The Association of Business Executives Certicate

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1.1 IB

Introduction to Business
afternoon 3 June 2009

1 Time allowed: 3 hours. 2 Answer any FOUR questions. 3 All questions carry 25 marks. Marks for subdivisions of questions are shown in brackets. 4 No books, dictionaries, notes or any other written materials are allowed in this examination. 5 Calculators, including scientic calculators, are allowed providing they are not programmable and cannot store or recall information. Electronic dictionaries and personal organisers are NOT allowed. All workings should be shown. 6 Candidates who break ABE regulations, or commit any misconduct, will be disqualied from the examinations. 7 Question papers must not be removed from the Examination Hall.

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ABE 2009

F/500/3659

Answer any FOUR questions Q1 (a) Explain the difference between: (i) (ii) (iii) (b) (c) A niche market and a mass market Competition-based pricing and demand-based pricing Promotion and place

(12 marks) (3 marks)

Dene the term segmentation.

Using examples, analyse how the market for clothes could be segmented. (10 marks) (Total 25 marks)

Q2

A small company makes hand crafted, large-scale, wooden toys using a job production system. Sales have been continually rising over the past three years and the company is considering introducing a batch production system. (a) Compare the advantages for this company of the job and batch production systems. (12 marks) Dene the term quality circles. (5 marks)

(b) (c)

Explain how quality circles might help to improve the quality of toys produced by this company. (8 marks) (Total 25 marks)

Q3

A family-owned private limited company manufactures a particular brand of sportswear in its four wholly owned factories. The company wants to expand into Eastern Europe. (a) Identify the advantages and disadvantages of using the following sources of nance to raise the 10 million required for the expansion: (i) (ii) (b) Sale and leaseback of its four factories An issue of new shares

(10 marks)

Give the equation for the following nancial terms: (i) (ii) (iii) The current ratio The gearing ratio ROCE

(6 marks)

(c)

For each of the ratios in (b), explain what use a bank would make of them if the company concerned was seeking a loan from the bank. (9 marks) (Total 25 marks)

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Q4

(a)

Explain the following terms: (i) (ii) (iii) (iv) HRM Labour turnover Job enrichment On the job training

(12 marks)

(b)

Identify and explain the main benets for a business and an employee of introducing a regular training programme for the workforce. (13 marks) (Total 25 marks)

Q5

(a)

Identify and explain three main problems that the owner of a small business might face. (9 marks) Examine the reasons why a franchise is more likely to survive in business than a sole trader. (16 marks) (Total 25 marks)

(b)

Q6

(a)

Using examples, explain the following terms: (i) (ii) (iii) Secondary sector Tertiary sector Not for Prot sector

(9 marks) (6 marks)

(b) (c)

Outline three ways in which the size of a business can be measured.

All businesses can be affected by government intervention. Give two examples of government intervention and evaluate one positive and one negative impact for each. (10 marks) (Total 25 marks)

Q7

(a) (b)

Explain the term PESTEL analysis.

(5 marks)

Using examples, discuss two advantages and two disadvantages of IT advances affecting business in recent years. (12 marks) Economic growth in Country A is slowing down and the value of its currency has fallen sharply. Explain the effect this might have on a country that trades with Country A. (8 marks) (Total 25 marks)

(c)

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Q8

(a)

Briey describe the main objectives of the following stakeholders in a business: (i) (ii) (iii) (iv) (v) Employees Shareholders The local community Suppliers Customers

(15 marks)

(b)

In order to reduce costs, a UK car manufacturer decides to outsource the supply of a major component to a rm in China instead of producing it at its UK plant. Explain what impact this might have on the stakeholders of the UK company. (10 marks) (Total 25 marks)

End of Question Paper

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Certicate Introduction to Business Examiners Suggested Answers Q1 (a) (i) A niche market is a relatively small and identiable segment of a larger market. This type of market appeals to small rms as they are often overlooked by large-scale producers and are therefore less competitive. This allows small rms to charge higher prices as the consumers are willing to pay a premium for what they perceive to be a more unique product or service. For example, a made to measure tailor can charge much more for a suit than a large clothing rm offering ready-made suits. In contrast a mass market is the group of consumers who are the majority buyers for common household products, i.e. they could be tagged as being average. This group consists of such a wide variety of people, their desires towards a certain product may be totally different from each other. Often competition to supply the mass market is erce, but relatively easy to enter because of the large amount of consumer pool available. There is little scope for differentiation in a mass market, e.g. petrol, baked beans etc. (ii) Competitor pricing or competition based pricing involves setting a price for a product or service based on the prices charged by competitors. The market usually has low product differentiation, where all producers are basically price takers, e.g. the market for petrol. Demand based pricing, however, is a pricing method based on the intensity of demand rather than the costs of production and distribution. It relies on being able to segment the market and apply price discrimination. An example might be rail or air travel where consumers are differentiated by class of seat or time of travel. (iii) Product promotion is a means of boosting a products sales as part of the marketing mix. A combination of advertising, branding, sales promotion and public relations can be used to inuence consumer opinions and buying habits. Place represents the location where a product can be purchased. It is often referred to as the distribution channel. It can include any physical store such as a corner shop, supermarket or department store as well as virtual stores on the Internet.

(b)

Market segmentation is concerned with analysing a market to identify the different types of consumer. These subgroups of people share certain characteristics that cause them to have similar product and/or service needs. By matching the consumer categories to types of product different niches can be identied and supplied. Segmentation can be by demography (age, social class, gender, etc.), psychographically (by attitude and tastes) or geographically (by region).

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(c)

The market for clothes can be segregated according to:

Gender - not only are the size of clothes different but also the preferred styling. Age - the market can be divided into sections for infants, children, teenagers and adults. Lifestyle - even within a single age category there will be many different segments to cater for the many styles, e.g. business suits, sportswear, casual clothes, party clothes, etc. Purpose - consumers desire clothes for specic purposes such as sport, working or relaxing. Socio-economic status - within one category different clothes can be made to cater for the wealth of the customer. This is usually achieved by the use of different materials and styling and branded labels (designer wear).

Q2

(a)

Job production is usually associated with the making of unique items. In this case the large wooden toys are each slightly different and can be made specically for the customer. This uniqueness can command a premium price above the normal market price for mass produced toys. The task normally requires the use of general-purpose tools or machinery that is operated by a highly skilled workforce. The unit cost is, therefore, quite high but the end product can command a high price. For the employees there is high motivation and satisfaction at producing such items to order. Another advantage is that materials only need purchasing when a rm order is received. Batch production, however, is concerned with making a number of standardised toys aimed at a more general market. A number of toys or batch completes each process before passing onto the next production stage. The greater quantity and longer production run allows the use of special purpose machines. Labour productivity is, therefore, much higher and the unit cost of the nished toy is much lower. The end product can be sold at a lower price and supply a much bigger section of the toy market. The differences between the two systems are, therefore, the type of product made, the machinery used, the skill level of the workforce needed and the unit cost.

(b)

Quality circles are discussion groups that meet regularly to identify quality problems, to consider solutions and to make recommendations to management. They are composed largely of factory oor workers as they are the people who know the operation best. The group allows workers to participate in the decision-making process and to display their ability to solve problems. The success of the original scheme at Toyota in the 1950s has resulted in its spread throughout the world. Its application to a manufacturing business could lead to greater motivation as the workforce are given the chance to show their knowledge of the process and to suggest improvements that will directly benet the quality of production. These could involve better design, the use of better materials or less wasteful processes. Quality circles are discussion groups that meet regularly to identify quality problems, to consider solutions and to make recommendations to management. In this company they would be composed largely of the factory oor toy makers as they are the people who know the operation best. The group allows workers to participate in the decisionmaking process and to display their ability to solve problems. For example, they might suggest new materials for the toys or different methods of constructing them. They might suggest new designs or new features. Its application to a batch production system could lead to much more efcient and low cost production. It could also lead to greater motivation as the workforce are given the chance to show their knowledge
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of the toy making process and to suggest improvements that will directly benet their working environment. In summary, a quality circle improves not only the quality of the product, but also reduces costs and motivates the workers.

Q3

(a)

(i)

Sale and leaseback is a contract to raise cash by selling an asset, in this case the four factories, and immediately renting the properties back on a long-term lease. The advantage of this type of nance is that it allows the company to stay in the factories and continue trading as though nothing has happened. The capital released can be used immediately to enable the company to expand into Eastern Europe. The disadvantage is that the company has sold some of its most valuable assets and it must pay a rental sum for the period of the lease. Overall the company will only benet if the expansion into Europe produced more prot than the cost of the lease. An issue of new shares is a reasonably cheap way of providing the company with more permanent capital which can be used to nance the expansion. Another advantage is that the company is not obliged to pay dividends to the shareholders. A disadvantage, however, is that the ownership is diluted and each share is now worth slightly less. The shareholder will only benet if the expansion creates sufcient prots to raise the share price and to deliver higher dividends. Current ratio = Current assets/current liabilities Gearing ratio = Long-term liabilities/Total Capital Employed 100 Return on capital employed = Operating prot/Total capital employed 100%

(ii)

(b)

(i) (ii) (iii)

(c)

A bank is concerned with the ability of a company to create sufcient prots to repay a loan. It is, therefore, interested in measuring the degree of risk involved in a loan. The three ratios help to formulate a picture of the company in the following way:

The current ratio (or liquidity ratio) measures the companys ability to meet its short-term debts. The bank will be looking for a ratio of approximately 2 to 1, i.e. twice as many current assets available to meet its current liabilities or debts. The gearing ratio measures the proportion of the companys capital that is provided by long-term lenders. The higher the ratio the more likely the company will be adversely affected by rising interest rates and therefore the greater the risk. The ROCE measures the companys return on the capital employed in the business. It is a measure of the nancial effectiveness of the business.

The bank would be looking for a current ratio close to 2, a low gearing ratio and a high ROCE as an indication that the company would be able to repay a loan.

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Q4

(a)

(i)

HRM or Human Resource Management is an integrated approach to the management of people in an organisation. It aims to make the most efcient use of a rms human resources. HRM includes the recruitment, selection, training, motivation and payment of all staff within a business. Labour turnover is the rate at which employees leave a business. A high rate of turnover is often caused by one, or a combination of: low wages; low morale; or poor working conditions. This in turn will increase the costs of the business as it is forced to recruit and train replacements. Job enrichment is largely based on the work of Herzberg. He suggested that an enriched job should ideally contain several tasks at different ability levels, some of which were beyond the workers experience to date. This would provide some progression. On-the-job training is instruction at the place of work on how the job should be carried out. It might consist of observing how an experienced operator carries out the task or being talked through the job by a supervisor. Whichever method chosen, it is usually cheaper than off-the-job training and more suitable to the company.

(ii)

(iii)

(iv)

(b)

The benets of regular training often outweigh the nancial costs of providing it. Training should mean that the workforce is more skilled, more exible and can adjust faster to changes required by customers. This in itself should provide a rm with a competitive advantage. Productivity is also affected in that better trained personnel can achieve higher outputs per period thus reducing overall unit costs. A lower unit cost will give the rm a competitive advantage over its rivals and can be used to gain market share by undercutting its main competitors. Training also has a motivational impact. A well trained labour force often has a lower labour turnover, which reduces recruitment and induction costs. The workers are more content to stay with a rm that invests in its employees. Investment in human capital is as important as investment in new machinery.

Q5

(a)

The majority of business failures are small rms. The main problems facing them are: Lack of capital - most small businesses are started with the owners own savings. In times of recession or falling sales this is inadequate to continue paying the business xed costs. Lack of expertise - small businesses employ only a few people many of whom are not specialists in areas such as accounting, marketing, production or personnel. Inadequate control of such areas as credit can lead to severe cash ow problems. Lack of planning - many small businesses start with a simple idea that is easy to establish and control, such as a retail outlet. They are nearly always started when the economy is buoyant and demand is high. Unfortunately the owner has rarely planned ahead to take account of opportunities to expand or for periods of low demand. When these occur the owner is taken unawares and is forced into making a hurried decision, often the wrong one for the circumstances.

(b)

One of the main reasons for sole trader failure is the lack of detailed planning and research at the outset of the business. A good idea or product is not always a guarantee of success. Too often the sole trader has failed to identify the extent of
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the customer base. This leads to early saturation of the market or where success is achieved early on to the emergence of competitors with similar products. Franchises on the other hand have done extensive research and have a tried and tested recipe for the promotion of the product. A second reason is concerned with nance. Sole traders often underestimate how much capital is required to run a business, especially when sales expand on a credit basis. Each credit sale means the sole trader having to wait for up to two months for payment. This can result in a growing overdraft, increased nance service costs and greater risk. A franchisee, however, has the support of the parent group that will often grant extended credit to match the expansion in sales at rates more favourable than a bank. Another reason for sole trader failure is lack of managerial experience. The owner is often a skilled worker or craftsman who is excellent at producing the product or service. This does not mean, however, that they are also skilled at bookkeeping, tax requirements, health and safety issues and marketing. The franchise operator has a team of experts who provide these services or are willing to train the franchisee in the necessary skills before and during the period of the franchise. The franchisor has a standard operating procedure to deal with advertising, stock control, employment, accounts and nancial planning. Errors of omission by the sole trader can lead to costly mistakes and even to the transgression of legal requirements concerned with safety issues and employment. The sole trader is reliant on his or her own resources, both physical and nancial. The franchise has the technical support and nancial backing of a much larger concern. Through the bulk buying power of the franchisor, the franchisee can benet from cost reductions for its raw materials, transport, advertising and promotion. The main advantage of the franchise operation is seen not when the economy is doing well but in times of recession. Falling sales and rising interest costs associated with periods of recession often signal the end of inadequately nanced small businesses. The franchise operator, however, has a vested interest in helping the franchisees to survive and can offer not only professional help but also temporary funding to enable the business to survive.

Q6

(a)

(i)

The secondary sector is that part of the economy concerned with the manufacture of products. It uses the end products of the primary sector as its raw material and transforms them into nished products. For example, a furniture manufacturer would use wood, metal, leather and plastic to produce a range of nal goods such as chairs, tables and beds. The tertiary sector is that part of the economy comprising of businesses that supply services, such as insurance, transport and banking. The Not for Prot sector is composed of the voluntary and community organisations, charities, social enterprises, pressure groups, co-operatives and mutual societies. They share the following characteristics:

(ii)

(iii)

They are non-governmental organisations. They are driven by a set of shared values, e.g. to help the poor. They are established for purposes other than nancial gain. Any surpluses are ploughed back into the organisation. Many use volunteer staff in addition to paid employees.
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(b)

The size of a business can be measured in several ways:

By sales revenue or turnover. In Europe a small rm is dened as having a turnover of less than 10 million Euros and a medium sized rm less than 50 million Euros. By the number of employees. A small rm is dened in The Bolton Report as one with fewer than 50 employees and a medium sized rm as between 50 and 249 employees. By the total capital employed in the business. A small rm would have less than 10 million Euros on its balance sheet and a medium rm less than 43 million Euros. By market share.

(c)

The government has a great inuence on business activity. Two ways it can intervene is by introducing new laws that affect businesses and by expanding public investment. The government dictates a legal framework within which the business must operate. Many of these new laws are concerned with health and safety in the work place. For example, a law tightening re regulations might require all rms to purchase new types of re detection and re-ghting equipment. This will have a negative impact on the rm in that it will lead to higher costs being incurred. However, for the producers of re equipment it will lead to an increased demand for re appliances, protective clothing and appliance testing. What is a cost for one rm becomes revenue for another. A second intervention might be an increase in the building of schools and hospitals. The immediate positive effects of this are the many contracts for building and equipping the new buildings. This will provide employment for thousands and good prots for the companies involved. However, the building programme has to be paid for by either increased taxation or government borrowing. The rst will result in a rise in taxes and the second by a rise in interest rates. Both will negatively impact rms and employees.

Q7

(a)

PESTEL analysis is a method that can be used to look at the environment within which all rms operate. The initials stand for Political, Economic, Social, Technological, Ecological and Legal. Each of these areas has an effect on a business in one way or another. A business must recognise this and adapt its strategy accordingly. For example, increasing social concern over pollution has forced many manufacturers to stop using certain raw materials and to adopt cleaner production systems. Firms that ignore external factors will lose sales to competitors that recognise them. One major advance in Information Technology has been the increased use of robotics in high-speed, fully automated ow production systems, e.g. in car assembly plants. This has resulted in higher productivity, increased quality and lower unit costs. These advantages have lead to lower consumer prices. The use of laser scanners in supermarkets has increased the speed and accuracy of the checkout operation as well as allowing immediate updates of stock levels and re-ordering. On the negative side, technology has replaced the need for a lot of unskilled and semiskilled labour. Those affected have suffered long-term unemployment unless they were fortunate enough to retrain. Advances in science can cause some products to be made redundant. For example, the development of computers for ofce work has replaced the need for typewriters. IT changes so quickly that employees can expect to retrain several times in a career. If they do not do so the workers skills will soon be out of date and employment becomes more difcult.

(b)

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(c)

Economic growth and the rate of exchange have a signicant impact on the level of imports from other countries. As Country As economy slows down demand for goods and services, including imports, will diminish. A similar effect will occur as the domestic currency falls in value. More currency is required to buy the same amount of imports. In other words the relative prices of imports have risen. A country that trades with Country A will nd it more difcult to export goods and services to Country A. However, exports from Country A will now appear cheaper and rms in Country A will be more willing to sell abroad because of the domestic slowdown.

Q8

(a)

(i)

Employees are concerned primarily about the level of pay, the working conditions, job security and job satisfaction. Shareholders have two main objectives. The rst is to receive a regular income in the form of dividends, which hopefully will rise year on year. The second objective is to see the share price rise above what the shareholder paid for the stock. This will provide the shareholders with a capital gain when the shares are eventually sold. To ensure the two objectives are met the shareholders are concerned with the quality of the management who are critical to the achievement of these short and long-term objectives. The local community may well have diverse objectives with regard to the creation of new businesses in their area. Although it will create jobs for local people it might also cause problems such as road safety for children and the reduction of greenbelt land. They may also be concerned about the impact of businesses on the local environment. A suppliers main objective is to increase sales to a business while at the same time not risking non-payment. They would seek a long-term close relationship based on trust. This would help to secure a guaranteed customer base from which a successful supplier could expand. They also wish to make prots on the goods and services supplied. A customer wants value for money. Any product or service must satisfy the needs of the customer at a reasonable price. A customer will also expect good service both during the purchase stage and the after-sales stage. Expert and impartial advice is also expected.

(ii)

(iii)

(iv)

(v)

(b)

In recent years many UK rms have outsourced production to Far Eastern countries. This has been done to take advantage of lower costs particularly in labour. A car manufacturer could save substantial sums of money by having major components made in China. This would be a good thing for some of the companys stakeholders. Firstly, the company might obtain higher prots because of the cost savings, part of which could be passed on to shareholders in the form of higher dividends. In a similar way some of the cost savings could be passed on to another group of stakeholders, the consumers, in the form of lower prices. However, not all stakeholders will benet. The loss of the component manufacturing might mean that some employees are made redundant. If this is a signicant number it might also affect the local community as spending falls and other businesses begin to suffer, e.g. local shops. Major changes in location can have signicant benets but also lead to long-term disadvantages as well.

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