make
Georgetown production the best, thereby helping the company and its employees
simultaneously. Staff get the benefit of greater job security as well as more satisfaction
from the working day.
➜ So although quality control is the strategy at the heart of ensuring that the products are
as close to perfect as possible, the more important element is staff attitude. They are the
ones who are building quality into everything they do.

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 46 The sales process

Teaching advice
Students will feel comfortable about service with a smile, but probably underestimate some of
the practical issues related to the sales process. Above all else, there is product knowledge. Why
else would any high street travel agency exist? For those who lack confidence in their purchasing,
a knowledgeable sales person is a relief. Of course, that raises possible questions about the
scope for mis-selling, with financial products especially. But the tone of the Specification is
generally positive about the sales process.
Then there is application. The sales process is hugely different in different circumstances.
Sometimes one wants to buy in isolation, clicking mouse or app to make one’s choice. At other
times we need advice (even if we don’t take it), such as when buying clothes as a surprise present
for a boy/girlfriend. Something like the following table might be worthwhile. Get students to
decide where to tick along each row and get some to explain their decisions.

Purchase Need contact with well- Need well-informed No human contact

informed sales person sales person on hand needed at all
Family camping holiday to Ethiopia
Ordering a Domino’s margherita (large)
Buying a new winter jacket
Wanting a new phone and contract

End of chapter exercises, page 226

1 Explain the importance of staff product knowledge for a customer going to buy their first
new car.
➜ Unless the customer is a car nerd, there will be a host of questions that need to be
directed towards a sales person. A first new car is often the biggest purchase an
individual has ever made, so they will want to be 100 per cent certain that the car is just
right. If the sales person is unable to answer key questions, the buyer is likely to lose
confidence and go elsewhere.
2 Why may speed of service matter more to some customers than others?
➜ To some, every moment queuing is an added pressure in a busy day, whereas others have
a more relaxed lifestyle, perhaps especially those who are not working.
3 Suggest two ways in which customer engagement might be promoted by a local kebab shop.
➜ To get customers to feel part of the kebab shop, remember customer names plus one or
two things about them (‘Hi Sam, how was Greece?) – it will make no difference if the
kebab is awful, but as long as the quality is okay it should increase loyalty.

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 46 The sales process

➜ Slip kids a free Chupa Chups lolly as a treat after they have finished their food. The
parents may not feel engaged by that, but the kids will keep them in line.
4 Explain the damage that might be caused to a company’s profits if it responds bitterly to
customer feedback.
➜ Almost always, if a customer criticises (no matter how unfairly), the right thing to do
is take it on the chin. Responding bitterly might lead to a tit-for-tat argument that the
business cannot win. Customers will tend to avoid potential awkwardness, so stay away.
5 Explain how a low-cost airline might benefit from improving its post-sales service.
➜ Nine times out of ten there is no need for post-sales service at an airline. But occasionally
baggage may get lost, or a wedding ring is left by the washbasin, for example, and the
effectiveness and humanity in the service may become hugely important.

Practice questions, page 227

Total: 15 marks
1 Analyse whether Fred. Olsen Cruise Lines seems to be focused sufficiently on providing
good customer service. (6)
➜ Er, no. It seems more focused on concerns about compensation claims. The cleaning
and sanitation measures seemed to come in response to the problem rather than as an
attempt to prevent things going wrong.
➜ For long-term customer loyalty it is difficult to think of anything more important than
ensuring customers are healthy, safe and happy. Keeping the ship going on with its next
voyage seems to show lack of respect for those who have been badly affected.
➜ The company seems more focused on keeping up short-term revenues than providing
good customer service.
2 The management at Fred. Olsen is considering two options for refreshing their service:
Option 1: Set up a new customer service department for dealing more quickly with
customer complaints.
Option 2: Spend longer in-dock between cruises, making sure that cleaning is more
thorough.
Justify which one of these two options Fred. Olsen should choose. (9)
➜ Option 1:
– The case for a new customer service department is partly to make sure that the large
number of upset customers feel reassured by the company’s response and therefore
may return as customers in future, or at least soften their tone when reviewing Fred.
Olsen on social media. In addition, it could be argued that a new customer service
department, if given the power, could be a force for change in the business, making
sure that the customer comes first in business thinking and decision-making.
– On the other hand, it may be that the new department is important for a month or
two when clearing up the mess left behind by the Balmoral incident but then ignored
internally as the business returns to a focus on cost-cutting.

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 Topic 2.3 Making operational decisions

➜ Option 2:
– Option 1 smacks of papering over the cracks. Option 2 is an attempt to tackle the
underlying cause of the problem.
– The idea of flying out 20 cleaners when a health problem arises suggests that the
business has a cavalier approach to health. It should be trying to prevent problems, not
reacting to them. From a customer point of view, a longer stop between cruises would
be hugely reassuring, making people happier to come back for another cruise and to
tell others that Fred. Olsen cares.
– Of course, longer stops between cruises means fewer cruises during the year and
therefore less revenue, plus the extra cleaning must incur costs. So the policy hits profit
in two ways: costs up and revenue down.
– But that is in the short term. In the longer term, happy, safe and satisfied customers are
the best guarantee of successful business prospects.

140
Exam-style questions on
Topic 2.3
Multiple choice questions, page 228
1 (b)
2 400
3 (c), (e)
4 (d)
5 (b)
6 (a)
7 (a), (c)
8 (d)

Discussion question, page 229

9 Discuss the importance to a growing business of keeping productivity up. [6]
➜ Productivity affects labour costs per unit of output and is therefore hugely significant.
The higher the productivity the lower the labour costs per unit. This enables the business
to make more profit per unit, or to cut prices if it thinks it can make its competitors
struggle. For a growing business, rising productivity would help generate the extra profit
to finance growth.
➜ On the other hand, it could be said that a time of growth makes it more important to
keep the rate of production up (rather than productivity). Greater efficiency may be more
important as the business faces maturity; at a time of growth, higher output is what the
customer needs.

141
 47 Business calculations

Teacher advice
Calculations play a huge part in exam grades. Not only do calculation questions discriminate
sharply between students in terms of marks, they also affect timing issues. The best at Business
maths get a double bonus: full marks on the questions (perhaps adding two grades to their
result) plus a few extra minutes to boost their marks on written questions. They get 10/10 in
6–7 minutes. Many others are getting 5/10 in 13–14 minutes, which is probably a worse outcome
than the maths-phobes who get 0/10 in zero minutes. These students use this time to write full
answers to the 9- and 12-mark questions.
In an ideal world we would have the time to get to understand each of our students’ strengths
and weaknesses here and point each one towards the right strategy. In the absence of that time,
it is worth thinking hard about a more generic strategy:
1 Teach everyone every numerical aspect of the course and every formula.
2 Give lots of reinforcement exercises, such as the worksheets from A–Z Business Training.
3 When revision comes round, focus hugely on percentage change calculations and the speed
with which people do them. Emphasise change/original x 100, but show how quickly a 20 per
cent increase on 400 can be calculated as 400 × 1.2 = 480. With your best students, quietly
tell them to drop the formula and the workings and simply calculate and set out the answer
(taking care about how the answer is stated, e.g. 400 or £400 or 400,000?). Top students
need full marks and the time bonus.
4 Practise plenty with calculating profit, break-even and profit margins. These will come up
most frequently.
5 Only if there is time left is it worth going into the more abstruse ones such as average rate
of return.

End of chapter exercises, page 234

1 Look again at Table 47.1 on page 231. Explain one possible reason why French Connection’s
gross profit margin was so much lower than that of SuperGroup and Ted Baker.
➜ French Connection was probably not able to charge such high prices as the other
(trendier) two, or if it did, customers would not buy, forcing the company to put lots into
the January and July sales at slashed prices.
2 Outline what would happen to profits if a business allowed its fixed running costs to grow
too fast.
➜ That would leave gross profit unchanged but would hit the net profit. Therefore the net
profit margin would fall, or might even turn negative.

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 47 Business calculations

3 Look at this data from Ryanair.

2015 2016
Sales revenue £5,654 million £6,536 million
Net (operating) profit £1,043 million £1,460 million
Table 47.4 Revenue and profit at Ryanair
(a) Calculate Ryanair’s net profit margin for 2015 and 2016.
– Net margin = net profit/sales revenue × 100
– 2015 = 18.45%
– 2016 = 22.34%
(b) Comment on whether 2016 was a good or bad year for Ryanair.
– 2016 seems to have been a sensationally good year for Ryanair, with net profit up by
around 40 per cent and a healthy 2015 net margin turning into a fantastic 2016 one.
4 Annual profits on an investment of £600,000 are shown in Table 47.5.
Annual profits (£ thousands)
Year 1 +100
Year 2 +400
Year 3 +400
Year 4 +180
Table 47.5 Forecast annual profits
(a) Calculate the average rate of return.
– Net cash flow over the lifetime of the project: 1,080 − 600 = 480 (£000)
– Annual average profit = £120,000
– ARR = £120,000/£600,000 × 100 = 20%
(b) The company has another investment possibility that could yield a 25 per cent return a
year. Should it go ahead with both?
– If it can afford to do both and the two investments don’t clash with each other, then
yes, certainly, do both as both are generating returns that are far ahead of the cost of
capital (the interest rate).

Practice questions, page 234

Total: 15 marks
1 Analyse whether Burberry’s higher net profit margin proves that it is better managed than
Ted Baker. (6)
➜ Given that they are both in the same sector and both have an international presence,
it is fair to compare them directly. Burberry has a classier image and therefore charges
higher prices, but that is no accident. The Burberry management had to work hard and
make a series of difficult decisions to achieve its very strong position in women’s fashion
worldwide.

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 Topic 2.4 Making financial decisions

➜ On the other hand, it could be argued that the higher profit margin is the benefit of past
success and therefore cannot be taken as proof of better management today. In other
words, Burberry has higher margins because it can charge higher prices than Ted Baker.
That does not prove that Burberry is better managed.
2 Having seen this graph, Sainsbury’s senior management is determined to improve the
company’s net profit margin. It has identified two methods:
Option 1: Moving the company’s head office from central London to central Bristol, to cut
the property rental costs in half.
Option 2: Making all staff and managers earning more than £120,000 redundant.
Justify which one of these two options Sainsbury’s should choose. (9)
➜ Option 1:
– Option 1 has two great benefits. The first is that it is not just a one-off, like cutting
this year’s £10 million bonus for the chief executive. Having been completed, Option 1
means halved property costs every year into the future. This permanent reduction in
Sainsbury’s fi xed costs reduces the company’s break-even point and increases its net
profit indefinitely into the future. Many head office staff may stay with the company
and move to Bristol, and clearly it would be wrong to cut their pay, but as new people
are recruited the wage levels in Bristol can probably be a bit lower than in London.
Therefore the business’s fi xed overheads will come down even more.
– The other benefit could affect morale throughout the business. Shop floor and
warehouse staff are used to being made to suffer from the mistakes being made at
head office. To see head office having the disruption and making an effort to cut costs
would be welcomed throughout Sainsbury’s. Instead of being told to cut costs, shop
floor staff could believe that ‘we’re all in this together’ and be more enthusiastic about
following cost-saving initiatives that come from head office.
➜ Option 2:
– A net profit margin of 3 per cent seems pretty feeble for a major business such as
Sainsbury’s, so drastic solutions may seem understandable. But however much one
may dislike seeing senior business leaders paid huge multiples of the pay rates for
shop floor staff, making redundant all those earning £120,000-plus makes little sense.
Among those senior managers are probably some over-promoted folk who deserve
to be made redundant, but there are also likely to be some dynamic, motivated and
intelligent staff who are worth their salaries. So even though there may be a case for
pruning the £120,000-pluses, it is unlikely to be sensible to get rid of them all.
– If all were given redundancy notices but invited to apply for new, lower-paid,
streamlined jobs at the top not many would apply. Sainsbury’s might be forced to
appoint from a selection of mediocre candidates who don’t rate their chances in a high-
level management role at another organisation where salaries are more in line with the
high wage ‘norm’ to which Sainsbury’s previously adhered.

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48 Understanding business
performance
Teaching advice
Much of the advice given for Chapter 47 could be repeated here. Calculations matter hugely, so
this chapter should be used fully, including all the questions at the end. There is also a strong
case for creating a regular slot in the Year 11 timetable, of perhaps 15 minutes a week, focusing
solely on calculations. It is difficult to get a moderate student to achieve 6/6 on a written question;
much easier to help them towards 6/6 on numerical questions.

End of chapter exercises, page 240

1 In the year to 26 March 2016 Lucozade retail sales were £463.8 million out of total sales of
£1,300 million in the UK market for sports and energy drinks.
(a) Calculate Lucozade’s sales as a percentage of the whole market for sports and energy
drinks.
– £463.8m/£1,300m × 100 = 35.7% (also acceptable: 35.68% or 36%)
(b) State whether a bar chart, a pie chart or a line graph would be the best way of
showing this.
– A pie chart makes the most sense, to show Lucozade’s slice of the pie.
2 Outline one possible reason why Airbus was able to move from a 44 per cent share of sales
in 2006 to 57 per cent in 2015.
➜ Airbus may have had a better product range than Boeing, perhaps due to higher or more
effective spending on research and development.
3 Given that spending per person on nappies was £9.64 in the UK and £3.41 in China in 2015,
how is it possible for China’s market size to be seven times that of the UK?
➜ Because the population of China is approximately 20 times that of the UK (1.35 billion
compared with 65 million).
4 Explain why financial data might not help a business make a decision about whether to
spend £5 million on a sponsorship deal with a successful Olympic athlete.
➜ It is very hard for data to be generated on the impact of sponsorship upon sales (there is
no direct link), so sponsorship is always an act of faith.
➜ An added factor is judgement over the character of the athlete – there are many issues
that can flare up that undermine the value of the sponsorship.

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 Topic 2.4 Making financial decisions

Calculation exercises, page 240

1.1 A business has total weekly sales of £15,000. One of its products sells £10,500 a week.
Calculate the percentage that one product represents as a percentage of the total.
➜ £10,500 is 70% of £15,000 (£10,500 / £15,000 x 100 = 70%)
1.2 A company’s profits fall from £42,000 last year to £29,400 this year. Calculate the
percentage change.
➜ The percentage change is a fall of 30% (-£12,600 / £42,000 x 100 = -30%)
1.3 Last year a company had 60 staff. This year it employs 81. Calculate the percentage
change in its staffing.
➜ Change of 21 on a base of 60 = +35% (21/60 x 100 = +35%)
2.1 In the past three years a company’s profits have been: £42,000, £12,000 and £66,000. What
has been the average level of profit per year?
➜ £42,000 + £12,000 + £66,000 = £120,000
£120,000 / 3 = £40,000 average per year.
2.2 In a warehouse employing 50 people, actual attendance at work has varied as follows:
➜ 4 weeks ago: 44
➜ 3 weeks ago: 46
➜ 2 weeks ago: 39
➜ 1 week ago: 34
Calculate the average weekly attendance.
➜ 44 + 46 + 39 + 34 = 163/4 = 40.75 average
3.1 A hamburger stall sells burgers for £5. Each one costs £2 to make and running the stall
costs £400 a week. Its weekly sales are 500 burgers.
a) Calculate the revenue.
– 500 x £5 = £2,500 revenue
b) Calculate the total costs.
– (500 x £2 = £1,000) + £400 = £1,400 total costs
c) Calculate the profit.
– £2,500 - £1,400 = £1,100 profit
3.2 A company sells 200 items a week at £12 each. Its variable costs per unit are £4 and
weekly fixed costs are £1,200.
a) Calculate the profit.
– Revenue £2,400 – Total costs £2,000 = £400 profit
b) Calculate the break-even point.
– Break-even = £1,200 / £8 = 150 units
c) Calculate the new profit if sales rise by 50%
– New profit = Revenue £3,600 – New total costs of £2,400 = £1,200

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 48 Understanding business performance

4.1 In the past six months a company has £90,000 of revenue, with £40,000 cost of sales. After
taking away other operating expenses and interest, the business was left with £12,000 of
net profit.
a) Calculate the gross margin.
– Gross profit = £50,000; gross margin = £50,000 / £90,000 x 100 = 55.56%
b) Calculate the net margin.
– Net margin = £12,000 / £90,000 x 100 = 13.33%
4.2 A business with revenue of £200,000 has a gross profit margin of 40 per cent. Calculate its
cost of sales.
➜ Cost of sales is 60% of £200,000 = £120,000
5.1 A business forecasts that a £50,000 investment should make £15,000 profit a year, after
allowing for all costs. Calculate the average rate of return.
➜ £15,000 / £50,000 x 100 = 30% a year
5.2 A company estimates that a £20,000 investment will bring in £40,000 profit over the next
four years (after allowing for the cost of the investment). Calculate the average annual rate
of return.
➜ £40,000 profit over 4 years = £10,000 a year. £10,000 a year / £20,000 x 100 = 50% ARR
6.1 A business has £4,000 of cash at the start of a month. Its cash inflow is £5,000 and outflow
is £2,000. Calculate the amount of cash it has at the end of the month.
➜ At the month end it has £4,000 + (£5,000 − £2,000) = £7,000
6.2 A business starts a month with £8,000 of cash. £10,000 is paid out but it ends the month
with £9,000 in cash. Calculate that month’s cash inflow.
➜ £8,000 + (? − £10,000) = £9,000, so the ? must be £11,000

Practice questions, page 241

Total: 13 marks
1 Calculate the fall in profit between last year and the 27 weeks to 3 July 2016. (2)
➜ The change from +£38 million to a loss of £22.5 million is minus £60.5 million.
2 Outline one problem that might arise from prices being ‘hiked too much over the last
three years’. (2)
➜ If people love the food, they will cope with prices being pushed up and up until a ‘tipping
point’ when they suddenly reflect that it is no longer good value. And once that point has
been reached, they will stop looking at Frankie & Benny’s good points and start picking
holes. An unhappy customer is a lethal weapon, warning friends and family not to visit.
3 Mrs Hewitt says the company’s problems are fixable. Apart from closing loss-making
restaurants she has identified two other options:
Option 1: Returning to the previous menu and prices.
Option 2: Introducing an app to access ‘Frankie & Benny’s Online’ – a free delivery service
Justify which one of these two options Mrs Hewitt should choose. (9)

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 Topic 2.4 Making financial decisions

➜ Option 1:
– For some alienated F&B customers it may be too late, but to rebuild the business
the menu and the pricing have to be right. No one goes to F&B expecting Michelin-
starred food – it is a place for a family meal and therefore needs to offer prices that
are affordable on a regular basis. The ideal F&B customer brings the family every two
weeks or so and therefore needs to be able to afford 26 meals a year (if a family of five
spent £100 a time, that would be £2,600 a year!).
– Then there is the menu. It has to have options for cautious eaters, who want comfort
and familiarity rather than experimental cooking. It is a family restaurant!
– On the other hand, it is important to bear in mind that senior F&B staff saw a need to
steer the menu away from comfort towards a new beginning. It proved a mistake, but the
underlying causes may still need to be addressed. Were sales slipping before the menu
change? If so, it will be vital for the business to introduce some catering sparkle to go
alongside the comfort. This might mean going further in terms of the ingredients (it is not
just ‘fillet steak’, it is ‘fillet steak from grass-fed Scottish beef’). The point is a simple one.
Just going back may not be enough; it probably needs to be two steps back and one step
forward.
➜ Option 2:
– There is no doubt about the dramatic effect a slick app has had on sales at Domino’s
Pizza and the success of Just Eat. In the bigger cities, Deliveroo has also been a huge
success. All have based their success on ‘e’, but especially ‘m’-commerce (m for mobile,
i.e. mobile apps).
– But will this approach work for Frankie & Benny’s? Surely not, if the business has the
wrong menu at the wrong prices. If people are not buying in the restaurants they will
not be buying online. So there is no real ‘either–or’ option in this case. The company
needs the menu to be sorted out, probably in line with Mrs Hewitt’s ‘back to the
future’ approach. After that has been proved to work, investing further in a new app
plus the delivery system to provide an effective service would surely be a wise move.

148
Exam-style questions on
Topic 2.4
Multiple choice questions, page 242
1 (a)
2 (a), (d)
3 (b)
4 (d)
5 (b)
6 (c), (d)

Discussion question, page 243

7 Discuss whether a growing business could ever have a net profit margin that is too high. [6]
➜ The net profit margin could be viewed as a measure of how much the business is gaining
at the expense of the customer. With Apple, the huge net margins show, in effect, that
iPhones are madly overpriced. For a growing business, very high net margins should
provide all the capital required for expansion and therefore save the business from
loading itself with debt. But there will always be a risk that today’s high margins become
tomorrow’s customer complaint. High margins for a restaurant may be okay until a
customer’s slightly disappointing experience stops him/her returning.
➜ On the other hand, it could reasonably be said that starting a business is a high-risk
activity, so it’s only fair that success should mean high rewards. If a business is trendy,
with lots of customers coming and returning, why not charge prices high enough to
provide generous net profit margins.

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 49 Organisational structures

Teaching advice
As I write, Samsung has just had to halt its launch of the Galaxy Note 7 and ask all customers to
switch off the devices. A US analyst estimated that this would cost Samsung $20 billion. Apple
executives must be gurgling with glee. So what do we suppose Jong-Kyun Shin, chief executive
of Samsung, knew about all this? Probably nothing until the issue blew up in his face. Towards
the bottom of the organisation there were almost certainly engineers and shop floor workers
who knew that risks were being taken in launching the Note 7. But the information never reached
those at the top – until it was too late. Samsung employs 489,000 people and there could easily
be 20 layers of management between the shop floor and Mr Shin. The huge, tall organisational
structure got in the way of effective communication, as it often does.
As with so much in the subject, the bare theory is abstract and dull; it needs to be brought to life
using context. Stories help with engagement and understanding, and with application marks.

End of chapter exercises, page 248

1 Outline the differences between a hierarchical and a flat organisational structure.
➜ A hierarchical structure has many layers of management, so decision-making may be slow.
➜ A flat structure has many staff answerable directly to each manager but not too many
layers of management, so communication can flow from bottom to top quite quickly.
2 Identify the benefits to a business such as Topshop of having local managers with the power
to make decisions about their local branch.
➜ Decentralised decision-making can be better tuned into local needs/circumstances,
e.g. buying in slightly different stock.
➜ Local decisions can be made quickly, without needing to check them out with a distant
manager.
➜ With speedier, better decision-making, sales revenue may rise and costs be kept down,
i.e. boosting profit.
3 Explain the implications to a large firm of having too many layers in its hierarchy.
➜ Slower communication between top and bottom.
➜ Slower decision-making, if staff feel that everything needs to be checked out with the
next layer above them.
➜ There is also a huge financial implication. Too many layers means too many management
salaries – this can drain the business of its profitability.

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 49 Organisational structures

4 (a) Draw an organisation chart to show the structure of your school.

– Mark generously, as students will find this quite a challenge.
(b) Give reasons to explain why the structure is designed as it is.
– Encourage students to do some research here, perhaps by asking in the school office or,
if the head is game, by asking the head to come in and answer 10 minutes of student
questions.
(c) Evaluate the effectiveness of the school’s structure.
– Ditto!

Practice questions, page 249

Total: 20 marks
1 Outline one problem that might arise from not replacing the head chef in Peterborough. (2)
➜ Reduction in the quality and consistency of the food.
➜ Lack of leadership leading to the problems mentioned, such as lack of cleanliness.
2 Outline how the use of quantitative data might have helped Carluccio’s avoid its mistake
with the Trinity Leeds store opening. (2)
➜ Quantitative data could have been used to analyse where customers came from for
the first Leeds site. Then to work out the likely overlap between the two sites in terms
of where customers were likely to come from. If the figures had shown that the new
site might draw 20 per cent of its customers from the same area of Leeds as the first
Carluccio’s site, the company could estimate the effect of Site 2 on sales at Site 1.
➜ This is the sort of calculation that every chain business does, to avoid ‘cannibalisation’
of sales.
3 Define the term ‘organisational structure’. (1)
➜ Who is answerable to whom within an organisation’s layers of hierarchy (often shown as
a diagram).
4 Analyse how Mr Kossoff might try to solve the problem of the ‘huge vertical gap’ between
top and bottom at Carluccio’s. (6)
➜ The first thing is that he must take the problem seriously. The risk with TV programmes
such as this is that the obvious problems are solved but the underlying ones are not.
➜ One approach might be to have a rolling programme in which every head office manager
spends a week a year working under a local store manager, in the kitchen or serving
customers. Even if the ‘undercover’ approach is abandoned, senior staff could still learn
masses from time on the shop floor.
➜ Prime Minister Theresa May has suggested that worker-directors might be helpful to
business – to have an elected representative of the staff in the boardroom, helping make
decisions with the company directors. Perhaps Carluccio’s should get on with just such
an initiative.
5 Mr Kossoff is still determined to expand Carluccio’s, and sees two ways of doing it:
Option 1: Expand in the UK, from 80 sites today to perhaps 120 in future.
Option 2: Expand into Europe, especially France and Germany.
Justify which one of these two options Mr Kossoff should choose. (9)

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 Topic 2.5 Making human resource decisions

➜ Option 1:
– The great strength of expanding in the UK is that Mr Kossoff can use all the evidence
from the existing 80 shops to decide on the ideal locations in future. He can weigh
up which types of high street or shopping centre prove the best for the Carluccio’s
brand, plus other factors such as vicinity to a train station, parking nearby and so on.
Therefore opening the next 40 will have fewer risks attached to it than opening the
previous 80.
– On the other hand, it could be argued that the prime sites will already have been
chosen, so only the second-best are left in the UK. Furthermore, as more outlets are
opened there is an ever-greater chance that some of the new business will come from
Carluccio’s outlets that are already open. So even if the risk level is low in these extra
40 outlets, so too are the rewards.
➜ Option 2:
– Despite Britain leaving the European Union, future UK businesspeople will continue
to eye growth in France and Germany long before they think of China or India. It is
not that ‘European culture’ is all the same, but people will be confident that they will
be able to understand how to tweak a Carluccio’s to make it work in Berlin or Paris.
– Opening more and more outlets in the UK means, in all probability, finding smaller
towns or less central locations, and then the possibility of cannibalisation, with a
new outlet drawing custom from an existing one. France and Germany, by contrast,
represent new territory. Germany is so huge (and populous) that if Britain has 80
Carluccio’s, Germany could easily take 100, as long as the menu is adapted subtly to
German tastes. Ditto France.
– In the UK, the French chain Paul is a model of how to succeed overseas. It has 27
outlets in London alone, all offering a range of sandwiches and cakes that is available
only in Britain, as well as some French specialities. So the company has adapted to
our tastes, and at the same time charges far higher prices in the UK than in France.
Carluccio’s should learn from this.

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50 The importance of effective
communication
Teaching advice
There are plenty of ways to play a Chinese whispers exercise in the classroom, all worthwhile.
It is a way to bring the topic to life. There are also horror stories in the real world such as the
following one about medical malpractice. In most businesses, communication failures would be
nothing like as important as in a hospital – inefficiency usually only costs profit, not lives.

US study links communication failures to 1,744 deaths in

five years
Two thousand patient deaths could have been avoided if medical staff and patients
communicated better. Communication failures were a factor in 30 per cent of the
malpractice cases examined by a medical research company. The cases – including 1,744
deaths – were often harrowing.
In one instance, a nurse failed to tell a surgeon that a patient experienced pain and a
drop in the level of red blood cells after the operation – alarming signs of possible internal
bleeding. The patient later died of a hemorrhage.
In another, medical office staff received calls from a diabetic patient, but did not relay the
messages to the patient’s primary care provider. The patient later collapsed and died from
a complication that arises when the body doesn’t have enough insulin.

End of chapter exercises, page 253

1 Use the chapter to identify three reasons why good communication is essential to any
organisation.
➜ Helps to prevent mistakes (do not deliver on Fridays!).
➜ Junior staff may have great ideas that senior staff would be interested to hear.
➜ When the business hits a problem, everyone needs to hear what to do.
2 Give two reasons why a business might experience barriers to effective communication.
➜ Over-use of technical jargon.
➜ Staff in different countries may interpret things differently because of language issues.
3 Outline why it might be useful to a manager to arrange a regular meeting with staff.
➜ To find out what the staff think could be done differently/better – and a regular meeting
helps plot how well managers are progressing the better ideas.
➜ To see who the brighter, more creative staff are, i.e. for promotion prospects.

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 Topic 2.5 Making human resource decisions

4 Explain two problems that could arise as a result of poor communication between the sales
department and the production department.
➜ If production does not know of a BOGOF promotion starting tomorrow, it will not have
produced all the extra units to meet the boom in sales.
➜ If production does not tell the sales department they are working flat out, a big order
arranged with Tesco may be impossible to meet.
5 Each year the Financial Times carries out a survey of staff attitudes to find Europe’s
‘Best Workplaces’. A past winner was Microsoft. An article on why Microsoft did so well
identified its communications as an exceptional strength. Below are some quotes about
communications at Microsoft:
(a) ‘At Microsoft employees spoke about the open communication with their leaders.’
(b) ‘They (managers) share the goals and results without withholding any information.’
(c) ‘Ask management any reasonable question and get a straight answer.’
(d) ‘Microsoft is very transparent about its pay model and bonus plans.’
(e) ‘The entire company holds a Happy Hour on the second Friday of the month … a chance
to eat and drink together.’
(f) ‘Higher management is open for a talk when you need advice or feedback.’
Decide which two of these six statements are the most important ones for successful
communications in a workplace. Explain why you have chosen them.
➜ Students are free to choose and explain any two of the six, though some may be harder
to justify than others. It can be argued that a), c) and f) are largely the same, with much
the same answer, as follows:
– Some businesses (and schools) have occasional meetings among staff and managers,
but there is a strong case for saying that the best communication is regular, open,
two-way and ‘no-blame’. In other words, say what you are thinking, not what the
other person wants to hear. If a staff member is furious that they did not get chosen
for promotion, it is best to talk (even shout) it through. So Microsoft’s approach seems
spot-on.
– Also in the spirit of openness is the company’s decision to publish pay models and
bonuses. This prevents rumours spreading from the accounts and HR staff (who have
access to the files) and should therefore avoid any build-up of hidden resentment.
Rumour and gossip can be quite poisonous in the workplace (or anywhere else, as soap
operas constantly affirm!).

Practice questions, page 254

Total: 18 marks
1 Define the term ‘communication barrier’. (1)
➜ Something that blocks information getting from the sender to the receiver(s).
2 Outline one piece of evidence that suggests poor communications at Pickfords. (2)
➜ Drivers arriving late and finding angry customers shows a failure to keep customers
informed of how the drivers are getting on – pretty unforgivable in these days of texts
and mobiles.

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 50 The importance of effective communication

3 Analyse the benefits to the business of solving these problems. (6)

➜ There are direct operational benefits. If aluminium ladders made it easier to load and
unload the lorries, jobs would be completed more quickly and customers would no longer
need to get irate. Then Pickfords could hope for repeat purchase.
➜ More important still is the impact on morale. If better communication made staff jobs
easier and more efficient, that would reduce the stress involved in the working day and also
make staff feel more valued and therefore better motivated. These important psychological
factors would then affect absenteeism (less) and customer service (more/better).
4 Pickfords is considering how to improve communications between management and the
workforce. It sees two options:
Option 1: Weekly video broadcasts given by Grant Whitaker, which every staff member
must watch.
Option 2: Weekly local meetings between staff and area managers, plus monthly meeting
between area managers and head office.
Justify which one of these two options the company should choose. (9)
➜ Option 1:
– An advantage of top-down information in this way is that the message is unfiltered,
in other words it is ‘straight from the horse’s mouth’. So there is no reason for different
staff members to go away with different messages. Also, video recordings can be
accessed by different people at different times, which is especially important for part-
time staff.
– On the other hand, however great Grant Whitaker is at video broadcasts, this medium
is one-way and, essentially, top-down. It is a way to ensure that all staff have access
to the same information from above, but no guarantee that people will concentrate
sufficiently to absorb the information.
➜ Option 2:
– This approach sounds time-consuming and bureaucratic, but it might work. Holding
regular meetings between local and area managers is a great way to spread best
practice, e.g. the area manager explaining how some areas offer an extra special service
that could be adopted locally. Furthermore, the monthly meeting with head office
could provide the opportunity for passing on new ideas that require cash spending,
like buying the new ladders.
– On the other hand, there is a risk that the meetings will become lazy talking-shops,
with lots of tea and biscuits but few decisions made. If this happens, the company will
be worse off than before and communication will be no better.

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 51 Different ways of working

Teaching advice
This topic could be quite tricky in a class where some students believe the world is still
a comfortable, salaried one while others have a more direct experience of modern, flexible
working. The highest number of flexible workers are the self-employed. Part-time self-
employment in the UK grew by 88 per cent between 2001 and 2015, and in total there were 4.6
million self-employed in 2015 (ONS figures). Curiously, the Specification does not mention self-
employment, but many of the ‘temporary and freelance’ contractors come into this category.
So it would be fantastic to bring in two parents (or other contacts), one of whom is salaried and
the other who is self-employed. Each could explain the ups and downs of their work status and
the students could be primed in advance to ask questions on certain topics, perhaps including:
➜ On a scale of 1–5 (with 1 at the top), how would you rate your job satisfaction?
➜ What about holidays? How many days’ holiday did you have last year?
➜ Having heard the other one speak, which do you now think is best: self-employment or a
salaried job?
The practice question on Deliveroo is spot-on for this Specification topic. To keep up to
date, don’t forget Ian Marcouse’s free e-mail service eBus17. Contact him at marcouse@
btopenworld.com.

End of chapter exercises, page 257

1 Identify two types of people who might welcome a job based on flexible rather than
full-time hours.
➜ A parent with childcare responsibilities that include the school run.
➜ A university student.
2 Explain the downsides of a zero-hours contract from the employee’s point of view.
➜ Even if the employee wants flexibility it is hard to see why anyone would want their
employer to tell them at the last minute: ‘no work/money next week.’ Almost everyone
wants – and many need – security of income.
3 Briefly explain whether ‘remote working’ would work well or badly for:
(a) the goalkeeper of a football team.
– Madness – the goalkeeper needs to train with fellow defenders (they are a team!).
Would work very badly.
(b) a specialist in creating and drawing the ‘people’ in computer games.
– Quite well – the specialist would have to be told carefully about the ‘characters’ of
these people but could then work on their own, sending in draft versions to make sure
the drawings were on the right lines.

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 51 Different ways of working

(c) a primary school teacher.

– Clearly, 100 per cent badly – even impossible.
4 Look at Table 51.1, then answer the questions below.
White Ethnic minorities Pakistani Chinese Afro-Caribbean
April–June 2013 3,761,000 425,000 86,000 14,000 66,000
April–June 2016 4,238,000 545,000 100,000 24,000 101,000
% increase +12.7% +28.2% +16.2% +71.4% +53.0%
Table 51.1 Self-employment in the UK, broken down by ethnicity
(a) Outline two possible reasons why the trend towards self-employment was higher among
ethnic minorities than the white majority.
– Possibly ethnic minorities have developed stronger confidence as entrepreneurs
recently, perhaps because of a boom in sectors where they are strong, such as
restaurants.
– Perhaps ethnic minorities have found it harder to get promotions/succeed on a big
company’s career ladder and are therefore striking out on their own as freelancers.
(b) Explain the possible effect on the Chinese community of the sharp rise in self-
employment.
– Self-employment can be great, but it always means a more erratic, unreliable
household income. This in turn makes it harder to borrow to buy a house (banks are
reluctant to lend). So the community may have to do more to help each other.

Practice questions, page 258

Total: 15 marks
1 Define the term ‘venture capital’. (1)
➜ Risk capital, usually a combination of share and loan capital.
2 Outline one reason why the delivery riders disliked the new Deliveroo deal. (2)
➜ It gave them far less security; in bad weeks they would receive hardly any income.
➜ They probably suspected that they would earn less overall (over a 12-month period).
3 Outline one benefit to the business of using self-employed riders instead of employing them
permanently. (2)
➜ For Deliveroo, self-employed riders can turn a fi xed cost (salaries) into a variable cost
(paying per delivery). That would reduce the company’s risk level if business tailed off
(as it probably does in January, when people are feeling short of cash after Christmas).
➜ There are legal issues relating to employment which do not apply to the self-employed.
Deliveroo is not responsible for sick pay or pension contributions for self-employed
riders, so it escapes some of the financial obligations traditionally expected from a
company in Britain.
4 State which month is the ‘really quiet’ one, according to delivery riders. (1)
➜ August.

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 Topic 2.5 Making human resource decisions

5 Deliveroo is considering how to avoid such bad publicity in future. It sees two options:
Option 1: Arrange weekly meetings with an elected representative of the delivery riders.
Option 2: Tell the riders that they must sign zero-hours contracts instead of being self-
employed from now on.
Justify which one of these two options the company should choose. (9)
➜ Option 1:
– There are two key points here: ‘weekly’ meetings with ‘elected’ representatives.
Meetings held as regularly as weekly are rare and have the potential to be valuable.
They should ensure that problems do not build up and then burst into rage, which
should suit both sides. Deliveroo is rightly concerned about its reputation and therefore
needs to find a way to talk meaningfully but privately. And of course there would be
little point unless the drivers trusted the person talking/negotiating for them, which
makes it vital that the representative be elected.
– On the other hand, there are still pitfalls. Weekly meetings can quickly become
a frustration unless both sides show a positive approach and a willingness to
compromise. If Deliveroo makes public promises but then offers nothing in the
meetings, drivers may get more angry than ever. Similarly, if the elected representative
starts acting too independently of the drivers, there could soon be a rift there.
Goodwill and openness are what’s needed – always – but when two sides have
different objectives, successful compromise is hard.
➜ Option 2:
– The advantage of switching from hiring self-employed riders to employing them on
a zero-hours basis is that you now have direct power over them. If individual riders
act against the business’s best interests, they will receive zero hours next week and
perhaps the week after. In reality this degree of power may backfire if managers
overdo the power they have, creating a new backlash – for example, encouraging the
riders to join a trade union to represent their interests. In general, though, a zero-hours
contract for staff puts the company bosses in a very powerful position.
– On the other hand, from the company’s point of view, a zero-hours contract has costs
that do not apply when dealing with self-employed riders. The company would have
to provide the bikes and riding gear (quite expensive) and has to pay holiday pay
and pension contributions in proportion to the number of hours worked. These are
significant extra costs that do not apply when using self-employed riders. In other
words, even though a zero-hours contract is tough on the employee, it is better than
self-employment.

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52 Effective recruitment

Teaching advice
This is a topic that students can really relate to. Once again it would be hard to beat a local
employer coming in to talk. Close to me is an American diner called Waffle Jack’s. Stephen,
the proprietor, is an endless source of horror stories about recruitment. The people who turn
up for interview late, grubby and even mildly aggressive. And the people who interview well,
sound enthusiastic, accept the job offer – and are never seen again. He would love to come into
a classroom, as would thousands of others around the country – they just never get asked.
For students, it is particularly hard to write answers that are from the employer’s perspective,
so that is the thing to be especially tough on when marking their work. Good examples of
12-mark recruitment questions would be:
1 Evaluate whether a successful, growing company such as ASOS should recruit internally or
externally.
2 Evaluate whether Tesco should recruit shop floor staff with the best attitude to work or with
the highest GCSE results.

End of chapter exercises, page 263

1 Outline three reasons why a small business may need to take on additional staff.
➜ It is growing fast and current staff are getting overstretched.
➜ It is coming up to a seasonal peak time (Christmas?) and extra temporary staff are
needed.
➜ There may be new administrative burdens, such as the paperwork needed to export to 27
different European countries once Britain leaves the European single market.
2 Suggest two reasons why the owner of a small business might be reluctant to employ
more staff.
➜ Worried about the increase in the company’s fi xed costs.
➜ Worried that the new staff member may disrupt the cosy relationships among the small
existing staff.
3 Examine two advantages of recruiting part-time staff to a small, expanding business.
➜ Part-time staff may give more flexibility, e.g. the business may be busier on Friday and
Saturday, so they can be employed for those days only – saving on business costs.
➜ Part-timers may be more focused on getting lots done in their very specific time slots
(such as a school-run parent who works from 9.30–3.00).

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 Topic 2.5 Making human resource decisions

4 Suggest one suitable method of dealing with the following staff shortages:
(a) providing cover for a receptionist on two weeks’ holiday.
– Hiring a temporary worker, probably from an employment agency.
(b) providing extra sales assistance at a delicatessen on Saturdays.
– Recruiting a permanent part-time staff member.
(c) providing additional waiters and kitchen staff at a restaurant over the busy Christmas
period.
– Recruiting temporary workers, perhaps on a six-week contract.

Practice questions, page 264

Total: 15 marks
1 Analyse whether a job description and a person specification would be enough to ensure
Raytheon recruits the right person for this job. (6)
➜ All a job description does is set out the nature of the job. Lots of the information would
be the same as in the extract from the Raytheon website, e.g. the title of the job, the pay
and the person to whom you would be answerable. It does little more than form the basis
for writing a person specification. This shows the type of person the company wants
to recruit: their educational background, their experience, and characteristics such as
‘entrepreneurial flair’.
➜ A person specification gives a checklist for an interviewer to use when talking to an
applicant. Without such a process, the person specification would be meaningless.
➜ So although a job description and person specification may be important in the
recruitment process, they are in no way ‘enough to ensure recruiting the right person’.
An interview and a careful look at the CV would be necessary and, if anything, are more
important.
2 The management at Raytheon is considering who best to recruit for this job:
Option 1: A brilliant university student predicted to get a 1st class degree, who started up
and is now captain of the Oxford Football Club’s women’s team.
Option 2: A graduate with a 2:1 degree who has spent the last year volunteering in Africa.
She has been running a team designing and building a road bridge over a small river in
Namibia.
Justify which one of these two options Raytheon should choose. (9)
➜ Options:
– This job requires first class planning, organisational and communication skills. Many
of these are qualities that you could expect from either of the candidates. In many
ways it is a ‘skill-off’ between one who started up the Oxford FC women’s team and
the other who has been building a road bridge in Namibia. Both of these achievements
seem to require excellent planning, organisational and communication skills. There
has to be a streak of independence in anyone who starts something from scratch.

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 52 Effective recruitment

– In truth, the recruiters are likely to spend a long time over the ‘brilliance’ of one
compared with the, perhaps, more ordinary nature of the other. Does Raytheon want
‘brilliant’ graduate trainees, or very good, professional ones? Whereas brilliance will
be welcomed in an advertising agency or in Apple’s research and development team, it
may be offputting to Raytheon. The company may prefer a ‘safe pair of hands’.
– Really, there is little to choose between them. I would be inclined towards Option
1 because starting a football team and being the captain seems to me to be a really
individual achievement, but in a team context. For ‘leaders of the future’, that is hard
to beat.

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 53 Effective training and
development
Teaching advice
Ever come across www.glassdoor.co.uk? It’s a gem, full of workers’ reflections on their
experiences at work. Here is a classic in relation to a well-known high street chemist. I could
have picked any of several quite similar ones. (I’ve left out the worst bits of the feedback.) I love
the aphorism at the end: ‘People quit their boss, not their job.’ But the obvious point is to use it
as a lead-on to discussion with the students about the implications of no training beyond Day 1.

‘Worst job I’ve had

Pros
Decent pay, if you can get a staff discount card you get good percentages off as well as a
double discount day twice a year.
Cons
My first day on the shop floor we were made to do till training with another member of
staff and that was the only training we got in any area of the store. I worked for one of
the flagship stores in London and it’s so understaffed yet management do not care as long
as they don’t go over budget. Management is constantly changing. Store is horrendously
understaffed and you’re worked to your limits, and if you have any … complaints you’ll be
told it’s for ‘the needs of the business’.
Advice to management
Pay staff members what they are owed, give out staff discount cards, organisation is key to
running a big company, and remember: ‘People quit their boss, not their job.’

End of chapter exercises, page 268

1 Explain why informal training might be important to the development of someone starting
their first job.
➜ There is so much to learn about the way the place works (the canteen, the importance
of the pub on Friday nights and so on) and informal training will help with those
things. It may also be useful to learn some short-cuts that enable you to do a good job,
but a bit faster.

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 53 Effective training and development

2 A small business owner has £40,000 of profit to reinvest in the business and is debating
whether to invest this sum in new, faster computers or in staff training. Suggest two
arguments in favour of each of the two options.
➜ Faster computers can speed up work and therefore boost productivity.
➜ They may help meet tight deadlines in getting things to customers.
➜ £40,000 on staff training could transform staff members’ attitude to their work, helping
to improve teamworking and also the customer experience.
➜ But it could backfire if the company brings in pompous trainers who irritate staff rather
than stimulate them. Spending on training is a risk.
3 ‘Staff training is a waste of time as half my staff leave within a year.’ Explain to this business
owner why they should change this attitude to training.
➜ It is a chicken and egg matter. Which came first? In other words, you should try a careful,
sustained investment in high-quality training, then see whether this starts to have an
effect not only on staff efficiency but also the willingness of staff to stay loyal to you.
4 Explain why a big business such as Google might provide a better formal training
programme to new staff than a small business.
➜ Google can afford to hire clever people to work full-time on putting on a great
programme whereas a small business owner would try to squeeze the training into an
already busy schedule.
➜ Google can afford to invest a huge amount, such as flying UK staff to California for a few
days to get a feel for the head office vibe.

Practice questions, page 269

Total: 15 marks
1 Analyse why greater investment in management skills might ‘benefit start-ups and
scale-ups’. (6)
➜ Good managers need a wide range of skills, from managing people to dealing with
customers and suppliers and making decisions. Most people are good at one or two of
those, but may be weak/very weak at some of the others. Because small businesses have
few staff who have to work closely together, a manager who is poor at handling staff can
do a significant amount of damage. So there could be huge benefits in terms of improved
teamwork, improved morale and fewer staff looking for work elsewhere.
2 You have been appointed as the new boss of the Federation of Small Businesses. You are
looking at two ways to persuade more small companies to invest in leadership training:
Option 1: Ask the potential leaders who are to receive this training to contribute half the cost.
Option 2: Ask all FSB members to contribute 2 per cent of sales revenue then hand out the
cash to those applying to do the course.
Justify which one of these two options you should choose. (9)
➜ Option 1:
– If companies follow this approach the costs will be halved because the potential leader
is contributing half. This is logical because the current boss may choose to take away
their experience to start up something brand new, or they may get poached by a rival

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 Topic 2.5 Making human resource decisions

business. Certainly you would hope that a boss could see that it is worth investing a bit
of their own money in good training.
– Once half the cash is coming from the manager’s own pocket there will surely be
demand for a much higher standard of training. Anything light or frothy will be
rejected; the training will have to be 100 per cent relevant to a boss. And that may be
asking quite a lot from a trainer.
– On the other hand, it may be that some perfectly sound managers resent a demand
for them to have to pay towards their own training. They may see it as meanness on
the part of the company/founder, and suspect that it represents a lack of faith, even
of trust. Bosses, like anyone else, can be touchy and sensitive – there is a risk that the
demand may backfire.
➜ Option 2:
– The advantage of this approach is that it makes the training free. Indeed, it gives
an incentive to use the training ‘to get our money back’. And if companies provide
the training not only for ‘the leader’ but for all the other senior staff, it could be very
worthwhile, possibly helping to overcome the barrier to growth identified by the FSB.
– However, the arguments against this approach are strong. It is hard to imagine that all
the FSB’s member firms would sign up to this scheme. Two per cent may sound trivial,
but 2 per cent sliced off revenue could make a huge difference to some companies’
profits. After all, giant Sainsbury’s makes only a 3 per cent ‘profit margin’. If it had to
give away two percentage points it would take its profit margin down to 1 per cent,
i.e. cut its annual profits by two-thirds. The point is that any business with slim profits
will turn down this idea. And if not everyone signs up, there is no prospect of this
happening. So it might be a nice idea in theory, but it is virtually impossible to see it
working in practice.

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54 Motivation

Teaching advice
If you type ‘motivation’ into YouTube you get a list of ghastly me-me-me motivational videos.
They prey on the worst assumptions people can have that leaders with ‘charisma’ can motivate
others. Hitler at the Nuremberg rallies, perhaps?
We need students to understand that motivation at work and motivation to work is much simpler
than that. It comes from within. Painting that picture because you love painting pictures, or
marking that homework because you love 11B and really want them to do well.
These quotes can help give a sense of what motivation is:
‘I love my job, each and every part of it. Being a nurse brings me so much pleasure and
keeps me on my toes.’ Monica Bulman, still working at Torbay Hospital, aged 83! In 2016
she had been working for the NHS for 64 years.
‘I look forward to going to work. I love dealing with people and property. Most products
are mass produced and all identical … all three-bedroom semis are different.’ Chris,
estate agent.
‘I love the fact that I get to control the power and speed of a fantastic machine. I thrive on
the responsibility.’ Train driver, East Coast mainline.

End of chapter exercises, page 275

1 What is it called when employees are given perks in addition to their pay?
➜ Fringe benefits.
2 Identify three benefits a highly motivated employee might bring to a business.
➜ Enthusiasm, which may rub off on fellow workers, making them enjoy their job more.
➜ High productivity as they put in more energy than others (get more done in a day).
➜ Ideas, as their motivation may lead them to think more deeply about how the workplace
could be made more efficient.
3 How might the store manager at a Costa Coffee boost staff motivation?
➜ By taking more interest in the staff, ensuring that good work and good customer service
are acknowledged and praised, and that any occasional problems (‘It’s my kid’s semi-
final at 4.00 this afternoon) are dealt with generously.

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 Topic 2.5 Making human resource decisions

4 Should your teacher’s salary be stopped and instead be paid solely on the basis of the
coming year’s GCSE results?
➜ Yes, if the financial incentive leads to better-prepared lessons, more lunchtime revision
sessions and better revision plans.
➜ No, if it leads to a jumpier, more stressed teacher who prioritises lazy-but-bright students,
gambling that their grades can be boosted most easily.
➜ Huge amounts of research evidence in this area show that financial incentives tend to
distort behaviour in ways that backfire.
5 (a) Explain how staff motivation might affect customer service.
– Higher motivation might lead to quicker service and that might be very important to
customers.
– It might also lead to more warmth in the service, i.e. friendlier service because the
employee is enjoying the job.
(b) Discuss whether the business would be better off using financial or non-financial
methods to try to achieve the improved motivation.
– Financial methods can easily get people to work faster but cannot get people to
smile warmly/genuinely. And customers can tell. So if possible it is better to motivate
through non-financial methods, i.e. help staff to enjoy the job more, which requires
consistently good, caring management.

Practice questions, page 275

Total: 20 marks
1 Outline one reason why Asda might regret scrapping staff ‘fringe benefits’. (2)
➜ Scrapping canteens and free coffee cuts out the social aspects of the job. Few people love
going to work to stack shelves unless they get a buzz out of the people they work with.
Asda has made it harder for staff (new staff, especially) to connect with each other.
2 Analyse why Morrisons may benefit from a ‘more representative’ balance between men and
women among its senior management. (6)
➜ ‘Equal opportunities’ makes simple business sense. No one who looks at GCSE or
A-level results could doubt that women are (at least) as clever as men. Who do you want
among senior management? The best and brightest you can find. So the business needs
to make sure that its brightest women have an equal path to the top as the brightest men.
Then a balance between the sexes will increase the average brainpower within the senior
management.
➜ In addition, it is probable that a majority of Morrisons’ customers are female. In which
case it must be sensible to have women taking at least half the senior management places
because it is reasonable to assume that women will understand female shoppers a bit
better than men will.

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 54 Motivation

3 Evaluate whether the actions that Morrisons has taken will achieve a ‘more motivated
workforce’. You should use the information provided as well as your knowledge of
business. (12)
➜ The David Potts line that ‘we are a business that listens hard to colleagues’ is a winner
when backed by actions that seem to confirm it. Full-time staff spend a third of their
life at work and may spend longer with colleagues than with loved ones. So staff love to
feel part of something positive, preferably a team of people who are heading in the same
direction. This does not stimulate motivation in itself, but it puts in place an underlying
warmth that makes motivation possible.
➜ The same conclusion can be drawn by the £30 million investment in staff facilities at
work and the big increases in pay. These also help in another way. It is hard to build
up efficiency or motivation if staff keep leaving. The higher pay and better facilities are
likely to make staff stay longer, perhaps a lot longer than before. A stable workforce can
generate an atmosphere of purpose and positivity that also provides the underpinnings
for higher motivation.
➜ Will all this lead to a ‘more motivated workforce’? Yes, if it is combined with clearer
promotion possibilities leading from the desire for more equal opportunities. This
needs to not only mean equality by gender, race and creed but also be based on merit.
Too often in the past, companies have promoted ‘yes men’. For motivation, people with
passion need to be promoted, even if they argue about the best way of doing things.

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 Exam-style questions
on Topic 2.5
Multiple choice questions, page 276
1 (c)
2 (b), (e)
3 (a), (e)
4 (c)
5 (b)
6 (c), (d)
7 (d)

Discussion question, page 277

8 Discuss whether a new business could benefit from keeping a flat hierarchy
as it grows. [6]
➜ The key benefit would be to keep decision-making quick and close to the customer. In
big companies with layer after layer of management, big decisions are made by people
who are far removed from real customers (and perhaps the real world). That is often a
recipe for disaster. New businesses are inevitably quite small – and need to be able to
respond quickly to new trends or new tastes. Keeping a flat hierarchy should help a lot.
➜ On the other hand, growth is challenging and if the hierarchy remains flat there’s a risk
that too many decisions might be made by different staff who are looking in slightly
different directions. Possibly a boss with more authority could make sure that decisions
are made that everyone sticks to. That might prevent mistakes being made at a time
when the growth of the business puts a few strains on everyone involved.

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