The Association of Business Executives Certificate

1.1IB
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Introduction to Business
morning 5 December 2007

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 scientific 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 disqualified from the examinations. 7 Question papers must not be removed from the Examination Hall.

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ABE 2007

F/500/3659

Answer any FOUR questions Q1 (a) Using examples, identify the differences between: (i) inputs and outputs (ii) short-run and long-run decisions (iii) secondary sector and tertiary sector

(9 marks)

(b)

Explain the advantages and disadvantages of operating a business as a franchise. (16 marks) (Total 25 marks)

Q2

(a)

Using examples, discuss how political, social and technological factors might influence a business. (13 marks) How might the business of an internationally popular hotel in London be affected by the following changes in the economic environment? (i) a rise in interest rates (ii) a fall in the exchange rate of the pound sterling (iii) a world-wide recession (12 marks) (Total 25 marks)

(b)

Q3

(a)

Many supermarkets are now located in retail parks situated on the edge of large towns and cities. What are the main location factors that influence such businesses in their decision? (17 marks) Briefly describe two benefits and two problems that such a location might cause for the local community. (8 marks) (Total 25 marks)

(b)

Q4

(a)

Distinguish between: (i) shareholders and stakeholders (ii) corporate objectives and corporate strategy (iii) private sector and public sector

(15 marks)

(b)

Explain how the objectives of a new business might change as it grows in size. (10 marks) (Total 25 marks)

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Q5

(a)

What do you understand by the terms? (i) primary research (ii) skim pricing (iii) USP (iv) product promotion How is the market for a product such as shoes segmented?

(12 marks) (13 marks) (Total 25 marks)

(b)

Q6

(a)

What do you understand by the term labour turnover and explain how it might be calculated (give equation)? (4 marks) Why should a firm be concerned about an increase in labour turnover? (9 marks)

(b) (c)

What steps can a business take to motivate employees to remain with the company? (12 marks) (Total 25 marks)

Q7

(a)

What do you understand by the following financial terms? (i) gearing (ii) current ratio (iii) working capital (iv) fixed assets (v) budget

(15 marks)

(b)

What is the purpose for a firm of drawing up a Profit and Loss Income Statement and a Balance Sheet? (10 marks) (Total 25 marks)

Q8

(a)

Explain the services that each of the following institutions could provide for a new business: (i) insurance companies (ii) banks (12 marks) Describe and differentiate between job production and batch production systems. (13 marks) (Total 25 marks)

(b)

End of Question Paper

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Certificate Introduction to Business Examiners Suggested Answers

Q1

(a)

(i)

(ii)

(iii)

Inputs are the four factors of production (land, labour, capital and managerial ability) that a firm requires in order to produce. The end product of the production process is the output for example a car, sewing machine, stainless steel sheets, etc. Short-run decisions are the day-to-day decisions taken by middle management and supervisors and might apply to one-off situations. An example might be the investigation of a quality issue or the resolution of a customer query. Long-run decisions are made by senior management and tend to be in force for a considerable length of time i.e. several years. An example might be the planned expansion of a business into foreign markets. The secondary sector is that part of the economy concerned with the manufacture of products from basic raw materials e.g. making mobile phones from metal and plastics. However, the tertiary sector is concerned with the provision of services, for example insurance, banking, transport and leisure activities.

(b)

A franchise is an agreement where one person (the franchisee) purchases from another (the franchisor) the right to sell a patented product or service using a wellestablished framework and method. The advantages of a franchise are: (i) The product is already proven in the market place and is known to the customer. (ii) The franchisee will receive expert help from the franchisor before, during and after set-up. (iii) The franchisor will provide on-going training and advice to overcome the franchisees lack of experience. (iv) The franchisor will provide a standard procedure for administration, basic bookkeeping, financial planning, stock control and personnel management. (v) The franchisor provides the advantages of bulk buying and mass advertising in return for the franchise fee. The disadvantages of a franchise are: (i) The franchisee may feel constrained by the regulations imposed by the franchisor. (ii) The franchisee must pay a percentage of all sales to the franchisor. (iii) The franchisee is restricted to the franchisor for all of the main purchases.

Q2

(a)

One method of understanding the effect of the external environment is to use PEST analysis which examines the impact of political, economic, social and technological factors: (i) Political governments impose regulations on business that must be adhered to. These cover health and safety issues, consumer protection, advertising standards, employment conditions and environmental factors. These will increase the costs of business. Governments also influence business through the tax system. Indirect taxes make the goods more expensive for the consumer while subsidies reduce the market price. Other influences include items, such as planning permission, incentives for location or the promotion of exports.

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(ii)

(iii)

Social A business must be aware of changes in society. Demographic changes will affect demand in different sectors. The ageing population in Europe has led to greater demands for healthcare and nursing homes. As societies grow wealthier the population spends a greater proportion on leisure pursuits, such as foreign holidays, sports and pastimes. Changes in public attitudes can also affect a business. The public are more environmentally aware and are not prepared to buy products and services that are considered antisocial e.g. aerosols that contain CFCs. Technological Technological changes affect not only the production process but also the range of products that are possible. The microchip has led to the miniaturisation of many products while the development of plastics has revolutionised the style of products and their cost. The media industry has witnessed vast changes with the advent of miniaturised music systems, flat screen televisions and High Definition broadcasting. A business must be aware of changes otherwise it will lose market share to competitors that are more technologically advanced. Usually a rise in interest rates will reduce the disposable incomes of families living in the UK which might affect the level of spending on luxury items, such as hotel accommodation. However if the clients are mainly from abroad the rise in rates will have no affect on them. Also if it is an expensive five star hotel whose customers are usually businessmen and wealthy individuals the rise might have no affect at all. However, the hotel could incur higher finance charges for any borrowing it has made and might be forced to raise its hotel charges. A fall in the exchange rate of the pound will make the hotel appear cheaper to foreign visitors. This should have a positive effect as the hotel is internationally popular. Bookings should increase which will improve the room occupancy level and lead to a rise in overall sales and profits. Generally a worldwide recession results in a fall in demand for all goods and services. This might significantly affect the luxury hotel trade particularly for the business traveller who will have less business to conduct around the world. Sales and profits might fall.

(b)

(i)

(ii)

(iii)

Q3

(a)

The main factors that would influence the location decision are: Availability of land a large supermarket requires a significant area of reasonably priced land not only for the storage and display of its goods but also for customer parking. Most supermarkets are single storey buildings therefore a flat area would be the most suitable. Closeness to market the profits of supermarkets rely on a large throughput of customers therefore it must be located close to a high density urban area. Suitable transport links supermarkets must have good road links for easy access for its suppliers vehicles as well as car and bus access for its customers. Availability of labour a supermarket requires a large number of unskilled and semi-skilled workers. Unskilled workers are required for warehouse duties and for stacking shelves. Semi-skilled workers are required for checkout, customer services, supervisory and security duties.

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(b)

One benefit for local residents will be easy and quick access for shopping. Large supermarkets often have longer opening hours which will also be a benefit. For some residents it will also provide employment, both skilled and unskilled. However, there might also be disadvantages in having a busy supermarket in an urban area. The first problem might be increased traffic, which will present a greater danger to children playing in the area and to pedestrians trying to cross a busy road. A second problem is the danger of damage to the local environment from pollution. Increased exhaust fumes will affect air quality plus there is likely to be more litter left from the thousands of customers. (i) A stakeholder is any individual or group that has an effect on or is affected by a business or organisation. This might include groups, such as employees, owners, trade unions, customers, pressure groups and competitors. A shareholder, however, is a part owner of a business who has invested funds in the purchase of firms shares. Shareholders have a right to vote and to attend the annual general meeting. Corporate objectives are the medium and long term targets of a business that give a sense of direction to the managers, departments and the organisation as a whole. They should be measurable and have a specific timeframe for example to increase European sales by 7% by June 2009. To be effective they must be realistic and attainable. However, a corporate strategy is the detailed plan for achieving the corporate objective. The plan would include details of not only what is to be done but also the financial, production and personnel resources required. Both the private and public sectors are part of a countrys economy. The public sector is owned and directed by the government on behalf of the people whereas the private sector is owned and managed on behalf of the owners and shareholders. The principal task of the private sector is to make profits whereas the public sectors main role is to provide free or cheap public services, such as health care and education.

Q4

(a)

(ii)

(iii)

(b)

As a new business grows its objectives will change. At first the principal objective is survival that is to reach a sustainable sales level that allows the firm to break-even. Unless a business can achieve this objective it will close as soon as initial capital is exhausted. Once a firm has reached a sustainable level of sales it might change its objective to one of profit maximisation. At this stage the business is attempting to maximise the difference between total revenue and total cost. A sustained period at this stage allows a business to develop capital reserves that can be used to fund the next stage of expansion. Successful firms can follow a policy of growth not only growing market share with existing products but introducing new products and moving into new markets. This leads to a greater diversification in its operations, which in turn should reduce the risk.

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Q5

(a)

(i)

(ii)

(iii)

(iv)

Primary research is the gathering of first hand data that is specifically relevant to a firms products, consumers or markets. This is carried out by fieldwork using questionnaires, interviews, focus groups or direct observation. It is usually expensive to collect but is specific to the product. This is a pricing policy that aims to price a new product at a high level so that it is only purchased by trendsetters, enthusiast or the very rich. Skimming the market is usually an option used for innovative products, such as the recent launch of High Density Television and digital cameras. USP stands for Unique Selling Point which is a feature of a product that can be focused on in order to differentiate it from all competition. The USP should be based on a real product characteristic that consumers can easily verify, for example a sports car boasting that it has the fastest acceleration. Stronger USPs are those based on a patented technical advantage, for example Dyson vacuum cleaners that boasted the only dual cyclone suction method. 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 influence consumer opinions and buying habits.

(b)

The market for shoes can be segmented according to: a. Gender not only are the size of shoes different for males and females but also the preferred styling. b. Age the market can be divided in to sections for infants, children, teenagers and adults. c. Lifestyle even within a single age category there will be many different segments to cater for the many styles e.g. business shoes, trainers, casual shoes, etc. d. Purpose consumers desire shoes for specific purposes, such as sport, hiking, working or relaxing. e. Socio-economic status within one category different shoes can be made to cater for the wealth of the customer. This is usually achieved by the use of different materials, styling, manufacturer and branding.

Q6

(a)

(b)

Labour turnover is the rate at which employees leave a business. In its simplest form labour turnover can be calculated using the equation: Number of employees leaving / Total workforce * 100% An increase in labour turnover might indicate that employees are dissatisfied with management, dissatisfied with working conditions or are unhappy about the rate of pay. Whatever the reason a firm should be concerned because replacing employees on a regular basis is costly in terms of time and money. Every replacement results in recruitment costs, such as advertising, interviewing and induction training. Departing employees represent lost skill and lost investment in training and expertise. These can only be replaced once the new recruits have gained sufficient experience.

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(c)

The Human Resources department can motivate employees by recognising that they must be treated as separate individuals. Each person will have different needs and desires from the job he or she is doing. These needs must be identified and fulfilled. Training and self-development are important as they recognize the personal worth of the individual to the company. The development of teamwork is important, as most workers require a social environment within which to develop their personal relationships. Job enrichment is also an effective means of increasing worker motivation, as is job enlargement. The elimination of boredom and monotony by frequent rotation is a good means of reducing dissatisfaction. Empowerment of the work force is also a good way of motivating staff. This involves delegating not only tasks but also giving the employee the freedom to decide what is done and how it is done. Finally the basic rewards in the form of pay and working conditions is also important. If the basic needs are not met it is difficult for the individual to be constantly motivated to achieve his or her best.

Q7

(a)

(i)

Gearing measures the proportion of capital employed that is provided by long term lenders. The gearing ratio is given by the equation: Gearing = Long term liabilities/Total Capital Employed *100

(ii)

The current ratio is a measure of a firms ability to meet its short term debts. It is a main test of liquidity, the ability to settle debts as they fall due by having available the necessary cash. The ratio should be between 1.5 and 2 signifying sufficient liquid assets to meet its obligations. Insufficient liquid assets could result in the closure of the business. The equation to calculate the ratio is: Current ratio = Current assets/current liabilities

(iii)

(iv)

(v)

Working capital is the day-to-day finance required to run a business. It is the finance required to pay for raw materials, running costs, labour and to finance credit offered to customers. Fixed assets are items that have a long-term function in a business and can be used repeatedly. Examples might include buildings, land, vehicles, equipment and machinery. A budget is a financial plan for a specified future period of time. A master budget combines the forecast income from sales together with forecast expenditure. This can be used to determine a forecast cash flow statement as well as a forecast profit and loss account.

(b)

The purpose of a Profit and Loss statement is to assess the success of the management decisions that have been made in the past and to help them to make appropriate decisions in the future. The statement will show the annual sales, the costs of generating those sales and the resulting profit or loss. Most companies hope to grow year on year. The Profit and Loss statement can also be used to inform and reassure existing shareholders or to persuade prospective investors to invest in the business. The statement would also be needed to support an application for a loan to a bank and to satisfy government in regard to taxation due. The balance sheet represents a valuation of the assets that a business owns and the liabilities that it owes. In other words it identifies the net wealth of the business. Shareholders hope to see growth in the net value of the business on an annual basis. The balance sheet also shows how much of the capital has been borrowed and thus provides an indication of the level of risk from interest rate changes.

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(a)

(i)

(ii)

Insurance is a means of managing risk. Technically it is the provision of a legal contract between an insurer who promises to pay the insured if a particular event (known as the peril) happens and the insured suffers a financial loss. For example a business may insure themselves against fire, theft, or storm damage. In return for the insurance the insured pays a premium usually by regular installments to an insurance company. The main types of insurance used by a business are fire and accident insurance. Fire insurance is required to protect not only the buildings belonging to a business but also the stock and equipment stored in it. It is possible to obtain extra insurance in order to cover consequential loss. This compensates for the disruption of business caused by a fire and may cover loss of profits and extra expenses incurred in restoring the business, such as temporary accommodation. Accident insurance covers a wide range of events. Employers liability protects the business from claims made by employees for injuries suffered at work. All businesses are required by law to have this form of insurance. Public liability is a similar form of insurance except that it covers the general public from injury caused by the business or its employees. For example if part of the roof fell off and injured pedestrians or if a company vehicle injured a cyclist then the public would be compensated by the insurer. Without this type of insurance the business may face extremely high claims for compensation, which could cause the firm to cease trading. Clearing banks (also known as retail banks) offer businesses a wide range of banking services. For every day purposes banks provide business accounts where money can be deposited, withdrawn or transferred, usually by cheque. This provides a safe and easy way for a firm to pay its debts and to secure its takings. Clearing banks can also assist to finance a business through a range of lending services that include overdraft facilities, short and medium term loans, factoring of debtors and leasing arrangements. In recent years banks have developed business consultancy services that a firm can use when faced with larger or more long term projects, such as entering a new market, expanding its business or negotiating a takeover. Specialist banks, such as merchant banks (also known as wholesale banks) provide services to assist with share issues, the raising of loan stock or mergers and takeovers. These are generally only used by the large public limited companies.

(b)

Job production is usually associated with the making of a unique item for example a road bridge, an oilrig or a wedding dress. The task normally requires the use of general-purpose tools or machinery that are operated by a highly skilled work force. The unit cost is, therefore, quite high and there is unlikely to be a repeat order. Batch production is concerned with making a number of standardised items aimed at a more general market. A number of items 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. This is often used in the textiles industry where garments of different sizes and colours are made in batches. The differences between the two systems are, therefore, the type of product made, the machinery used, the skill level of the work force needed and the unit cost. The product is a one-off in job production whereas a standard product is made by the batch method. As the product is unique the machinery must be versatile in job production but is more specialised for the larger quantities required in batch. In the same way the labour is more skilled for the job method. Finally the unit cost for the unique order is generally higher than the equivalent product produced in large quantities.

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