ANSWERS 1
2 ▶ Name the two groups of stakeholders in the
photograph.
Customers and employees are the two groups of
stakeholders in the photograph.
3
▶ The goods sold in the store above are bought from
suppliers. What are the possible needs of suppliers?
Businesses that provide raw materials, parts, commercial
services and utilities to other businesses are called
suppliers. In this case, suppliers provide the store with
the stock that is sold on to consumers. Relations between
businesses and their suppliers must be good because they
rely on each other. Businesses want good quality resources
at reasonable prices. In return suppliers will require prompt
payment and regular orders. If suppliers do not receive
prompt payment from their customers, this may cause them
problems. For example, they may not have enough money
to pay their own bills.
MULTIPLE-CHOICE QUESTIONS
1C, 2C, 3B, 4A
CHAPTER REVIEW
CASE STUDY: JCB
1
▶ JCB makes producer goods. What is meant by the term
producer goods?
Products sold by one business to another are called
producer goods. JCB designs and manufactures a wide
range of machinery for the construction industry. These are
producer goods because they are sold to other businesses,
not consumers.
2
▶ What is meant by the term private sector?
Business organisations owned by individuals or groups of
individuals operate in the private sector.
3
▶ Name two possible stakeholders in JCB.
Any two from: shareholders, suppliers, employees,
customers, the local community or the government.
4
▶ Describe the role played by managers in a business
such as JCB.
Managers help with the running of a business. They
are often employed to run the dierent departments in
businesses such as marketing, production, finance and
human resources. Managers have to show leadership, solve
problems, make decisions, settle disputes and motivate
workers. Managers are likely to help plan the direction of
the business with its owners. They also have to control
resources, such as finance, equipment, time and people.
Managers are also accountable to the owners. This means
they have to take responsibility if things go wrong.
5
▶ JCB operates in a changing business environment.
What does this mean?
Most businesses operate in a changing business
environment. This means that they may be aected by
external factors that are likely to change over time. Such
factors include the strength of competition, the economic
climate, government legislation, population trends, demand
patterns, world aairs and social factors. In this case, JCB
ANSWERS
*Please note: questions without answers are ‘open’ and
designed for group or class activities.
CHAPTER 1
CASE STUDY: THE KANDY CYCLE SHOP
1
▶ Why do you think Tharanga opened a second-hand
bicycle shop?
Tharanga had always wanted to run a business because
he wanted to be his own boss. He also had a passion for
bicycles and spent a lot of his spare time restoring old
bicycles and selling them on to local people as a hobby.
He probably felt he could make a living by exploiting this
hobby. He may also have been motivated by the prospect
of making some money.
2
▶ What are three resources used by Tharanga when
setting up his business?
Tharanga when setting up his business used a range
of resources. For example, he needed premises, tools
and equipment, such as spanners, pliers, screwdrivers
and wrenches, spare bicycle parts, lubricants, business
stationery, electricity and a mobile telephone. He also
employed his younger brother as a shop assistant.
3
▶ Why do you think businesses exist?
Businesses exist to provide goods or services. In this
example, Tharanga sold second-hand bicycles and carried
out a repair and maintenance service for bicycle owners. In
the private sector these goods and services are sold in the
hope that a profit is made for the business owners.
ACTIVITY 1
CASE STUDY: GULF CONFECTIONERY AND BISCUIT CO.
1
▶ Does the Gulf Confectionery and Biscuit Co. supply
products that satisfy needs or wants?
The Gulf Confectionery and Biscuit Co. manufactures
high-quality toees, sweets and lollies. These products
are designed to meet consumers’ wants, not their needs.
They are non-essential products. They are not required for
human survival. People can live without toees, sweets and
lollies, so they are not designed to meet their needs.
2
▶ The Gulf Confectionery and Biscuit Co. is a private
enterprise. What does this mean?
Individuals or groups of individuals own most businesses
privately. They are private sector businesses. The Gulf
Confectionery and Biscuit Co. is a private enterprise that
makes toees, sweets and lollies. The owners hope that the
business is successful and is able to make a profit.
ACTIVITY 2
CASE STUDY: STAKEHOLDERS
1
▶ What is meant by the term business stakeholder?
A stakeholder is an individual or a group that has an interest
in the operation of a business. Some stakeholders, such as
owners, have a financial interest in the business.
2 ANSWERS
diversify geographically and develop new products such
as tablets and televisions. This means that it must find
new markets for its products and also develop new ones.
Relying only on smartphones is likely to make the business
vulnerable. Micromax has also decided to shift production
of its smartphones from China to India. This might help to
cut costs and make the business more profitable. Finally,
Micromax needs to sort out its internal problems so that
established managers and new executives work together
more eectively.
4
▶ In groups, produce a spider diagram to show the
dierent possible objectives a business might have.
Present your ideas to the rest of the class.
ACTIVITY 1
CASE STUDY: CAIRO FOOD SUPPLIES (CFS)
1
▶ What evidence is there to suggest that CFS aims to
maximise profits?
The information shown by the graph in Figure 2.1 suggests
that profit is very important to CFS. Between 2008 and
2015 profits have grown from around EGP1110.2 million
to EGP 3901.7 million. This is a huge growth in profits –
over 250 per cent during the time period. The company
also has a strong dividends policy which suggests that
the shareholders’ value high returns on their investments.
Therefore, it is reasonable to conclude that CFS is a
business that aims to maximise its profits.
2
▶ Who is likely to benefit most from such an objective?
The profit from business activity belongs to its owners. In
this case the owners of CFS are the shareholders. Since
CFS has a strong dividends policy the shareholders will
benefit particularly from profit maximisation and the rapid
growth in profits between 2008 and 2015. However, some
employees may also benefit. For example, senior executives
are likely to get bonuses which are related to profits. Also,
profitable businesses can aord to reinvest some of their
profits to help develop new products. This may benefit
consumers if attractive new products eventually reach the
market.
ACTIVITY 2
CASE STUDY: DOHA AIRLINE MEALS
1
▶ Why is independence and control an important
objective in this case?
Some people want to be ‘their own boss’ – they want to
be in control. This is an important non-financial objective
for many business owners, such as Omar Hassan. These
entrepreneurs are driven by the desire to be independent
and to take control of their own futures. The freedom to
make all the decisions when running a business is very
appealing. Some people often resent being told what to do
at work. Omar was employed by a large hotel working in
the kitchen. However, he did not like following instructions
and being told what to do all day. He set up in business
mainly because he valued independence very highly. He
wanted to take complete control of his life and also thought
might be aected by a decline in the construction industry,
for example. This might happen if there is a recession or a
reduction in government expenditure on building projects. To
survive, businesses such as JCB must produce goods and
services that satisfy customer needs. They must have clear
objectives and recognise that the changing environment can
bring both new opportunities and impose limitations.
6
▶ Assess whether the owners of JCB would be happy with
the financial performance of the business between 2011
and 2014.
The owners of most businesses hope to make a profit.
This is one of the main reasons why people get involved
in business ownership – they hope to make some money.
In this case, the graph in Figure 1.2 shows that JCB saw
profits fall from £355 million in 2011 to £303 million in
2014. This is a 14.6% fall over the time period. Generally,
owners would prefer profits to rise over a period of time
as their business grows. However, sometimes this may
not be possible. Businesses may struggle due to internal
factors, such as poor management, or external factors,
such as emerging competition or poor trading conditions.
In this case, information suggests that the construction
industry has struggled between 2011 and 2014 in some
parts of the world. Consequently, since this is an external
factor, JCB owners might be fairly satisfied with the
financial performance of the business. At least it hasn’t
started to lose money.
CHAPTER 2
CASE STUDY: MICROMAX
1
▶ What are two reasons why Micromax is starting to
struggle?
Micromax was a successful company in 2015 where it
had overtaken Samsung as market leader in the sale of
smartphones in India’s rapidly growing market. However, a
year later the business started to struggle. There were two
main reasons for this: sti competition from Samsung oering
a new range of cheaper sets and Chinese low cost producers
entering the market. The second reason appears to be an
internal problem. Tensions between established managers
and new executives are causing conflict and instability. For
example, it appears that a funding deal fell through which
was crucial to the development of the company.
2
▶ What do you think is the main aim of Micromax at this
time?
At the moment, Micromax is struggling to face up to threats
from strong rivals in the market. It has also got internal
problems that are damaging the progress of the company.
Consequently, it could be argued that the main objective
of the business at the moment is to survive. If Micromax
cannot overcome the threat from strong competition and
deal with its internal issues, the business may eventually fail.
3
▶ What measures might Micromax take in order to
achieve this aim?
In order to survive in the future, Micromax needs to
employ measures designed to make the business stronger.
Industry analysts have suggested that Micromax needs to
ANSWERS 3
3 ▶ Work out the change in sales revenue between 2010
and 2017.
For this amended question the answer will be:
€1 543 000 − €240 000
____________________
€240 000
× 100 =
€1 303 000
__________
€240 000
× 100
= 542.9 per cent
4
▶ Describe one benefit to SuperSkiSwiss.com of sales
growth.
Many owners aim to grow their businesses. This usually
means they want to increase sales revenue. It is a common
business objective because growth has a number of
benefits. For example, as a business grows it will usually
gain a larger market share. As market share grows
businesses enjoy a higher profile and eventually may be
able to have an influence in the market. For example, it
may be able to charge higher prices. Other benefits include
lower costs, more profits and more security.
5
▶ SuperSkiSwiss.com may be concerned about social
responsibility. What evidence is there in the case study
to support this view?
In recent years a growing number of businesses have been
keen to improve their social responsibility. For example,
SuperSkiSwiss.com appears to consider the needs of the
environment when making business decisions. The biggest
environmental impacts from SuperSkiSwiss.com are carbon
emissions from the distribution of goods, the running of
buildings and waste from packaging. SuperSkiSwiss.
com aims to use resources as eciently as possible by
controlling emissions, and focusing on the sustainability of
packaging. In 2016/17 SuperSkiSwiss.com cut its carbon
emissions by 15 per cent. It also reduced its stock and
vehicle movements across Europe and saved 11 tonnes of
materials by reducing the number of swing tags (product
labels) used. This suggests that SuperSkiSwiss.com wants
to foster a good public image. If a business has a bad
image or poor reputation it may lose customers.
6
▶ How might a company like SuperSkiSwiss.com change
its objectives as it evolves? Provide two reasons in your
analysis.
Over a period of time, as businesses like SuperSkiSwiss.
com evolve, aims and objectives are likely to change.
This is usually because businesses have to respond to
certain events or changes in circumstances. For example,
businesses like SuperSkiSwiss.com operate in dynamic
markets. This means they have to deal with regular
changes. For example, a new entrant may appear in the
market, a rival might introduce a new product or the
economy may start to decline. When market conditions
change it may be necessary to set new objectives. In
this case the fashion industry is highly competitive. For
example, if trading becomes dicult as a result of more
intense competition, SuperSkiSwiss.com may decide
that survival is more important than rapid growth until the
market ‘settles down’.
New legislation might also have an impact of the objectives
of a business. In recent years many business have become
more socially responsible. This may be a reaction to new
environmental, employment or consumer legislation.
he could improve on some of the inflight meals oered by
airlines. Omar also had an oer to sell his business – he
would also be kept on as the managing director. However,
Omar declined; he wanted to keep control because it was
very important to him.
2
▶ What is meant by a SMART objective? Use information
in this case as an example.
SMART business objectives should be Specific. This
means that the objective should state clearly what is trying
to be achieved. They should be Measurable, which means
the outcome must be able to be measured in numbers.
They should be Achievable meaning that people involved
should be able to complete them and Realistic, which
means that they can be achieved given the resources
available. Finally, SMART objectives also need to be Time
specific. This means that they state a period of time
to achieve the objective. In this case, DAM set SMART
objectives in 2015. DAM aimed to increase sales from
2.4million units to 2.8 million units in 12 months.
3
▶ Why is it important for objectives to be achievable and
realistic?
DAM’s managing director, Omar Hassan, said that there
is no point in setting objectives that are unrealistic and
unachievable by sta. In fact, setting unachievable
objectives may have a negative eect on business
performance. This is because sta might become
demotivated knowing that a particular objective is
impossible to achieve. Similarly, if there are not enough
resources available to a particular objective, it makes the
objective unrealistic and could discourage workers. In this
case, Omar said that the key objective was agreed with the
sales team. This suggests that the sales objective was both
achievable and realistic. Consequently, the objective should
help to motivate sta to achieve it.
MULTIPLE-CHOICE QUESTIONS
1B, 2C, 3A, 4D
CHAPTER REVIEW
CASE STUDY: SUPERSKISWISS.COM
1
▶ What is meant by a business objective? Use this case
as an example.
The objectives of a business are the goals or targets
which the business wants to achieve. In this case one of
SuperSkiSwiss.com’s objectives is to grow the business.
This is suggested by the fact that the company has grown
sales revenue from 0 in 2010 to an estimated €1 543 000 in
2017. SuperSkiSwiss.com also aims to be Europe’s number
one online shopping site for skiers. SuperSkiSwiss.com
hopes to achieve sales of €3 000 000 by 2020.
2
▶ Some businesses have non-financial objectives. Name
two examples of non-financial business objectives.
Examples of non-financial business objectives include
social objectives, personal satisfaction, challenge and
independence and control.
4 ANSWERS
ACTIVITY 1
CASE STUDY: KISULI, OKUMA AND OWINO
1
▶ Why do you think Kisuli, Okumu and Owino drew up a
deed of partnership?
When a group of people form a partnership, they often
agree to draw up a deed of partnership. This is not a legal
requirement, but it does help to make the rights of each
individual partner clear in the event of a dispute. The deed
of partnership is a legal document and covers issues such
as how much capital each partner has contributed, how
profits (and losses) will be shared, the procedure for ending
the partnership, how much control each partner has and
the rules for taking on new partners. Without a deed of
partnership disputes may be more dicult to resolve.
2
▶ How does this case study illustrate one of the main
advantages of partnerships?
One of the main advantages of a partnership is that
partners are likely to have dierent skills and by specialising
they can oer clients a wider range of services. The
partners in this business each specialise in a dierent
specific area of finance or accountancy. Michael Kisuli is
a corporate tax specialist, Edwin Okumu is an investment
analyst and Joseph Owino specialises in external audits.
Specialisation also helps to improve the eciency of a
business because specialists are generally more skilled in
their field of expertise.
ACTIVITY 2
CASE STUDY: SAVE THE CHILDREN
1
▶ What are the features of a social enterprise? Use this
case as an example.
Social enterprises aim to improve human and environmental
well-being rather than make a profit for owners. Generally,
social enterprises have a clear social and/or environmental
mission. They generate most of their income through trade
or donations and reinvest most of their profits. They are
majority controlled in the interests of the social mission and
are accountable and transparent. In this case, Save the
Children aims to improve the well-being of children across
the world. In particular, Save the Children raises money to
run world-class programmes to save children’s lives and
challenge world leaders to keep to their promises to give
children a brighter future.
2
▶ How might charities such as Save the Children raise
money?
Most charities rely on gifts and donations to fund their
social activities. In this case Save the Children raises very
large amounts of money globally. In 2015, it generated
around US$2100 million. According to the pie chart in
Figure 3.2 a large proportion of this money came from
institutions and governments – 58 per cent. The next
largest source was from individual donations – 25 per
cent. Individuals are often generous when giving to causes
that protect the interests of children. Corporations and
foundations are another important source. This might be
companies and special charitable foundations. Save the
Children is a large international charity. Smaller charities
Inthiscase, SuperSkiSwiss.com claims that it wants
to grow in a sustainable way. As a result, for example,
the businesses is committed to the protection of the
environment. This might be the result of a growing body
of legislation passed to help protect the environment.
SuperSkiSwiss.com aims to use resources as eciently
as possible by controlling emissions, and focusing on the
sustainability of packaging. In 2016/17 SuperSkiSwiss.com
cut its carbon emissions by 15 per cent. It also reduced its
stock and vehicle movements across Europe and saved
11 tonnes of materials by reducing the number of swing
tags (product labels) used. These results suggest that
SuperSkiSwiss.com may have modified its objectives as a
result of environmental legislation.
Finally, the reasons for a business changing its objectives
are often due to external factors. These are factors
which are beyond the control of businesses. However,
sometimes a business such as SuperSkiSwiss.com might
change its objectives for internal reasons. For example,
there may be change in the senior management team.
In such circumstances the objectives might change. For
example, new senior managers might want to pursue
profit maximisation so that higher dividends can be paid to
shareholders. However, there is no evidence in this case
to suggest that SuperSkiSwiss.com has made any such
changes.
CHAPTER 3
CASE STUDY: MARIANA BELLO
CASE STUDY: THE HATTA DENTAL AND IMPLANT CLINIC
1
▶ Who owns the businesses in the above two case
studies?
Mariana Bello is the sole owner of Mariana’s. Khalid Said
and Ismail Mansour own the Hatta Dental and Implant
Clinic – they are business partners.
2
▶ Discuss one advantage and one disadvantage of
owning a business with a partner.
One advantage of owning a business with someone else is
that more money can be raised when setting up. Khalid and
Ismail both put in AED 200 000 when they set up the Hatta
Dental and Implant Clinic. The challenge and responsibility
of running the business can also be shared. One major
disadvantage is that the profits have to be shared. Owners
may also disagree and fall out.
Business owners have to take risks.
3
▶ What risks are taken in the above case studies?
In both these cases, the owners had to risk their own
money when setting up and running the business. Mariana
Bello used €20 000 of her own savings when she set up her
café in Seville. Similarly, Khalid and Ismail both put AED
200 000 into their dental practice when setting up.
4
▶ Discuss in groups whether you would be prepared to
take the risk to set up in business. List your reasons for
and against and present to the rest of the class.
ANSWERS 5
less risk when taking out a franchise. Entrepreneurs
have to risk their own money to get started. In this case
it costs up to £13 900 to take out Husse franchise. This
is less risky than starting a business alone because
the franchisee has the advantage of trading under an
established and successful brand name. In this case,
Husse is established in over 50 countries worldwide.
Many pet owners will be aware of the ‘tried and trusted’
brand name. This gives the franchisee a head start and
reduces the risk of failure – a huge advantage. However,
there are disadvantages when taking out a franchise,
such as Husse. In some franchise agreements profit is
shared with the franchisor. For example, in addition to
the original fee it may be necessary to pay and annual
commission. There is also a lack of independence.
Franchisors often require strict operating conditions.
For example, a Husse franchisee may not be allowed to
trade outside the agreed territory. Finally, it can be an
expensive way to start a new business. For example,
it may be cheaper to set up a pet food delivery service
without the use of Husse. To conclude, taking out a
franchise may benefit those who are struggling to come
up with their own idea, those who want to reduce some
of the risk in business and those who are happy to
sacrifice some independence.
CHAPTER 4
CASE STUDY: QUBIT DIGITAL LTD
CASE STUDY: HYUNDAI LTD
1
▶ Who owns limited companies?
Shareholders own limited companies. For example, in
the Qubit case study, it is likely that the four ex-Google
employees who founded the company in 2010 will own
shares. In addition, information in the case study says that
some of Qubit’s shareholders include Goldman Sachs and
venture capitalists Sapphire Ventures and Accel Ventures.
These investors bought shares when they contributed
some of the £50 million capital to the business. These are
the current owners of Qubit. Hyundai is also owned by
shareholders. Hyundai’s shares are listed on the London
Stock Exchange. This means that anyone can buy them
and become a part owner of the company.
2
▶ Who runs limited companies? (Use examples from the
case studies.)
Limited companies are run by a board of directors headed
by a chairperson. A team of eight senior directors led by
Chairman Mong-Koo Chung runs Hyundai, the huge South
Korean motor corporation. The team running Qubit is likely
to include some, or all, of the original founders – the four
ex-Google employees.
3
▶ Comment on the size of limited companies, such
as those above, compared to sole traders and
partnerships.
Evidence in the case studies suggests that limited companies
are significantly bigger than sole traders and partnerships.
For example, Qubit employs 200 people. Most sole traders
and partnerships would employ much smaller numbers of
people – perhaps less than 10 in the majority of cases.
might organise fund-raising events such as cake sales,
sponsored activities and selling greetings cards. Some also
run business ventures, such as charity shops.
MULTIPLE-CHOICE QUESTIONS
1D, 2C, 3A, 4B
CHAPTER REVIEW
CASE STUDY: HUSSE
Franchisees are entrepreneurs.
1
▶ What is meant by the term entrepreneur?
Entrepreneurs are the business owners and without these
people businesses would not exist in the private sector.
They come up with a business idea, invest their own
money and get a business started.
2
▶ What is meant by the term franchisor?
In a franchising operation the franchisor is the owner
of the franchise. Franchisors receive money when they
allow others to take out a franchise and trade under their
name.
3
▶ What are the four roles of an entrepreneur?
Innovation
Decision making
Organising
Risk taking
Franchisees are likely to have unlimited liability.
4
▶ What is meant by unlimited liability?
Many small business owners, such as sole traders and
franchisees, have unlimited liability. This is very important
because it says something about the risk they take.
It means that if the business collapses the franchisee
is liable for all business debts. The franchisee can be
forced to meet these debts from personal wealth. It
means that a person can actually lose more than was
originally invested in the business. In this case, a Husse
franchisee could lose more than the original £10 000 paid
to the franchisor before trading began.
5
▶ Assess the advantages to a franchisee of taking out a
Husse franchise.
Taking out a franchise may suit someone who wants
to run a business but does not have his or her own
business idea. The Husse franchisor grants the
franchisee a licence to trade under the brand name
of Husse. In return for £10 000 the Husse franchisee
gets a range of benefits and support. Husse oers
benefits such as £2000 of stock for resale, additional
materials worth £2000, which includes items such as a
Husse tent, signs for a van, catalogues and a two-day
in-house training course. Husse franchisees also get
an exclusive territory with around 55 000 households.
Regular money for marketing is provided, in the first six
months, and so is support such as advisory services
and a development manager. All these benefits are key
advantages of operating as a franchisee. There is also
6 ANSWERS
2 ▶ What evidence is there to suggest that Sony is a
multinational?
Sony is a huge multinational corporation. In 2016, Sony
employed over 125 000 people across the world and
enjoyed sales of about US$80 000 million. Sony has
factories, oces and technology centres in many countries
around the world including Japan, China, Europe, the USA
and India.
3
▶ Describe two features of multinationals. Use examples
from the case study.
One common feature of multinationals is their powerful
advertising and marketing capability. This means, for
example, they can invest huge amounts of money in
impressive advertising campaigns to outcompete smaller
rivals. In this case, Sony is a highly recognised global brand
name. The strength of the brand has been built up over
many years of successful trading. However, to support the
brand Sony continue to invest heavily in global advertising.
Figure 4.4 shows that Sony invested JPY 474 370 in
worldwide advertising in 2014.
Another common feature of multinationals is the huge
assets and turnover. This means that multinationals are
extremely well resourced and can often aord to take on
large-scale contracts and projects that many other firms
could not cope with. In this case, in 2016, Sony enjoyed
sales revenue of around US$80 000 million. Sony has
factories, oces and technology centres in many countries
around the world including Japan, China, Europe, America
and India. Finally, the value of Sony’s assets at the end
of June 2016 was US$159 450 million. The scale of these
numbers shows how big Sony is as a business.
MULTIPLE-CHOICE QUESTIONS
1C, 2B, 3A, 4C
CHAPTER REVIEW
CASE STUDY: HKOFFICESUPPLIES.COM
1
▶ What is meant by the term private limited company?
A private limited company is an incorporated business that
raises capital from the sale of shares to private individuals –
often members of the family.
When Kwok Hung Oce Supplies Ltd was formed, Lee
had to produce a memorandum of association.
2
▶ What information would this document contain?
A memorandum of association gives important details
about the company. Examples include the name of the
company, the name and address of the company’s
registered oce, the objectives of the company and the
range of its activities and the amount of capital to be raised
and the number of shares to be issued.
3
▶ What is the purpose of a prospectus?
When ‘going public’, a company is likely to publish a
prospectus. This advertises the company to potential
investors and invites them to buy shares before a flotation.
It is an advertising document but the information it contains
must be legally accurate.
For example, Qubit Digital Ltd turned over £11 million
in 2016 and employed over 200 people. Not many sole
traders would enjoy revenue as high as this and employ so
many workers. Hyundai is very large – its turnover in 2015
was KRW 91 959 000 million. It also has factories all over
the world including the USA, China, Russia, Turkey, Czech
Republic, Brazil and India in addition to those in South
Korea.
4
▶ In groups, make a list of 20 companies that you know
about. Try to decide whether they are large or small.
ACTIVITY 1
CASE STUDY: KHAN SUGAR MILLS
1
▶ Name the documents needed to set up a limited
company.
Two key sets of documents are needed before a business
can trade as a limited company. These include the
memorandum of association and the articles of association.
2
▶ Who controls Khan Sugar Mills Ltd?
Khan Sugar Mills Ltd is a private limited company. It
is a family business and is owned by three brothers, a
venture capitalist called FarmVent and some of the senior
managers. Three quarters of the company is owned by the
Khan brothers – Abdul, Mohsin and Nabil; they each own
25 per cent of the shares. FarmVent own 20 per cent of the
company while senior managers have a small 5 per cent
interest. Since the three brothers own three-quarters of the
company, together they have complete control over the
company.
3
▶ What are the advantages to Khan Sugar Mills
of operating as a limited company. Provide two
advantages in your analysis.
Private limited companies, such as Khan Sugar Mills Ltd,
enjoy a number of advantages. One significant advantage
is that the company cannot be taken over by outsiders.
This is because the shares are not on open sale. Shares
in private limited companies cannot be transferred without
the permission of the other shareholders. They cannot be
bought on the stock market. This is because only shares in
PLCs can be traded on the stock market. Therefore, Khan
Sugar Mills Ltd is safe from an unwanted takeover.
Another advantage is that all of the shareholders have
limited liability. This means that they can only lose the
amount of money they originally invested in the company
if it were to collapse. Khan Sugar Mills Ltd’s shareholders
cannot be made to use personal wealth to pay o business
debts. Limited liability means they enjoy legal protection
from business creditors.
ACTIVITY 2
CASE STUDY: SONY
1
▶ What is meant by the term multinational?
A multinational is a large business with significant
production or service operations in at least two dierent
countries.
ANSWERS 7
2 ▶ Suggest what the objectives of the NWSC might be.
The main objective of NWSC is to provide a public service;
it has committed to the provision of good quality customer
service. NWSC aims to supply everyone with clean safe
water within 200 metres of all towns and urban centres
(coverage is currently 78 per cent). On the NWSC website,
it states that ‘The Customer is the reason we exist. We do
everything to the delight of our customer.’
3
▶ Why do you think the government gets involved in
business ownership?
In the private sector, most businesses aim to make a profit.
However, organisations in the public sector aim to provide
a public service. Sometimes providing a public service may
be unprofitable, therefore, private sector firms would not
be interested in supplying the market. Consequently the
government needs to run and own organisations so that the
provision of particular public services can be funded from
taxpayers’ money.
Also, some industries, like water supply, are crucial to the
well-being or security of the nation. Therefore, since they
are so important, it is arguably better if the government
takes control so that supply and quality can be guaranteed.
ACTIVITY 1
CASE STUDY: SNCF GROUP
1
▶ Using this case as an example, describe three features
of a public corporation.
SNCF is responsible for providing a national train service
across the whole of France. It is owned by the French
government. Government ownership is an important
feature of public corporations. Another feature of
public corporations is that they are created by an act of
parliament. The powers and duties of each organisation
are clearly specified in the act. In this case, under
French law, SNCF is an établissement public industriel et
commercial – a public service company with a commercial
and industrial mission, owned by the French state. A
third feature of public corporations is that they exist
provide a public service. In this case, the aim of SNCF is
to provide a nationwide rail network. It is committed to
customer satisfaction and makes social progress a priority.
It has recently launched a range of projects to improve
punctuality for people travelling to work, make fares easier
to understand and make the rail system more accessible
forall.
2
▶ Who will take financial responsibility for the losses
made by SNCF in 2016?
Although SNCF generated revenues of €32 273 million in
2016, which was 2.8 per cent higher than the previous year,
it made a net profit of €567 million. A big improvement over
2015 when SNCF made a net loss of €12 228. This loss has
to be covered by the French government since they are
the owners. However, it is the French taxpayers who take
financial responsibility for the loss because all government
services are paid for (mainly) from taxes collected by the
government.
Share issues have to be underwritten.
4
▶ What does this mean?
There is a chance that when going public some of the
shares put up for sale will remain unsold. To overcome this
problem an underwriter is paid a fee to buy up any unsold
shares. It is like an insurance policy.
5
▶ Why is going public expensive?
‘Going public’ can be expensive because of the number
of dierent types of costs involved. These include legal
costs to ensure that the prospectus is ‘legally’ correct.
Lawyers have to read and analyse all the information in the
prospectus to ensure that potential investors will not be
misinformed. There are the printing and distribution costs of
the prospectus and also an administration fee, which must
be paid to a bank for processing all the share applications.
There are also underwriting, advertising and administrative
expenses.
6
▶ Discuss whether Lee should convert his business to a
public limited company. Make a clear judgement at the
end of your evaluation.
Lee Kwok Hung wants to convert his private limited
company into a public limited company. It is unlikely that
Lee and his family will be able to raise HK$200 million in
any other way to meet the high cost of developing an online
business and expanding into South China. Therefore, he
would need to ‘go public’. Going public is a way of raising
large amounts of money. Another advantage is that Lee’s
business may be able to exploit economies of scale if it is
much larger. They might be able to buy very large quantities
of stock from suppliers at reduced prices, for example. The
new company, HKocesupplies.com, might also benefit
from the publicity usually associated with a flotation. Public
limited companies have a higher profile than any other form
of business organisation and as a result they may have
more customer recognition, which in turn might boost sales.
This would be important when expanding into South China
and launching a new service.
However, Lee should consider the disadvantages before
making his final decision. Public limited companies are
more tightly regulated to protect investors. They also
have to publish more detailed financial information, which
competitors might see. Lee’s business could also be taken
over by another company because shares can be bought by
anyone. Finally, the costs of going public are significant and
some of the HK$200 million will be used up in the flotation
process. Despite these disadvantages, if Lee wants to raise
HK$200 million and become a large supplier in South China,
he would probably need to operate as a PLC.
CHAPTER 5
CASE STUDY: THE UGANDAN NATIONAL WATER AND
SEWERAGE CORPORATION
1
▶ Who owns and runs the Ugandan National and Water
Sewerage Corporation?
The Ugandan National and Water Sewerage Corporation is
owned by the Ugandan government and run by a board of
directors, which is accountable to a government minister.
8 ANSWERS
They are not motivated by profit. The ABC’s aim is to
serve the Australian people. In particular, it is ‘focused on
keeping audiences at the centre, providing high-quality
programming, independent news and information and
content that enriches Australian communities’. If a public
corporation does make a profit, the money will be returned
to the government or reinvested in the business.
3
▶ Why might organisations like ABC operate as public
corporations? Give two reasons in your analysis.
There are a number of reasons for the public ownership
of certain services. First, public corporations, such as the
ABC, often provide vitally important public services. It is
argued by many that it is better for industries that are vital to
the nation’s security to be owned by the government. This
would prevent ‘outsiders’ from another country taking them
over and exploiting the nation. If the provision of a particular
service is vital to the well-being or security of the nation, it is
considered desirable for the government to maintain control
so that continuity of supply and quality can be guaranteed.
In this case, the government can ensure that Australia
receives a good quality national broadcasting service.
Second, in some markets the private sector would not deliver
important services to unprofitable regions. For example, the
cost of providing electricity to a remote farm many miles
away from the main power lines would be too high for a
private sector operator. However, a public corporation may
be prepared to meet this cost because profit is not a key
objective. In this case, it is suggested radio and other ABC-
like services would not be broadcast to isolated regions if the
ABC were transferred to the private sector. Australia covers
an enormous geographical area and it is easy to see that
providing services to many rural communities, for example,
just would not be worthwhile for a private sector operator.
4
▶ Assess the case for privatising the ABC.
In many countries, the number of public corporations has
been reduced. For example, in the UK, industries such as
rail transport, water provision, electricity generation and
distribution and telecommunications have been transferred
to the private sector. In this case, the arrival of digital
technology has had a huge impact on the media. The ABC
is facing increasing rapidly increasing competition from
new media companies and platforms. To add to these
diculties, the Australian government has begun a round of
cuts to the corporation’s funding. By 2018/19, the ABC will
lose a total of A$254 million. In light of these developments,
some have argued that the ABC would perform more
eectively in the private sector.
There are a number of reasons why governments choose
to privatise public corporations. In this case, one argument
in favour of privatising the ABC is that it does not provide
a universal service. According to one survey, over one
year, 40.1 per cent of those questioned did not watch the
ABC at all. Another reason is that the government would
also save money if it were transferred to the private sector.
The government currently provides over A$1000 million in
funding. Many say that this money could be used to reduce
government debt or cut taxes. A third reason is that some
people also think that the ABC favours left-wing political
parties. In 2016, the ABC’s new managing director, Michelle
Guthrie, said that the ABC ‘can do better’ at presenting
ACTIVITY 2
CASE STUDY: AIRPORT PRIVATISATION
1
▶ What is meant by the term privatisation?
Privatisation is the process of transferring public sector
resources, such as public corporations, to the private
sector. In this case, a number of airports and airport
facilities have been privatised. For example, in 2013, the
Brazilian Government raised US$ 9100 million by privatising
two major airports ahead of the 2014 World Cup.
2
▶ Why were governments keen to maintain state control
of airports until recently?
Governments have historically preferred to keep control of
businesses operating airports. Even as recently as 2006,
only about 2 per cent of the world’s airports were owned
or managed by the private sector. The reason for this is
because airports are considered as strategically important
to the nation. If the provision of a particular service is vital
to the well-being or security of the nation it is considered
desirable for the government to maintain control so that
continuity of supply and quality can be guaranteed.
3
▶ Describe two possible reasons why governments
should want to privatise airports.
One motive for privatisation is to raise money. If the
government sells a public corporation, such as an airport,
the money can be used by the government. In this case
for example, the Brazilian government plans to sell more
airports to raise money to help reduce its budget deficit.
Another possible motive for privatisation is that airports
are likely to be run more eciently in the private sector.
According to Ahmed Bukalla, director of operations at the
Department of Civil Aviation, Sharjah International Airport,
UAE. ‘When privatisation comes, there will be pressure for
further productivity gains, and airport operators will need
to be even more innovative and adopt new technologies to
stay competitive.’ Therefore in the private sector businesses
will serve the public better because if they don’t they risk
‘going bust’.
MULTIPLE-CHOICE QUESTIONS
1C, 2B, 3D, 4A
CHAPTER REVIEW
CASE STUDY: AUSTRALIAN BROADCASTING
CORPORATION
1
▶ What is meant by the term public corporation?
A public corporation is a business organisation that is
owned and controlled by the government. The ABC is a
public corporation because it is owned and controlled by
the Australian government.
2
▶ Describe two features of public corporations. Use the
ABC as an example.
Public corporations, such as the ABC have a number of
unique features. One of these is that they are established
by law. It is established under the Australian Broadcasting
Corporation Act. Another important feature of public
corporations is that they aim to deliver a public service.
ANSWERS 9
4 ▶ Why might businesses in general be forced to change
their legal status as they grow?
The main reason why businesses need to change their legal
status as they grow is to attract funding. Businesses will
find it very dicult to grow as a sole trader or partnership.
They are considered too risky for many investors and often
struggle to raise finance. Businesses usually have to raise
money by selling shares to become large operators.
MULTIPLE-CHOICE QUESTIONS
1D, 2C, 3C, 4C
CHAPTER REVIEW
CASE STUDY: ESHANIBABYGEAR.COM
1
▶ Why was a sole trader organisation most appropriate
for Eshani’s business when she first started?
Many small businesses when they start are sole traders.
Unless large amounts of money are needed, this type of
organisation is suitable because it is easy to set up and the
owner is in complete control. Eshani said ‘When I started,
I started small, operating from home, and never needed
outside funding, so being a sole trader seemed the simplest
option.’
2
▶ Discuss why Eshani formed a partnership.
After trading successfully from her home as a sole trader
for three years, Eshani decided to open a shop. However,
she needed money for premises, stock and marketing.
Also, after a few months there was a strain on cash flow.
Therefore she decided to take on her best friend as a
partner. This helped to share the burden of running the
business and injected LKR 6 million much needed cash.
Eshani formed a private limited company after the break-
up of the partnership.
3
▶ Do you think it was appropriate?
After the break-up of the partnership Eshani was right to
form a private limited company. This type of organisation
helped Eshani to achieve her objectives. Eshani now has
control of the business. This is because she has 70 per
cent of the shares. Her mother bought 20 per cent and she
allowed two of her best sta to buy the remaining 10 per
cent. However, with 70 per cent no-one can overrule her.
Eshani sold shares to her employees to raise more money
for the business. However, another reason was because
she wanted to reward them for their loyalty and keep them
motivated. Finally, Eshani needed more capital to expand
the business. Some of the money raised from selling shares
was used to set up an online business.
4
▶ Assess whether Eshani should form a public limited
company to buy the shops.
Going public is a big step for a business. It is an expensive
move because of the costs involved such as producing
a prospectus, administration costs to cover the whole
flotation process, legal costs and underwriting fees. Also
trading as a PLC means anyone can buy shares in the
company. This means that an outsider could take over the
company. The business would also have to release more
financial information to the public and meet the cost of
a broader range of political views. However, if the ABC
operated in the private sector it might be under more
pressure to provide a more balanced and independent
broadcasting service.
In contrast, many believe that it would be better if the ABC
remained under the control of the government. One reason
is because according to some surveys the corporation
seems to be doing a good job. The ABC does appear to be
meeting the needs of its customers. In the annual Newspoll
ABC Appreciation Survey, support for the corporation was
strong. Around 86 per cent of Australians believed that
ABC performs a valuable role, a large majority believed it
provides quality content and a majority said it was doing a
‘good job’ meeting its media obligations. One of its public
services is providing online content. According to data in
Figure 5.2, this is very well-received. Over a 10-year period,
between 91 per cent and 86 per cent of respondents
thought the service was ‘good’. Between 2007 and 2016,
the number of respondents that felt online quality was ‘very
good’ rose from 28 per cent to 40 per cent.
To conclude, it could be argued that the ABC should
remain as a public corporation. This is because evidence
from surveys generally shows strong support for the
corporation in its current form. Transferring it to the private
sector might raise some money in the short term, but a
valuable public service, available to the whole of Australia,
might be lost forever.
CHAPTER 6
CASE STUDY: WU YANG
CASE STUDY: SHANGRI-LA HOTELS AND RESORTS
Wu Yang is happy operating as a sole trader.
1
▶ Suggest two reasons why she might be happy.
She likes the independence of operating as a sole trader.
She has no real desire to expand and therefore does not
need to raise any more capital.
2
▶ Why could Shangri-La not realistically operate as a sole
trader?
Shangri-La is a large multinational. It is a global hotel
company with hotels in North America, Europe, the Middle
East, Asia and Australia. Shangri-La could not operate as a
sole trader. The company has grown steadily since it was
established in 1971 and no doubt has needed some more
capital to fund this growth. There is no way a sole trader
could provide funding on such a scale. Multinationals need
to be PLCs to attract the huge amounts of finance they
need and to enjoy a high international profile.
3
▶ What evidence is there to suggest that Shangri-La is a
growing company?
Since the company was established it has grown
significantly. For example, in 2015 the Group opened nine
new Shangri-La hotels. It also launched the modernised
Shangri-La’s Le Touessrok Resort & Spa, Mauritius,
rebranded four properties to Hotel Jen. In the last five years
it has continued to grow. Figure 6.1 shows that its revenues
have increased by 11 per cent from US$1912 million in
2011 to US$2123 million in 2015.
10 ANSWERS
most countries. Most agriculture is concerned with food
production like olive growing in this example.
The secondary sector encompasses manufacturing and
processing. In this case olives are being processed into
olive oil. Machinery is likely to be used to squeeze the
oil from the olives. This might be followed by a cleaning
process to ensure that the olive oil is suciently pure.
Look at Figure 7.1.
2
▶ What has happened to the number of people employed
in agriculture in Spain since 1980?
In Spain, like in many countries, the number of people
employed in agriculture is falling. The graph in Figure 7.1
shows that the number of people employed in agriculture
has fallen from around 19 per cent in 1980 to just under 5
per cent in 2010.
3
▶ Describe one possible reason for the pattern described
in question 2.
One of the main reasons why employment in agriculture
has fallen in Spain so sharply is because of advances in
technology. Before and around the 1980s, farmers may
have relied more heavily on labour. However, because of
the growing availability of aordable technology they may
employ more machines. Developments in technology have
been enormous in agriculture. In this case, Marco Casillas
is considering the purchase of some harvesting machinery
to reduce labour costs and remain competitive. Once such
machines have been purchased, the need for labour drops
sharply.
MULTIPLE-CHOICE QUESTIONS
1A, 2C, 3A, 4B
CHAPTER REVIEW
CASE STUDY: HISENSE
1
▶ What is the dierence between secondary and tertiary
production? Use examples from the case study.
The secondary sector involves manufacturing and
processing, that is, the conversion of raw materials into
goods. In this case, Hisense is a manufacturer of white
goods and a range of electronic products. It makes these
goods in a wide range of factories both in China and
abroad.
The tertiary sector is to do with the provision of services.
There are many dierent types of services, such as
professional, household, transport and financial. In this
case, Hisense has branched into the provision of services
in areas such as information technology and design. These
services are aimed mainly at other businesses.
Look at Figure 7.3.
2
▶ What evidence is there to suggest that China’s economy
has become more balanced since 1990?
The pie charts in Figure 7.3 show some important changes
in the amount of employment in dierent sectors of
the economy between 1990 and 2015. In 1990, China
employed 60 per cent of its workforce in agriculture. By
2015, this had fallen to just 28.3 per cent. In contrast, the
stock market regulation. This might allow competitors to
plan strategies to overcome the threat of Eshani’s business
in the market. However, Eshani has a firm objective.
She wants to take the business to the next stage of
development. Her online business is expanding fast and
Eshani also thinks she could develop a small chain of
shops. A major retailer has recently oered a number of
stores for sale. To buy, convert and stock them would cost
LKR 400 million. By going public Eshani could raise this
sort of money and achieve her objective.
However, Eshani might need to consider other approaches.
She could grow more slowly and fund growth from
profits. She may be able to borrow money from banks.
Alternatively, she may be able to persuade some other
entrepreneurs to invest in her business. All these options
would need to be considered before she finally decided to
go public. However, if a flotation were successful, it would
allow Eshani to achieve her objective.
CHAPTER 7
GETTING STARTED – BUSINESS CLASSIFICATION
1
▶ Which of the businesses shown on the previous page
are concerned with a agriculture, b manufacturing or c
services?
The farm workers growing crops are an example of a
business involved in agriculture. It is using the land to grow
produce.
The business processing food is a manufacturer. It is
making products.
Both the railway company and the app designer are
businesses that supply services. The railway company
is transporting people by rail and the app designer is
designing new apps for mobile phones.
2
▶ Which of these businesses are most likely to employ
large numbers of people in a developing nation? Explain
your answer.
Developing nations tend to employ more people in
agriculture. Their economies are still in the early stages of
development and generally their focus is on the production
of food. Therefore the business involved in agriculture is
most likely to employ the most people in agriculture. The
photograph shows the crops being harvested by people
rather than machines.
3
▶ In pairs, draw up a list of 20 businesses in your area and
decide whether they are agricultural, manufacturers or
service providers.
ACTIVITY 1
CASE STUDY: AGRICULTURAL EMPLOYMENT
1
▶ What is the dierence between the primary and the
secondary sectors? (Use examples from this case
study.)
In the primary sector, business activity involves extracting
raw materials from the earth. In this case, olive growing
by the Casillas family is an example of farming. Farming
is probably the most important primary sector activity for
ANSWERS 11
rather rapidly), has seen an increase in the tertiary sector
from 18 per cent to around 42 per cent. This trend is likely
to continue in the future as the country develops – the
tertiary sector will grow as it has done in developed nations.
CHAPTER 8
CASE STUDY: NUCLEAR POWER STATIONS
1
▶ What are four factors that must be taken into account
when locating a nuclear power station?
Factors that are likely to be taken into account when
locating a nuclear power station include the following.
• Government influence: nuclear plants cannot be built
without a lengthy consultation process involving
the authorities, local communities and the power
companies. There are legal controls over their location.
• Nuclear plants need stable ground and plenty of space.
• Most plants need access to a water source, such as a
lake or river.
• Access to a large workforce. The construction of nuclear
plants may need around 2000 people and around 500
more to help operate them.
Many nuclear plants around the world are built just outside
small or mid-size towns and on the coast.
2
▶ Describe how the changing business environment has
aected the location of many service providers such as
retailers.
The changing business environment may aect the location
decisions made by some businesses. In recent years
retailing has changed significantly. Many thousands of
business providing services now operate online. Some
high-profile examples include Amazon, Alibaba, Facebook
and Twitter. Online businesses may operate as retailers,
consultants, bloggers, tutors, web designers, information
providers and teachers, for example. The one thing they all
have in common is that they use the Internet to trade. One
of the main advantages of these businesses is that they can
be located anywhere. Most traders online can locate their
base anywhere in the world provided they have access to
the Internet.
3
▶ In groups, consider where you might locate a a banana
plantation, b a large car factory and c a new shopping
centre or mall. Give at least two reasons for each
answer.
ACTIVITY 1
CASE STUDY: RENAULT
1
▶ Discuss the possible reasons for Renault’s decision to
locate a factory in Tangier.
Manufacturers need to consider factors such as the cost
of land, transport, labour costs and skills, proximity to the
market and whether there is any government help when
locating factories. In this case Renault has recently built a
factory in Tangier. One attraction of Morocco is that in an
area of North Africa where political disturbance is common,
Morocco is seen as a politically stable location. Businesses
will clearly avoid locations in countries where disruption
number of people employed in the tertiary sector rose from
18 per cent to 42.4 per cent. Employment in the secondary
sector also grew from 22 per cent to 29.3 per cent. These
changes have resulted in a more balanced economy for
China. It was less dependent on agriculture in 2015 as
it was in 1990. However, if the changes follow the same
trend, China’s economy may become more unbalanced in
the future as it becomes more dependent on services.
3
▶ Discuss the interdependence that exists between the
dierent sectors of business activity.
Businesses in each of the three sectors rely on each other.
For example, in the primary sector cereal farmers rely on
bakers in the secondary sector for their sales of wheat.
Bakers may depend on advertising agencies in the tertiary
sector to produce television adverts for their products.
The transport industry in the tertiary sector relies on the oil
industry in the primary sector to provide fuel for its vehicles.
Workers in both the secondary and tertiary sectors rely
on the primary sector for their food. This reliance between
sectors is called interdependence. In this case, Hisense
may rely on retailers and other distributors to sell its
manufactured goods to consumers.
4
▶ What is meant by de-industrialisation?
De-industrialisation occurs in well-developed countries,
such as the USA, Germany, Japan and France. It involves
the decline of the manufacturing sector at the expense of
the tertiary sector. In the last 20 or 30 years, many western-
style economies have seen employment in manufacturing
fall sharply. However, at the same time there has been a
steady increase in the quantity and value of services.
5
▶ Assess the main causes of de-industrialisation.
A number of suggestions have been suggested to explain
the process of de-industrialisation. There may have been a
change in consumer demand. People may prefer to spend
more of their income on services rather than manufactured
goods. For example, people may be spending more on
holidays, restaurants, travelling and personal services and
less on consumer durables. Competition in manufacturing
may be another important reason. Recently there has been
some fierce competition in the production of manufactured
goods from developing countries such as India, China,
Thailand and Brazil. These countries can often produce
manufactured goods more cheaply than in western
economies. In this case, China has seen an increase in the
manufacturing sector. In the last 30 years or so, China has
developed a competitive edge in this sector due mainly to
its cheap and large supply of labour.
Another reason is that as countries become more
developed the public sector tends to grow. Since the
public sector mainly provides services such as education
and transport and healthcare, this adds to the growth of
the tertiary sector. Finally, advances in technology mean
that employment in manufacturing falls because machines
replace people. The reason for the decline in manufacturing
in well-developed countries may be dierent depending on
the circumstances of the individual nation. For example, a
country that has an inecient manufacturing sector may
be vulnerable to overseas competition. In this case, China,
which is still a developing country (although it is developing
12 ANSWERS
park conveniently. Some service businesses, particularly
fast-food providers, are developing ‘drive-through’ facilities
to avoid parking problems. In this case, Abdullah’s potential
customers, oce workers for example, may be within
walking distance from his restaurant. This would be an
advantage but he might also be keen to find a location
where customers can park easily when arriving for a meal
or a night out.
2
▶ Why might businesses, such as Abdullah’s seafood
restaurant, deliberately choose to locate close to
competitors?
Abdullah is currently considering a location close to where
a number of other restaurants operate. Premises occupied
by a recently failed restaurant have become available but
he is concerned about the competition in the area – many
entrepreneurs would share this fear. However, in contrast
some businesses deliberately choose locations where
there is a concentration of similar businesses. This might
be important in industries where comparison shopping
is popular. It might also be possible to catch the excess
demand from existing businesses, particularly if premises are
located in a restaurant and entertainment area. Consequently,
for these reasons, Abdullah may eventually decide to locate
is seafood restaurant close to potential rivals.
MULTIPLE-CHOICE QUESTIONS
2A, 2B, 3D, 4A
CHAPTER REVIEW
CASE STUDY: THE NEW DELHI INSURANCE COMPANY
1
▶ What is meant by the term greenfield site?
Greenfield sites are areas of land, usually on the outskirts
of towns and cities, where businesses develop for the first
time. In this case, Site A is a greenfield site. It is a brand
new purpose built oce block on the outskirts of the city
about 3 miles (5 km) from a large residential area.
2
▶ Determine the monthly rent for each site assuming that
the company employs 2000 sta.
Calculate the monthly rent for each site assuming that the
company employs 2000 sta.
Monthly rent for site A is given by:
2000 × 200 × US$1.00 = US$400 000 per month
Monthly rent for site B is given by:
2000 × 200 × US$1.10 = US$440 000 per month
Governments may try to influence the location of
businesses.
3
▶ Describe two reasons for this.
One reason why governments try to influence location
decisions is to avoid congestion where there is already
enough or too much development. This will reduce the
strain on existing infrastructure, such as roads, schools and
hospitals. Governments may also aim to minimise the impact
businesses might make on local communities. For example,
most people would object if a business opened a noisy night
club in a highly residential area or if a large petrochemical
company established a refinery in a national park.
from political change is a potential risk. Tangier is also a
thriving port and just 10 miles (16 km) away from the large
European market. This was important to Renault since most
of the factory’s output in Tangier is intended for export.
Economic growth in Morocco is currently high, around 5
per cent in 2016. The people are becoming wealthier. This
means that demand for Renault’s cars is likely to increase.
Morocco has improved its infrastructure in recent years.
For example, Tangier is eectively linked by motorways and
railways to industrial parks. Indeed, Renault has its own
direct rail link to the port. Morocco also provides a strategic
geographical location for manufacturers. It is at the
crossroads of the world’s most important sea links. Finally,
Renault is a French company and French is the commercial
language of Morocco. This may have been a factor when
choosing Tangier as a location.
2
▶ What are two possible benefits to Morocco of Renault’s
decision to locate a factory in Tangier?
Most governments are keen for foreign businesses to
locate operations in their countries. The benefits can be
substantial. For example, in this case Renault will create a
lot of jobs for people living in and around Tangier. Initially,
while the factory was being built, jobs would have been
created for construction workers. Once the factory was
operational, a large number of factory workers would have
been needed. In addition to this, Moroccan-based suppliers
of components and commercial services would have
benefitted, which would have created even more jobs. This
generates income for these people and hopefully improves
their living standards.
The government is also likely to benefit from the new
factory. This is because any profits made by Renault from
the operation of the plant are likely to be taxed by the
Moroccan government. These tax revenues can be used
to fund more public services such as education and new
infrastructure.
ACTIVITY 2
CASE STUDY: RESTAURANT LOCATIONS
1
▶ What factors will Abdullah need to take into account
when deciding where to locate his seafood restaurant?
Give two factors in your analysis.
Service providers may have dierent location requirements
to those of manufacturers. In this case, Abdullah is
choosing a location for his seafood restaurant in Manama,
Bahrain. For many service providers, proximity to their
market is crucial. This is because many services are sold
direct to consumers. For example, restaurants, cafes,
shops, hair salons, taxis and dry cleaners have to be
located in towns and cities. This is where customers live
and shop. In this case Abdullah wants to target business
customers working in the financial quarter of the city so this
would presumably influence his search for a location.
For customers, suppliers and employees, easy access and
parking is becoming a serious issue. Trac congestion is
a growing problem in many parts of the world. Businesses
need to choose locations where there is less chance of
trac congestion. It is particularly important for customers
since they will quickly look for alternatives if they cannot
ANSWERS 13
company because it hopes to locate its new call centre
in an urban area where its new recruits have access to
a wide range of amenities and leisure facilities such as
restaurants, coee bars, sports clubs and cinemas. This
is important because the company will need to attract
2000 well-qualified employees to help sta the call centre.
Access to these facilities might help the company to attract
high quality sta. Transport links to the Site B are excellent.
The main railway station is just two minutes walk away.
Potentially, this means that the company could attract sta
from further away. This would provide more choice during
the selection and recruitment process.
The oce block at Site B is in a fashionable and popular
area, however, the building itself is not modern and will
require some investment to upgrade the facilities. The cost
of modernising is not given but the site does provide room
for expansion if the company needs more oce space in
the future.
Deciding which site to locate the call centre oce is not
straightforward here since there are advantages to both
sites. The New Delhi Insurance Company has to decide on
its priorities. If the company wants to minimise costs, Site
A might be a preferable location. Monthly rent is 10 per
cent lower, the government is oering US$ 500 000 financial
support and the building is purpose-built and ready for
occupation. Modernisation will not be required. However,
the more expensive city centre site will provide more
amenities for workers and might make the recruitment of
high quality sta easier. It is very close to the main railway
station so it might be possible to recruit sta from further
away. To conclude, if cost is the main issue here, then
Site A would be the preferred location. However, if sta
recruitment and meeting sta needs is more important, then
Site B might be more attractive. It is a close call!
CHAPTER 9
CASE STUDY: THE GLOBAL MARKET FOR CARS
1
▶ What do you think is meant by a global market?
If a business hopes to sell its products to consumers in all
countries in the world, it will be selling in a global market, to
the largest possible number of customers.
2
▶ Comment on the pattern of global demand for cars.
The global demand for cars is growing. In 2015, global
sales reached 72.37 million. By the end of 2016, it is
expected that sales will reach the 75 million mark. One of
the main reasons for this growth is the rising demand in
emerging economies. Sales in China, for example, were
around 25 million in 2015. This is about one third of the total
sold. Emerging economies such as China, India and Brazil
are becoming wealthier as they develop. This means that
people in these countries can aord to buy cars – many
perhaps for the first time.
3
▶ Work out the global market share of the major car
producers shown in Figure 9.1.
10.08 + 9.87 + 7.99 + 7.49 + 6.40 + 5.17
_____________________________________
72.37
× 100
47
______
72.37
× 100 = 65.69 per cent
Some governments use regional policy to help develop
‘poorer’ areas. Regional policy provides opportunities for
businesses. For example, governments use incentives, such
as quick planning permission, investment grants, tax breaks,
employment subsidies and rent-free factory space, to attract
businesses. In this case the government is keen to attract
businesses to the greenfield area where Site A is located.
The government is oering US$500 000 of support if the New
Delhi Insurance Company locates its call centre there.
4
▶ What factors would service providers, like the New
Delhi Insurance Company, have to take into account
when deciding on a business location? Give two
reasons in your analysis.
Service providers like the New Delhi Insurance Company
are likely to consider a range of factors when choosing a
suitable location for new operations. These might include
proximity to market, the cost of land, accessibility and
parking, amenities and recreational facilities, network
services and competition. In this case, the New Delhi
Insurance Company hopes to locate its new call centre
in an urban area where its new recruits have access to
a wide range of amenities and leisure facilities, such as
restaurants, coee bars, sports clubs and cinemas. This is
important because the company will need to attract 2000
well-qualified employees to help sta the call centre.
As the importance of electronic data continues to grow,
businesses will require greater and more capacity.
Also, many businesses operate in an increasingly
global economy. This means that access to continuous
communication systems is vital. These growing
requirements have made connectivity a major concern for
many oce-based businesses, for example. In this case,
the New Delhi Insurance Company is opening a large call
centre. This will require first class communication networks
and that would therefore be a key issue.
5
▶ Comparing the two sites, which one might be most
appropriate for the new call centre?
In this case both Site A and Site B have specific advantages.
One of the main benefits of Site A is the quality of the oce
space available. Site A provides a brand new purpose built
oce block on the outskirts of the city about 3 miles (5 km)
from a large residential area. Since the New Delhi Insurance
Company needs to attract 2000 new workers, proximity to a
large residential area is also attractive.
Information in the table also shows that graduate
unemployment around Site A is 8.6 per cent. Since the
company needs to attract well-qualified and university
educated employees to sta the call centre, the higher
level of graduate unemployment means there will be more
people available to choose from. Site A can also provide
ecient electronic communication connections that are
likely to be important for a call centre. Finally, Site A is
also attractive financially. Monthly rent will be US$400 000
compared to the US$440 000 at Site B. Site A also is
a greenfield site and the government is keen to attract
businesses to the area. Financial support of US$500 000
is being oered to the New Delhi Insurance company if it
chooses to locate there.
Site B also has attractions. This is a city centre site close to
all the amenities. This could be important to the insurance
14 ANSWERS
protecting domestic industries. Many countries have
also simplified their monetary and legal systems to make
international trading easier.
4
▶ Produce an illustrated poster that shows what is meant
by globalisation.
ACTIVITY 2
CASE STUDY: MOBILE PHONES
1
▶ Work out the number of mobile phones sold by
Samsung in 2015, assuming it had a market share of
21.4 per cent.
The number of phones sold by Samsung is given by:
1424 million
___________
100
× 21.4 = 304.736 million
2
▶ What opportunities might globalisation provide for
mobile phone producers such as Samsung, Apple and
Huawei? Give two opportunities in your analysis.
One important opportunity that producers like Samsung,
Apple and Huawei might benefit from is lower costs. If
businesses are able to grow by increasing output to larger
markets, they may be able to lower their costs. This is
because as firms grow they can exploit economies of
scale. These are the cost reductions that firms can enjoy as
they grow. With lower costs businesses will become more
competitive. This might help them to win a larger share of
the market, increase sales and profit margins. In this case,
with sales of over 300 million sets, Samsung should be able
to exploit economies of scale.
Another important benefit of globalisation to such
businesses is access to huge markets. Clearly global
markets are considerably larger than domestic markets. If
a business has access to several billion customers rather
than, say, 40 million, this provides huge opportunities
to increase sales. Therefore, access to global markets
provides growth opportunities for businesses. This should
result in much higher sales revenue and an increase profits.
MULTIPLE CHOICE QUESTIONS
1B, 2A, 3A, 4B
CHAPTER REVIEW
CASE STUDY: THE GLOBAL ONLINE RETAIL MARKET
1
▶ What is meant by the term globalisation?
Globalisation is the growing integration of the world’s
economies.
2
▶ Work out the percentage increase in estimated online
retail sales between 2014 and 2018.
The percentage increase in global online sales is given by:
2489 – 1316
____________
1316
× 100 = 89.1 per cent
3
▶ Suggest two ways in which a government can help to
support the process of globalisation.
Globalisation can only flourish if governments are
committed to it. For example, countries cannot trade
if the governments keep international borders closed.
The six major car producers in the world share 65.69 per
cent of the global car market.
4
▶ Why do you think Japanese car manufacturers have
started to dominate the world market?
One reason why Japanese car manufacturers might have
started to dominate the world economy is because they
produce cars more eciently. Information in the case study
says that the emerging Japanese car producers are leaner,
that is, more ecient. This means they can produce cars
more cheaply and sell them at a lower price. Consequently
they have taken market share from the US producers that
used to dominate the market.
ACTIVITY 1
CASE STUDY: GLOBALISATION AND AIRLINES
1
▶ Work out the percentage increase in passengers carried
between 1980 and 2015.
The number of passengers carried rose from 642 million
to 3441 million between 1980 and 2015. The percentage
increase is given by:
3.441 – 0.642
_____________
0.642
× 100
2.799
______
0.642
× 100 = 435.9 per cent
2
▶ Describe two features of globalisation that have
supported the growth of the airline industry.
One of the features of globalisation is that people are free
to live and work in any country they choose. This has
resulted in more multicultural societies where people from
many dierent nations live and work in the same city. This
increase in the movement of people around the world has
increased demand for transport, such as air travel.
Also, rising trade between nations will increase the need for
business people to meet up. There has been an increase in
the number of business people using airlines as they travel
to meet foreign business colleagues. Globalisation has also
resulted in the increased transportation of goods around
the world. The airline industry will have benefited from this
increase in shipping.
3
▶ What are the reasons for the development of
globalisation? Provide two reasons in your analysis.
There are a number of reasons for the development of
globalisation, for example, developments in technology.
Modern computing allows firms to transfer complex data
instantly to any part of the world. It also means that more
people can work at home, or any other location that they
choose as long as there is an Internet connection. Many
people do not have to be oce-based to do their jobs.
This means it is easier for firms to have operations all over
the world. The Internet also allows consumers to gather
information and buy goods online from firms located in
dierent parts of the world.
A second reason is deregulation around the world. For
example, privatisation has allowed more competition in
many industries. Also, a lot of the barriers to trade have
been removed. An increasing number of economies are
more open and more and more countries have stopped
ANSWERS 15
of countries, many businesses will fear for their survival.
Often, the companies that are able to exploit globalisation
are strong, well resourced and influential. They can use their
resources by investing heavily in marketing, for example, to
move into new markets and put pressure on existing firms
in the industry. In this case, it is suggested that just three
suppliers – Amazon, eBay and Alibaba – could dominate
the global online retail market. If they become too strong
they might put smaller online retailers out of business.
As the pace of globalisation increases, the prospect of
increased competition is the most worrying threat for most
businesses, both large and small.
Also, with the free movement of capital that globalisation
brings, it is possible for a business in one country to take
over a business in another. Consequently, companies may
feel more vulnerable to a takeover since there are a larger
number of predators. If takeovers are hostile it means that
a company can be taken over against its will. It is possible
that Amazon, eBay and Alibaba might grow by taking over
some of their rivals.
To conclude, improvements in online payment systems,
shipping, local transport providers, warehousing and
the removal of trade barriers have all contributed to the
growth in global online sales. Indeed, in just five years
global sales have grown by 89 per cent. The opportunities
that globalisation brings, such as lower costs, access to
wider markets, more labour and reduced tax liabilities, are
substantial. However, online retailers will have to protect
themselves from intense competition. Indeed, the threat
from the ‘big three’ could be a serious threat to the survival
of smaller operators.
CHAPTER 10
CASE STUDY: LG ELECTRONICS
1
▶ What evidence is there to suggest that LG is a
multinational company?
Multinationals are huge business organisations with
production operations in at least two dierent countries. LG
Electronics is a multinational because in 2016 it had 125
global operations and employed 77 000 people worldwide.
It also enjoys massive revenues. For example, in 2016 LG
generated US$55 367 million in sales revenue.
2
▶ Why are multinationals important for the global
economy?
Multinationals are important for the global economy
because of the contribution they make to global output
and employment. Huge corporations like LG Electronics
employ lots of people worldwide. This gives people income
and improves their living standards. Multinationals also pay
taxes, which the host government can spend on public
services, such as water provision and education. Most
multinationals also produce a wide variety of products that
provide consumers with lots of choice and helps to improve
the quality of life.
3
▶ Suggest one possible reason why a company might
become a multinational.
One of the main reasons why businesses become
multinationals is because such large businesses can lower
International trade will be very limited if governments put up
trade barriers. Therefore trade barriers should be removed.
4
▶ Describe how interdependence might aect online
retailers such as Amazon, eBay and Alibaba in the
future.
One of the features of globalisation is interdependence.
This means that events in one economy are likely to aect
other economies. For example, a recession in India might
have an impact on global online retailers, such as Samsung,
eBay and Alibaba. They might experience a loss of sales
in the Indian market. This might be significant because the
Indian market might be very large indeed. The loss of sales
might result in a lower revenues and reduced profits.
5
▶ Assess the opportunities that globalisation might bring
to online retailers in general.
Globalisation is likely to provide a range of opportunities
that businesses, such as online retailers, may be able to
exploit. The most important is probably access to huge
markets. Clearly global markets are considerably larger
than domestic markets. If a business has access to several
billion customers rather than, say, 40 million, this provides
huge opportunities to increase sales. Secondly, if online
retailers are able to grow by increasing output to larger
markets, they may be able to lower their costs. This is
because as firms grow they can exploit economies of scale.
These are the cost reductions that firms can enjoy as they
grow. With lower costs online retailers will become more
competitive. This might help them to win a larger share of
the market, increase sales and profit margins.
Another opportunity that globalisation is likely to provide
results from the free movement of labour. This means that
businesses will have access to a larger pool of workers.
One benefit of this is that if businesses are growing fast
there may be a shortage of domestic labour. Globalisation
means that workers from overseas can help to boost the
labour supply. It also means that businesses have more
people to choose from when recruiting. As a result they may
be able to recruit better quality workers who should help
to improve productivity. A shortage of labour can restrict
the development of a business. Also, a large labour supply
might help to prevent wages from rising. It is often said that
the arrival of larger numbers of foreign workers holds wages
down – particularly in markets where unskilled labour is
needed. In online retailing some of the sta employed are
likely to be unskilled – order picking and packing goods for
example. Lower wages will help businesses to lower their
costs.
One benefit of globalisation is that businesses can choose
where to locate their base. Consequently they can reduce
the amount of tax they pay by locating their head oce in
a country where business taxes are low. Ireland has proved
a popular destination for businesses in recent years since
its rate of corporation tax is just 12.5 per cent (on trading
income). This is well below other rates in the world which
generally greater than 20 per cent.
However, despite the opportunities arising from
globalisation there may also be some threats: the main one
is competition. As more companies around the world try
to sell their goods and services in an increasing number
16 ANSWERS
profit made by Mars resulting from production at the
new Pune plant.
MULTIPLE-CHOICE QUESTIONS
1D, 2A, 3D, 4B
CHAPTER REVIEW
CASE STUDY: MCDONALD’S
1
▶ Suggest two features of a multinational. Use this case
study as an example.
McDonald’s is a giant multinational. It has operations in
over 100 dierent countries employing around 1.8 million
people globally. It has huge assets and turnover. For
example, it turned over US$6620 million in 2015.
McDonald’s has become a multinational through eective
marketing.
2
▶ What does this mean?
Some businesses become multinationals by relying on
eective marketing. McDonald’s is a classic example.
McDonald’s is a low-tech firm that developed a highly
successful brand in the USA and then exploited it globally.
McDonald’s does face fierce competition, from KFC, Wendy
Burger and other fast-food outlets all over the world, for
example. However, McDonalds has probably protected its
brand name with patents and uses heavy advertising and
innovative marketing to attract customers. Most people
will have seen McDonald’s adverts on the television, for
example.
3
▶ What are the benefits to McDonald’s of operating as a
multinational? Give two benefits in your analysis.
McDonald’s, like all multinationals, has access to a much
wider market than companies that focus entirely on
domestic markets. McDonald’s has around 34,000 outlets
around the world and in over 100 countries; even in India,
where most people do not eat beef or pork, there are about
180 restaurants. It is reckoned that each day over 60 million
people worldwide purchase something from McDonald’s.
It is also estimated that they sell more than 75 hamburgers
per second. Multinationals can boost their sales revenues
by selling to global markets. This will help to increase profits
and win market share from competitors.
Also, since multinationals are large companies, they
can exploit economies of scale and enjoy lower costs.
McDonald’s can buy resources at lower prices and borrow
money at cheaper rates, for example. Reducing costs will
help them gain a competitive advantage and put pressure
on their rivals.
4
▶ Assess the benefits to a country/economy when
McDonald’s locates outlets in that country.
When a multinational like McDonald’s locates operations
in a foreign country, that country and its economy is
likely to enjoy a number of benefits. These include an
increase in income and employment. Multinationals
create new jobs in developing countries. For example,
McDonald’s employs over 1.8 million people all over the
world. Local suppliers are also likely to get some work
when a McDonald’s outlet is opened. The extra output
their costs (by exploiting economies of scale). This means
they can make more profit. This will benefit shareholders, as
they are likely to receive higher dividends.
4
▶ In groups, draw up a list of ten businesses that you
think might be multinationals. Then do some online
research to see if you are right.
ACTIVITY 1
CASE STUDY: NIKE
1
▶ What are the benefits to NIKE, Inc. of operating so many
factories around the world?
Nike has control of hundreds of factories in over 40
countries around the world. This means they can supply
markets close to their factories and avoid the cost of
transporting large quantities of stock to buyers from a
single factory. This will help to reduce transport costs
significantly and improve the profitability of the company.
2
▶ How important is a strong brand name to a
multinational like Nike?
Multinationals tend to have well-known brand names.
Nike is a very strong brand name. This is very important
because it helps to raise the profile of the business all over
the world. A high profile in the market and a strong brand
name will help to boost sales. This is because when people
see a recognisable brand like Nike, existing customers are
encouraged and new customers are attracted.
3
▶ How does Nike remain a high profile company?
Since Nike’s brand name is so important to the profile of the
business in the marketplace, it is important to maintain its
strong position. Multinationals, such as Nike, are prepared
continually to reinforce brand names. One way to do this
is to invest heavily in advertising. In this case, Nike spent
US$804 million on advertising in 2016. This was 10 per
cent higher than the previous year. This is a huge amount of
money to spend on advertising alone. However, it helps to
protect the Nike brand and generate global sales. Indeed,
Nike made a profit of US$785 million in 2015.
ACTIVITY 2
CASE STUDY: MARS
1
▶ How might: a the local Pune community and b the
Indian government benefit from Mars’ investment in
Pune?
a When multinationals set up operations overseas, income
in those countries rises. Multinationals create new
jobs. In this case, the new US$160 million Mars factory
is expected to create 200 jobs for people in Pune.
However, there will also be some indirect employment.
Local suppliers are also likely to get work when the Mars
factory is complete. The extra output and employment
generated by Mars will increase economic growth and
raise living standards for people in India, particularly
Pune.
b The profits made by multinationals are taxed by the host
nation. This increases tax revenues for the government in
that country, which can be used to improve government
services. In this case, the Indian government will tax any
ANSWERS 17
particularly developing countries. Provided the activities of
multinationals are monitored, it may be possible to minimise
the disadvantages such as environmental damage and
exploitation.
CHAPTER 11
GETTING STARTED – TOYOTA
Look at Figure 11.1.
1
▶ What are the key changes in Toyota’s regional sales
between 2003 and 2017?
• The total number of cars sold in Asia has risen sharply.
• As a proportion of total sales, Asia is now a more
important market.
• The total number of sales in the Middle East has risen
sharply as a percentage.
• As a proportion, Japan is a slightly smaller market in
2012.
• Sales in Japan have actually fallen.
• As a proportion, America is a slightly smaller market.
• NB Other changes not listed here may be identified.
2
▶ Why is international trade important to Toyota?
Figure 11.1 suggests that international trade is very
important indeed to Toyota. About 75 per cent of its sales
are outside Japan, which suggests that about 80 per cent
of Toyota’s revenue is the result of international sales.
3
▶ How might international trade help a business like
Toyota to grow?
By selling overseas businesses can generate more sales
and more profit. In this case, without international markets,
Toyota would be considerably smaller because around
75 per cent of its revenue is generated outside Japan.
The ability to sell in overseas markets has allowed Toyota
to grow since it was set up in 1937. It is now one of the
biggest corporations in the world.
4
▶ In groups discuss how international trade might aect
you. For example, think about the products you buy and
where they come from.
ACTIVITY 1
CASE STUDY: IMPORTS AND EXPORTS IN KENYA
1
▶ Using examples from the case, distinguish between
exports and imports.
Exports are goods and services sold abroad by businesses.
In this case, some of the main goods sold abroad by
Kenyan businesses are agricultural products and tea.
However, they also sell goods such coee, tobacco, iron
and steel products, textiles, petroleum products and
cement. Some of Kenya’s customers for its exports are the
UK, the Netherlands, Uganda, Tanzania, the United States
and Pakistan.
Imports are goods that are bought from overseas. In
this case, Kenya buys products like machinery and
transportation equipment, motor vehicles, iron and steel
and plastics from abroad.
and employment generated by multinationals such as
McDonald’s will increase economic growth and raise living
standards for people in these countries.
Another benefit they might provide is income for the
government. This is because the profits made by
multinationals are taxed by the host nation. This increases
tax revenue for the government in that country and this can
be used to improve government services such as health
care, roads and other infrastructure.
In some cases, multinationals provide training and work
experience for workers in less developed countries. Also,
governments in less developed countries often spend more
on education to help attract multinationals. This happened
in India where the government invested heavily in IT
education and training. In the case of McDonald’s, it is likely
that training would be given to all of its employees before
they begin work.
The arrival of multinationals like McDonald’s has
encouraged more people to set up businesses in some
countries. Multinationals may provide the skills and
motivation needed for enterprise. For example, a new
multinational may encourage locals to supply services such
as transport, accommodation, maintenance, cleaning and
leisure activities.
However, despite the benefits outlined above,
multinationals are sometimes criticised for their behaviour.
For example, many environmentalists are suspicious of
multinationals because they may cause environmental
damage. One reason is because multinationals are heavily
involved in the extraction industries, such as coal, oil
and gold mining. Mining is often destructive. However,
McDonald’s is not likely to receive such criticism since it is
not a mining company.
Multinationals are sometimes accused of exploitation. For
example, they may pay locals low wages. There is some
evidence in this case of such alleged exploitation. Recently,
McDonald’s has been attacked for paying its workers
low wages. In 2014, it was reported that thousands of
fast-food workers around the world stopped work or held
protests against McDonalds and other fast-food suppliers.
Employee action has been ongoing since 2012 in the
USA where workers are demanding US$15 per hour pay
rates and the right to join a trade union. Indeed, around
200 workers went on strike in New York. Also, in Brazil,
McDonald’s has encountered trade union protests because
of wage theft, poverty-level pay and poor treatment of
pregnant workers. Protests against McDonald’s were also
seen in Japan and South Korea in 2014. However, although
such exploitation may occur, many multinationals have
good records when developing business interests in less
developed countries.
Another possible disadvantage of attracting multinationals
is that the profits made by multinationals abroad are often
repatriated. This means that profits are returned to the
country where the multinational is based. As a result the
host country loses out.
To conclude, many would argue that in the case of
McDonald’s, the benefits of multinationals are greater than
the disadvantages. Higher incomes, new jobs and rising tax
revenues are an attractive proposition for many countries,
18 ANSWERS
cheaply. For example, South Africa buys machinery and
scientific instruments from other countries. This may be
because other countries have the resources to produce
such goods more eciently. It is obviously beneficial to buy
goods from other countries if they are cheaper. South Africa
sells commodities such as gold, diamonds and coal. This is
because the country has a large supply of these resources.
It has more gold, diamonds and coal than it needs for its
own purposes. Consequently, it can generate income by
selling them abroad.
2
▶ What is meant by an invisible export? Use an example
from this case study.
Invisible trade involves the exchange of services. For
example, South Africa has a flourishing tourist industry. It
has some attractive resorts, such as Cape Town, and an
interesting culture. The money South African businesses
get from tourists is recorded as an invisible export.
3
▶ Describe two benefits of international trade to
Alumburg.
One important benefit to Alumburg of international trade is
that it can sell goods to more customers. By expanding into
overseas markets, it can sell more output. These extra sales
will generate more revenue and hopefully help to make the
business more profitable. In this case, Alumburg has started
to enjoy sales in the European market. For example, it has
one order worth ZAR 124 million.
Also, by selling abroad Alumburg will reduce its reliance
on the domestic market. If sales were to decline in South
Africa, it can still generate revenue by selling more in its
growing European markets. Trading overseas in a range of
dierent markets helps businesses like Alumburg to reduce
the amount of risk involved in business.
4
▶ a How might Alumburg be aected by exchange rates?
b If €1 = ZAR 10, how much would a European
customer have to pay in euros for an order worth
ZAR 124 million?
c If the exchange rate rose to €1 = ZAR 18, how might
Alumburg be aected?
a Alumburg will be aected by exchange rates because
it deals with overseas businesses where the currency
is likely to be dierent from that in South Africa. For
example, it sells goods to European countries where the
euro is used. This means that a change in the exchange
rate could aect the price paid by European customers
for Alumburg’s goods.
b A European customer would pay €12.4 million (ZAR 124
million ÷ ZAR 10) for the order.
c Alumburg will benefit from the change in the exchange
rate. The euro has strengthened against the rand: one
euro can now buy ZAR 12 instead of 10. This means that
goods purchased in South Africa will be cheaper. For
example, the ZAR 124 million order for machinery will
now cost €6.89 million (ZAR 124 million ÷ ZAR 18). As
a result, there is likely to be an increase in demand for
Alumburg’s goods because they are relatively cheap for
European customers.
2
▶ Describe the pattern of international trade in Kenya over
the period shown.
Over the time 2001–16 period, both the value of exports
and the value of imports have increased for Kenya. For
example, the value of exports has grown from around KES
17 000 million in 2001 to around KES 50 000 million in 2016.
The value of imports has grown from about KES 20 000
million in 2001 to around KES 120 000 million in 2016 (after
reaching KES 160 000 million a short time before). However,
it is clear that throughout the time period, the value of
imports was always higher than the value of exports. This
means that Kenya has been running a trade deficit (it
imports more than it exports).
3
▶ Why do you think Kenya relies heavily on primary goods
for its exports?
Many African countries rely on the sale of primary goods
for their exports. There may be two reasons for this. One
is because many African states, like Kenya, have a large
supply of certain natural resources that they can export.
Kenya sells agricultural products and tea, for example.
Kenya is fortunate to have the right sort of resources
needed for the production of these goods. A second reason
is because many African states are developing countries.
As a result they are yet to develop manufacturing facilities
and the required skills to export services. Consequently,
they have to rely on the sale of primary goods to earn
foreign currency.
ACTIVITY 2
CASE STUDY: RONNIE MACKAY
1
▶ Work out the price in US dollars of the machines sold by
Ronnie Mackay to the US firm (assume £1 = US$1.50).
The price in dollars is given by:
£3 600 000 × US$1.5 = US$5 400 000
2
▶ Work out the amount paid in pounds by Ronnie Mackay
for the €2.5 million of components bought from
Germany (assume £1 = €1.10).
The sterling price of the German components is given by:
€2.5 million ÷ €1.10 = £2 272 727
3
▶ Work out the amount in euros received by the Spanish
supplier for the £200 000 of materials sold to Ronnie
Mackay (assume £1 = €1.10).
The amount in euros received by the Spanish supplier is
given by:
£200 000 × €1.10 = €220 000
MULTIPLE-CHOICE QUESTIONS
1B, 2A, 3C, 4D
CHAPTER REVIEW
CASE STUDY: ALUMBURG
1
▶ Suggest two reasons why nations trade. Use examples
from this case study.
Countries trade with each other for a number of reasons.
One is to obtain goods that others can produce more
ANSWERS 19
businesses to grow. Lower tax on business profits might
also encourage more people to set up businesses since the
financial rewards will be greater.
ACTIVITY 1
CASE STUDY: THE GREEK ECONOMY
1
▶ Why has the Greek government been forced to
constrain its spending?
The Greek government has been forced to reduce its public
spending because it has built up too much debt. Years
of overspending, together with the impact of the financial
crisis, meant that Greece needed ‘bail outs’ from the EU.
For example, in 2015 Greece owed a total of €323 billion
and had received around €240 billion in ‘bail outs’ from the
EU. Greece has one of the highest debts (as a percentage
of GDP) in the world. Figure 12.3 shows that Greece’s
debt is 175 per cent of its GDP. Only Japan is higher in the
sample of countries shown.
2
▶ How might a government constrain public spending?
Give two ways in your analysis.
In return for the money from the EU, Greece had to raise
taxes and cut public spending. One approach to constraints
in public spending is to cut wages of public sector workers.
In this case, Greece made a 20 per cent cut in public sector
wages. Wages were also reduced by 30 per cent in state-
run enterprises.
Another way to constrain public spending is to cut
departmental budgets. In the case of Greece, there was
lower spending on education, defence, healthcare and
public investment. Finally, cutting state benefits and other
payments to people can reduce spending. Greece was
forced to lower pensions and social security payments as a
condition of the ‘bail out’.
Kostas Samaras runs a private fitness centre in Athens.
3
▶ Discuss the possible impact public spending
constraints might have on his business.
The private fitness centre run by Kostas Samaras is likely to
have suered badly as a result of the constraints in public
spending. With cuts in wages to public sector workers and
lower payments to pensioners and others, many people
would not be able aord the fees for the fitness centre.
Spending on recreational activities is non-essential and
when faced with cuts to disposable income people will react
by cutting down on this type of expenditure. As a result, the
fitness centre may have struggled to make a profit. At worst,
it may have gone out of business due to a lack of revenue.
MULTIPLE-CHOICE QUESTIONS
1D, 2C, 3A, 4B
CHAPTER REVIEW
CASE STUDY: GOVERNMENT INFLUENCES ON BUSINESSES
1
▶ What is meant by the term tari?
A tari is a tax on an import. Taris make imports more
expensive and are therefore designed to reduce demand for
imported goods.
5 ▶ Discuss how the international competitiveness of a
country could be aected by changes in the exchange
rate.
Sustained changes in the exchange rate can have an impact
on the international competitiveness of a country. If the
exchange falls sharply for a long period of time, this means
that all exporters in the country can sell their goods more
cheaply abroad. This can have a positive impact on the
economy of that country. Higher export sales mean more
employment, income and tax revenues for that country. In
this case, the South African exchange rate fell sharply against
the euro from €1 = ZAR 10 to €1 = ZAR 18. This meant that
price of exports from South Africa fell. A European customer
of Alumburg’s saw the price of an order fall from €12.4 million
to €6.89 million. This is a very significant change in price
and should result in more orders for Alumburg. If this fall in
the exchange rate is sustained, South Africa will be more
internationally competitive during this period.
However, a lower exchange rate means that import prices
will rise. This means that consumers will have to pay more
for overseas goods and holidays abroad and businesses
have to meet the rising cost of imported raw materials and
components. In this case South Africans will see steep rises
in the price of imports as a result of their falling exchange rate.
CHAPTER 12
CASE STUDY: BOOSTING THE JAPANESE ECONOMY
1
▶ What evidence is there to suggest that Japan’s
economy is still performing weakly?
The Japanese economy has been performing weakly for
20 years or more. However, the data in the graph shows
that even in the last five years the problem still exists. The
graph shows that total incomes (GDP) in Japan have fallen.
In 2011, GDP was US$6157.5 billion but by 2015 this had
fallen to US$4383.1 billion. This is a poor performance
since most countries would expect incomes to grow over
time as the economy expands.
2
▶ How might the construction industry benefit from the
measures taken by Shinzo Abe?
One of the key measures taken by Shinzo Abe was to invest
money in infrastructure projects such as building bridges,
tunnels and earthquake resistant roads. This would benefit
businesses in the construction industry since they would
get the work needed to implement this measure.
3
▶ How might lower interest rates benefit businesses?
When businesses invest money, to expand or develop
new products, for example, they often need to borrow the
money needed for the extra expenditure. Consequently,
if interest rates are lower it will be cheaper for them to
borrow. This should encourage more businesses to invest
in order to expand since the risk of doing so is reduced with
cheaper loans.
4
▶ How might businesses in general benefit from the
changes in taxation made by Shinzo Abe?
The lower levels of business tax will be welcomed by
businesses. This means they get to keep more of their
profits. Some of this profit is likely to be reinvested to help
20 ANSWERS
attract businesses from overseas to set up operations in the
country. This would help to generate more employment and
income.
The government also plans to hold interest rates at their
current low levels for several years. This will benefit
businesses since the cost of borrowing will be lower. The
purchase of new machines and other capital goods funded
by borrowed money will be encouraged. This will help the
development of businesses and make them more ecient.
Consumer demand will rise because people’s mortgage
payments fall and they have more disposable income. Also,
demand for goods bought with borrowed money will rise
because consumers will find such purchases cheaper.
The introduction of taris on a range of imported shoes,
clothes and fashion accessories will help some businesses.
If imports of these goods become more expensive it
will be easier for domestic producers in these industries
to compete and survive. Therefore clothes and shoe
manufacturers, for example, should enjoy a boost in sales as
their goods become relatively cheap compared to imports.
If the government relaxes some out of date consumer
legislation this could make it easier for businesses to
operate. Legislation generally has a constraining eect
on businesses and can impose costs. For example, if
businesses have to comply with legislation that prevents
them from selling products to people under the age of 21,
this restricts their market.
The government also plans to open negotiations to
join a trade bloc. This could have a positive impact on
businesses. For example, trade blocs provide opportunities
for businesses to specialise in the production of those
goods and services that they can produce more expertly or
at a lower cost.
Belonging to a trade bloc also gives them access to wider
markets and can help to lower costs if economies of scale
can be exploited when sales and output rise. Membership
may also provide protection from large predatory
multinationals from outside the bloc.
To conclude, all these measures can potentially help
businesses, particularly those in the clothes, shoes and
fashion accessories industries where competition has been
reduced with taris on imports. However, the government
is also cutting some expenditure and freezing public sector
pay. These measures will have a negative impact on some
businesses. Therefore the gains mentioned above might be
cancelled out to a certain extent.
CHAPTER 13
CASE STUDY: SOCIAL MEDIA AND BUSINESS
1
▶ Why is social media so important to businesses?
Social media is so important to businesses because of the
enormous number of people that use it. In 2016, it was
reported that every day around 500 million tweets were
posted on Twitter, 4500 million ‘Likes’ were expressed
on Facebook and 95 million photos were uploaded onto
Instagram. Electronic devices, such as smartphones and
tablets, enable people to exchange this wide range of data
instantly and globally. Social media has become a powerful
2
▶ Suggest two practices that consumer legislation might
attempt to prevent.
Consumer legislation is designed to protect consumers and
prevent restrictive practices, such as price fixing, restricting
consumer choice by market sharing and raising barriers to
entry by spending huge amounts of money on advertising,
which smaller companies couldn’t match.
3
▶ Describe one possible impact on businesses of the
20 per cent planned spending cuts on roads and
motorways.
Governments spend large amounts of money on large
infrastructure projects such as motorway construction and
road maintenance. A 20 per cent cut in such spending
is likely to have a negative impact on businesses in the
construction industry. Large contracts would be lost and
some businesses might struggle with reduced revenue. This
could aect profitability and, in some cases, businesses
that are too reliant on government contracts, might go out
of business. Suppliers in the construction industry are also
likely to be hit.
4
▶ Why do businesses prefer lower interest rates? Give at
least two reasons in your analysis.
Businesses prefer interest rates to be lower rather than
higher. This is because high interest rates can damage
business activity. When interest rates rise business costs
will also rise because interest charges on current loans and
overdrafts increase. This will reduce profit.
The purchase of new machines and other capital goods
funded by borrowed money is also discouraged because
it is more expensive. This will slow the development of
businesses and make them less ecient. Consumer
demand will fall because people’s mortgage payments rise
and they have less income. Also, demand for goods bought
with borrowed money will fall because consumers will find
such purchases more expensive.
Changes in the interest rate will have a bigger impact on
those businesses that have lots of debt and those which
produce goods bought with borrowed money.
5
▶ Assess the possible impact of the budgetary measures
designed to help businesses.
It is not uncommon for governments to take measures
to help the business sector. This is because businesses
provide employment, generate income and provide tax
revenues. A flourishing business sector is very good for
the economy. In this case, the government has taken a
number of measures to help businesses. Two of these
relate to taxation. The government planned to increase tax
allowances on investment and would reduce corporation
tax from 25 per cent to 20 per cent. Both of these
measures will help to encourage business investment.
Higher tax allowances on investment means that the cost
of investment is reduced, which would make investment
more attractive. Lower levels of corporation tax means that
businesses will be able to keep more of their profits. This
would provide more funding for investment. If businesses
invest more, in new technology and research and
development for example, they are more likely to remain
competitive and grow. Lower corporation taxes might also
ANSWERS 21
Another attraction of 3D printing is its wide range of
applications. The technology can be used to make
components for cars, airplanes and spacecraft; produce
prosthetics (artificial body parts) for the medical industry
and produce an range of personalised products such
as jewellery, fashion accessories and toys, for example.
Eventually, 3D printing will allow businesses to design, test
and manufacture low-volume or one-o parts both quickly
and cheaply.
However, 3D printers have some disadvantages. They may
cost between US$25 000 and US$50 000, although this is
less than the cost of more sophisticated rapid prototyping
(RP) machines, which can cost between US$100 000 and
US$500 000. The surface on the models is also a little rough
compared to production using RP machines. Also, models
can only be made from one or two materials and there are
only two colours. Although these disadvantages currently
exist, they are not likely to prevent the future success of
3D printing. Like most technology, it will get cheaper and
eventually the disadvantages are likely to be resolved.
ACTIVITY 2
CASE STUDY: ELECTRIC VEHICLES
1
▶ Describe two external factors that have contributed to
the development of EVs.
Growing concern about the damage done to the
environment has encouraged the development of EVs.
The carbon emissions from vehicles contribute to global
warming. Also, the rising cost of oil has made driving more
expensive and consumers may welcome alternatives,
although in 2014 the price of oil fell quite sharply so this
reason may have carried less weight at that time.
2
▶ What are the advantages of EVs for consumers? Give at
least two advantages in your analysis.
EVs will be more environmentally friendly because they will
not release carbon into the atmosphere. Many consumers
will see this as an advantage. The car is also cheap to run.
It is expected to cost about US$0.04 per mile (US$0.06 per
kilometre). Also, the batteries used to power the car can
be recharged in four hours and have a range of 107 miles
(about 170 km) on one charge.
3
▶ Assess the impact global oil prices might have on the
plans of car manufacturers in the future.
Although the price of oil has fallen by over 50 per cent since
2014, according to the graph in Figure 13.2, this may only
be a short-term change. In the future, oil prices might rise
back to previous levels or beyond; this will make EVs even
more attractive. However, even if oil prices remained low,
it is possible that car manufacturers will ‘push’ EVs in the
marketplace. One reason for this is that they have probably
invested heavily in R&D and will want to recover the outlay.
But also, people are still becoming increasingly concerned
about the damage done by emissions to the environment
and therefore might start to buy EVs on a large scale.
MULTIPLE-CHOICE QUESTIONS
1D, 2A, 3D, 4C
phenomenon and it is no surprise that businesses are
making increasing use of it – particularly in the marketing
of their products. Social media has a global reach and even
small businesses can communicate with large numbers of
people all over the world.
2
▶ How might businesses use social media?
The use of social media generates huge amounts of data
about a business’s customers such as their profiles, their
preferences and what they think of products. This is a
valuable resource. Businesses have set up links to some
of these social media platforms and these communication
channels allow them to tell people about their products and
listen to their views. Businesses can use social media to
raise and strengthen brand awareness, run targeted adverts
with real-time results, increase trac on their own websites
and find out what competitors are doing. Businesses spend
huge amounts of money advertising on social media. Figure
13.1 shows that advertising spending on social media is
expected to rise to US$29 910 million in 2016, up from
US$11 360 million in 2013.
3
▶ In groups, discuss your own experiences of interacting
with businesses on social media. Make a list of the
possible benefits of such interaction and present the
information to the rest of the class.
This is an open question and designed for students to
exchange experiences and ideas.
ACTIVITY 1
CASE STUDY: 3D PRINTING
1
▶ Assess the possible benefits to businesses of new
technology like 3D printers. Make a clear judgement in
your evaluation.
Technological development usually brings new
opportunities for businesses. It could be new products that
people have not seen before or new machinery that can be
used to improve eciency. For example, new technology
can help to shorten product life cycles. This is because new
products are quickly developed to replace ones that use
less sophisticated technology. Developments in technology
often mean that businesses can replace labour with capital.
This is welcomed because human resources are often said
to be the most dicult to manage. New technology also
lowers unit costs. Recently, the development of social
media has helped to improve communications between
businesses and customers. This allows businesses to
remain aware of changing consumer needs.
In this case study, new 3D printers are expected to make a
big impact in business. Although 3D printers were invented
in 1986, only in recent years have businesses really
started to exploit the new technology on a commercial
scale. Between 2016 and 2022, the 3D printing market is
expected to grow to US$30 190 million. 3D printers reduce
the need to produce hand built models and prototypes
and are very ecient. They are said to be around ten
times faster than other methods of model production and
five times cheaper. This means that prototypes can be
produced in hours rather than days. This will help to speed
up product development, for example.
22 ANSWERS
one immediate outcome was a fall in the exchange rate.
The value of sterling fell by more than 10 per cent after
the Brexit vote. This means that British exporters may
find it easier to sell goods abroad since exports become
cheaper. In contrast, imports are more expensive so British
businesses using imported raw materials and components,
for example, will face higher costs.
5
▶ Assess whether Aterro Recycling will thrive in the
future.
The future could be bright for Aterro Recycling. The graph in
Figure 13.3 shows that the global recycling market is set to
grow from €14 000 million to €35 000 million between 2011
and 2020. This is an increase of 218 per cent and suggests
that Rohan Gupta and his brother have set up a business in
a rapidly growing market. Also, the speed of technological
development seems to get faster over time. This suggests
that piles of e-waste will grow even faster than at present.
This will obviously benefit Aterro Recycling since it means
there will always be plenty of e-waste to recycle in their
plant. The company’s revenue is growing rapidly and in
2013 reached US$15 million. Aterro Recycling is already
expanding and also has processing plants in Mexico and
Ireland. If this expansion is continued then revenues and
profits should continue to grow.
However, Aterro Recycling will have to be watchful in the
market for new entrants. If the recycling of e-waste appears
to be a highly profitable business activity, new entrants
will enter the market and fight for a share. If very large
companies appear, they might be a threat. For example,
large multinationals with their huge resources might be able
to push Aterro Recycling out of the market if they are not
prepared.
Aterro will also need to remember that future external
factors might aect their activities. For example, a new
government might pass a law that means that Aterro’s
current industrial processes are not environmentally friendly.
This could force them to invest in new plant and equipment.
There might also be an evolution in technological
development where all new products are perhaps more
durable or contain less opportunities for recycling. For
example, a lot of new technological products are being
‘miniaturised’. This might result in a sharp fall in e-waste.
CHAPTER 14
CASE STUDY: DIGI.COM BERHAD (DIGI)
1
▶ What evidence is there to suggest that DiGi is a
successful business?
Evidence in Figures 14.1 and 14.2 suggests that DiGi has
enjoyed some success in the last five years. The company’s
revenue has increased by around 16 per cent over the
time period, from MYR 5954 million in 2011 to MYR 6914
million in 2015. The profit made by the company has also
increased over the same period from MYR 1254 million to
MYR 1723 million – a significant 37.4 per cent increase. In
addition to this, DiGi has won a high profile award. In 2015,
it received the prize for being the ‘Best Managed Public
Company in Asia’ (in its category). Most people would
judge that this represents success.
CHAPTER REVIEW
CASE STUDY: ATERRO RECYCLING
1
▶ What is meant by external factors?
Sometimes businesses have to deal with events and issues
that are completely beyond their control. These external
forces can impact on businesses unexpectedly and usually
mean that businesses have to make changes to the way
they operate. The eects of external factors can be both
positive and negative. They may provide new opportunities
or they may lead to serious costs. For example, in this
case Aterro Recycling is benefitting from an external
factor. Owing to rapid technological developments, there
has been a huge build-up of e-waste around the world
but particularly in India. This has provided a business
opportunity for Rohan.
2
▶ How will Aterro Recycling help to reduce resource
depletion?
Aterro Recycling is making a positive contribution to the
environment by recycling waste. This means that it is
providing valuable resources from materials that have
been discarded and left to deteriorate. The factory uses
processes to extract precious metals like platinum, gold
and selenium from the e-waste. These precious metals
generate revenue for Aterro and ensure that stocks of these
resources are not depleted as quickly as they would be
without recycling.
3
▶ How might developments in technology have impacted
on Aterro Recycling?
Aterro Recycling was set up when Rohan Gupta tried to
throw away an old laptop without harming the environment.
He realised that India did not have a system to deal with
the vast quantities of e-waste being generated. Computers,
laptops, television sets, mobile phones and electronic oce
equipment are examples of e-waste. In one Indian city,
Bangalore, e-waste amounts to 18 000 tonnes per year and
is still growing 20 per cent annually. The growth is driven by
rapid developments in technology with the frequent arrival
of new, updated and attractive electronic products. E-waste
is now the world’s fastest growing and most toxic waste.
Rapid developments in technology provided Rohan Gupta
and his brother with a business opportunity.
Businesses may be aected by political factors from time
to time.
4
▶ Discuss how political factors can aect business
decisions.
Some parts of the world are politically volatile and
businesses have to be cautious if they develop interests
in countries that are politically unstable. For example, few
businesses would have considered setting up operations
in Syria, Western Turkey, Iraq and Libya in 2016 due to
quite severe political instability. However, political factors
can also influence businesses in stable, democratic
countries. The activities of pressure groups can also play
a role influencing business activity. For example, in 2016,
the British people voted to leave the EU. Not many people
would have predicted this and the eects of Brexit, as
it became called, are still to be determined. However,
ANSWERS 23
ACTIVITY 2
CASE STUDY: LOSADA PAELLA
1
▶ What was the size of Losada Paella in 2016 according to
EU definitions?
According to the EU definitions of size, in 2016, Losada
Paella was a small company. This is because turnover was
less than €10 million and greater than €2 million.
2
▶ In what year did the size of Losada Paella change?
2008.
3
▶ Do you think Losada Paella has been successful?
In the first few years of trading, Losada Paella enjoyed
healthy improvements in revenue from €98 000 in 2002 to
€200 000 in 2008. However, in 2008 Marta set up a website
for the business and started to sell her products online. This
was an enormous success because by 2016 turnover had
risen to €2.4 million. This represents an increase of 1100
per cent!
MULTIPLE-CHOICE QUESTIONS
1B, 2A, 3C, 4D
CHAPTER REVIEW
CASE STUDY: QETIC LATEX PLC
1
▶ Work out the total number of people employed by Qetic
Latex.
180 = 16% of the total workforce at Qetic. Therefore the
total workforce is given by: 180 ÷ 0.16 = 1125 workers
2
▶ Is Qetic a small, medium-sized or large business?
According to the EU definitions of business size, a firm that
employs over 249 is considered large. Qetic employs a total
of 1125 workers and is therefore large according to this
measure.
3
▶ Discuss how consumer satisfaction might be used to
measure the success of a business like Qetic Latex.
Many businesses will look at how consumers’ needs and
wants have been satisfied when measuring success. If its
customer service is good, a successful business will find
that it has loyal customers and a growing customer base.
In this case, Qetic Latex sells goods to other businesses.
However, it will still be important to meet their needs.
Many businesses are becoming more customer-focused
and making eorts to get feedback from their customers.
Qetic Latex may have developed a relationship with their
business customers over time. If these relationships are
strong and customers are loyal then Qetic may consider
that it is being successful. Also, in 2016, the company won
two high profile industry awards for the quality of its latex
products. This suggests that customer satisfaction might
be high.
Finally, an increasing number of businesses use customer
surveys to gather information about customer satisfaction.
The information they gather can be analysed and used to
assess customer satisfaction levels. If customer satisfaction
levels rise over a period of time then the company will
consider it is being successful.
2
▶ In pairs, discuss what other information might be
helpful to measure the success of DiGi. Draw up a list
and present the information to the rest of the class.
When measuring the success of a business, it is often
helpful to make comparisons with other businesses
in the industry. For example, if other firms in the
telecommunications industry enjoyed much bigger
increases in turnover and profits than DiGi, then its
performance is not so impressive. It is also important to
take into account other factors such as market conditions.
If the improvements in revenue and profit were made during
a recession, for example, then the figures are perhaps even
better than they suggest.
ACTIVITY 1
CASE STUDY: ALUMINIUM CANS
1
▶ What is the change in CanKing’s revenue between 2010
and 2015?
CanKing revenue 2010
9 per cent × US$450 million = US$40.5 million
CanKing revenue 2015
8 per cent × US$560 million = US$44.8 million
Change in revenue = US$4.3 million (increase)
2
▶ Do you think CanKing has been successful over the
time period?
CanKing has increased its revenue from US$40.5 million
in 2010 to US$44.8 million in 2015. This is an increase
of 10.6 per cent over the time period. The owners may
consider this successful. However, it depends on whether
CanKing set any revenue targets for the time period. This
would provide a basis for comparison. CanKing’s market
share is down slightly from 9 per cent to 8 per cent but it
still occupies fourth place in the market. Arguably, CanKing
has been successful since revenue has increased and its
market share is down just a little – its market position is
unchanged.
3
▶ Which company has been most successful over the
time period? Explain your answer.
It appears that Singh Holdings has been the most
successful business over the time period. It has become
the market leader at the expense of Zcan. In 2010, Zcan
had 34 per cent of the market with Singh Holdings having
22 per cent. By 2015, Singh Holdings had increased its
share to 29 per cent while Zcan saw its share fall to 27 per
cent. Singh Holdings also saw its revenue jump from US$99
million to US$162.4 million. This is a significant increase of
64 per cent.
(Note: It is calculated from the information in the pie charts
and case study material)
4
▶ Why might it be dicult to measure success using
market share?
Measuring market share might be dicult. Information
would be needed about the size of the total market and the
revenues of the main suppliers in that market. Some of this
information might be dicult to obtain. Therefore, using
the value of market shares to measure success may not be
easy.
24 ANSWERS
they would ‘bring the company to its knees’ if the workers
weren’t deployed in another part of the organisation or paid
reasonable compensation for their loss of employment.
This would suggest that employees are far from happy and
would judge that the company is not being successful.
To conclude, up until the recent internal conflict, the
business appeared to be successful. Certainly shareholders
were enjoying rising and regular dividends. Qetic also won
two high profile industry awards for the quality of its latex
products. This was the result of its commitment to product
development and investment in a US$50 million research
centre in 2015, an investment that presumably created
new jobs. However, at the moment, the future success of
the business is in question. Some ugly scenes at the main
plant were broadcast on television and it was reported that
shareholders were very worried about the ongoing conflict.
This concern was reflected in the share price, which fell 12
per cent the day after the broadcast. If the internal conflict
is not resolved quickly the performance and success of the
business is likely to be at risk.
CHAPTER 15
CASE STUDY: THE PEPPERTAP
1
▶ Why did the PepperTap fail?
Businesses may fail for a number of reasons. In this case,
there are three specific reasons. First, the PepperTap had
problems with some of its partner retailers. They failed
to adopt the necessary technology to keep consumer
information up-to-date – this meant that customers were
not getting the quality of service they needed. Second, the
PepperTap was oering high discounts to try and enter
the market – this quickly used up the company’s cash.
Finally, the cost of maintaining high stang levels to meet
delivery commitments was also expensive. The PepperTap
promised to deliver groceries within two hours of an order
being placed. This was far quicker than any rivals. However,
Navneet and his team felt that they had an advantage over
their competitors in making their delivery operation more
ecient, since some of them had previously worked in this
area, and costs would eventually fall. As it turned out, the
PepperTap were unable to find fast enough solutions to
these problems and they ran out of cash.
2
▶ What measures might have been taken to avoid
failure?
Initially, perhaps the PepperTap should have avoided
using retailers that were not able to adopt the necessary
technology. This may have slowed down the growth of the
business but quality would have been maintained. They
could also have reduced the discounts they were oering,
which cost them a lot of money. Instead of oering 20 per
cent, perhaps they could have oered just 10 per cent.
Finally, their two-hour delivery promise was too challenging.
Although they were probably trying to get a competitive
edge, it is still necessary to be realistic and set targets
which are achievable.
3
▶ In pairs, make a list of things that you think might cause
a business to fail. Try to decide which one of these is
most likely to be a threat.
4
▶ Describe how shareholders might measure the success
of a business.
Most shareholders in public limited companies will have
bought shares with the aim of making money, consequently
they will focus on dividend payments and share prices.
Over time, shareholders would want both dividend
payments and share prices to rise. In many countries, large
financial institutions such as insurance providers, pension
funds and investment companies own shares. These
groups tend to be very focused on short-term returns.
They like to see regular dividend growth and if dividend
payments were frozen or cut they might see this as a sign
of failure or weakness. In their view, successful companies
are those that increase dividends each year. In this case,
Qetic is 66 per cent owned by institutional shareholders.
Consequently, there is likely to be pressure on Qetic to
deliver regular dividend growth.
5
▶ Assess the success of Qetic Latex. Make a clear
judgement in your evaluation.
Most Qetic shareholders would argue that the business
has been successful. They would point to Figure 14.8 that
shows that dividends per share have risen from US$1.10
in 2011 to US$1.70 in 2015. This is an increase of 54.5 per
cent over the time period. Most investors would consider
this a fair return on their investment. Dividends have grown
steadily over the whole time period. There have not been
any ‘dividend holidays’ (a year where a company pays no
dividends) or dividend reductions. However, shareholders
also look at share prices since they can make a profit if
they buy shares and sell them later when the price has
risen. In this case, the share price fell sharply in 2016. It fell
by 12 per cent in one day immediately after the television
broadcast showing some disturbances at the Qetic factory.
This would be a cause for concern if the fall were not
reversed soon afterwards.
Employees in the business may dier in their view about
Qetic’s success. The needs of employees may be dierent
from those of the shareholders. Employees depend on
businesses for their livelihood. Most employees have no
other sources of income and rely on their wages. Like the
owners, employees want the business to be successful. If
a business is growing and profitable, employees are likely
to get higher wages, more benefits and perhaps a bonus.
They will also feel more secure in their jobs. However,
employees have other needs that must be met. They will
need to be trained so that they can do their jobs properly.
They want good working conditions, opportunities to
interact with other employees, fair and honest treatment
and opportunities for promotion. Generally, employees
will want to maximise their financial rewards and welfare.
If the business they work for is able to satisfy all, or most
of these needs, then in their opinion the business will be
judged as successful. In this case, in order to improve
productivity, one of the moulding sections at Qetic was
due for automation. This meant that 180 sta would be
laid o. The announcement of the job cuts was received
very badly by the Qetic employees. Two workers protested
by chaining themselves to the main gates preventing the
movement of suppliers’ vehicles. A week later the situation
escalated when a representative of the workers said that
ANSWERS 25
b Another possible reason for Kingfisher’s collapse
was high operating costs. If costs are too high then a
business needs to charge more to make a profit. This
might result in a loss of trade to low-cost competitors. A
firm’s costs might be higher than rivals for a number of
reasons. For example, businesses may be wasteful. In
this case, there is evidence that Kingfisher was wasteful.
Kingfisher chose to oer customers some high quality
inflight entertainment, which was not usual for domestic
flights. For example, a deal with DishTV to provide live
inflight entertainment meant that 50 or so customised
dishes had to be installed on each aircraft. Passengers
were also oered free headphones. In addition,
Kingfisher invested in some very expensive advertising
campaigns, featuring Deepika Padukone, one of
the highest paid actors in the world. It also oered
passengers access to exclusive lounges and luxury
meals. These costs, and others, made it very dicult for
Kingfisher to make a profit.
3
▶ Describe one external factor that might have
contributed to the downfall of Kingfisher.
There may have been some factors beyond the control
of Kingfisher that contributed to the failure. Economic
conditions were poor for several years after 2008 and
the airline was caught out by high fuel prices and some
discretionary taxes. However, it might be argued that most
of Kingfisher’s troubles were internal.
MULTIPLE-CHOICE QUESTIONS
1A, 2B, 3C, 4A
CHAPTER REVIEW
CASE STUDY: DANDENONG SOFT FURNISHINGS
1
▶ Suggest two possible causes of cash flow problems.
Cash flow problems might be caused by overtrading,
investing too much in fixed assets, allowing too much
credit, over-borrowing, seasonal factors, unforeseen
expenditure, external factors and poor financial
management.
2
▶ How can rising debt aect a business like Dandenong
Soft Furnishings?
When a business borrows money, it has to pay interest to
the lender. Consequently, when businesses borrow more
and more, the size of their interest payments rises along
with the size of their debt. This means that costs rise and
profits fall. In this case, following the purchase of Marigold
Furnishings and investment in an expensive television
advertising campaign, Dandenong Soft Furnishings
borrowed A$10 million. This meant that the business had to
make regular interest payments until the loan was repaid.
This had a negative eect on the financial performance of
the business because soon after it started to lose money.
3
▶ Assess the reasons why Dandenong Soft Furnishings
failed. Make a clear judgement in your evaluation.
A number of factors led to the failure of Dandenong
Soft Furnishings. Once Charlie had retired from the
business and appointed his daughter, Agnes, as CEO,
its performance seemed to decline. It could be argued
ACTIVITY 1
CASE STUDY: VALTREX CONSTRUCTION
1
▶ What is meant by overtrading?
Overtrading is likely to occur when a business tries to grow
too quickly. Cash and other liquid resources get tied up
financing the expansion of the business and eventually the
cash runs out. Without cash a business cannot trade.
2
▶ How is it possible for a profitable business, like Valtrex
Construction, to fail?
It is possible for a profitable business to collapse if it runs
out of cash. One situation in which this might happen is
when a business is overtrading. If a business grows too
quickly, it uses up liquid resources to fund the growth.
This is exactly what happened to Valtrex. Up to 2014,
the business had grown to US$30 million sales and was
trading profitably. However, the directors decided to grow
the business further and during 2015 recorded sales of
US$45 million. The company appeared to be growing too
quickly, resources became strained and it ran out of cash.
Profitable businesses can also fail if they get a large
bad debt, if they are faced with a large and unexpected
payment or if they oer trade credit that is too generous.
Eective cash flow management is important. One of the
main reasons for business failures, both profitable and
unprofitable, is cash shortage.
ACTIVITY 2
CASE STUDY: KINGFISHER AIRLINES
1
▶ What was the value of Kingfisher’s debt in US dollars
when it collapsed in 2012 (assume US$1 = Rs66)?
Kingfisher’s debt was Rs7000 crores
(1 crore = Rs10 million).
Therefore 7000 crores = Rs70,000,000,000.
In US dollars this will be 70 000 000 000 ÷ 66 =
1 060 606 100, that is, US$1600 million.
2
▶ How might: a poor management and b high costs have
contributed to the failure of Kingfisher Airlines?
a Senior managers and business leaders have been known
to bring down companies almost single-handedly. A
business might lose its competitive edge in the market
because the leader makes a mistake. This could be
the result of poor decision making or a failure to make
urgent changes. In this case, it has been suggested that
Kingfisher Airlines lacked a strong leader. There was a
frequent change of personal at the top, which meant that
the business was unstable. The owner of the airline, Vijay
Mallya, never took an active role in running the business
and eventually the airline was given to his son, Siddharth
Mallya, as an 18th birthday present. It was alleged that
Siddharth did not have the experience to run such a
large and complex business organisation. One option
would have been to make Gopinath (ex-founder of Air
Deccan) the CEO. However, this opportunity was missed
and, in general, the company lacked the expertise and
experience of a specialist manager in the airline industry.
26 ANSWERS
Email
• Deepika Mendis – Head of Finance, Portland Carriers
• Celia
• Request for a sales report to be sent.
2
▶ Produce an illustrated poster that shows the dierent
ways you communicate with your friends.
ACTIVITY 1
CASE STUDY: ELMART
1
▶ Who is the sender of the information in this example?
The sender is Roberto Navarro in this case.
2
▶ What is meant by vertical communication? (Use an
example from the case study.)
Vertical communication takes place when messages are
passed up and down the organisational hierarchy in a
business. In this case, the communication is upwards.
Roberto Navarro is sending information to the finance
director, a superior higher up the organisational structure.
3
▶ What sort of information is being sent in this example?
Some financial information is being sent in this example.
Table 16.1 contains financial information about the
performance of the stores in May 2016. The table has been
sent to the finance director who is writing a report for a
board meeting.
4
▶ Why is upward communication helpful?
There are a number of reasons why upward communication
is helpful. It may help managers to understand the views
and needs of subordinates and make them aware of
potential problems. It also helps sta to feel that they are
valued and provides managers with information that can
be used to make decisions. Finally, upward communication
can show whether or not downward communication has
been eective.
ACTIVITY 2
CASE STUDY: STAFF COMMUNICATION
1
▶ Is this case an example of internal or external
communication?
The use of a noticeboard by Yuri, the section manager, to
inform all sta in his section to attend a short meeting is
an example of internal communication. It is communication
that takes place inside the business.
2
▶ What is meant by ‘on the grapevine’?
The grapevine is an informal method of communication. It
involves people passing on information unocially. In this
case, Yuri is relying on the grapevine to a certain extent.
He is hoping that sta who fail to see his message on
the noticeboard will pick up the brief details from those
members of sta who have.
3
▶ Do you think using a noticeboard was an appropriate
method of communication in this case?
The use of a noticeboard is not really an appropriate
method of communication for the type of message that
was being sent in this case. The attendance at the meeting
that despite Agnes’s academic qualifications in business
management, she was a poor leader and made a number
of key errors in the running of the business. One was to
buy rival chain, Marigold Furnishings, for A$ 6.3 million. The
price was far too high and Dandenong already had stores
competing successfully with Marigold in more than one-
half of the locations. This was perhaps a foolish purchase.
Another error was to invest heavily in a national television
advertising campaign just after the purchase. This stretched
the company financially forcing them to borrow A$ 10
million. However, worse was to come.
The marketing manager wrote a report for Agnes explaining
the importance of online selling and that Dandenong
should consider very seriously setting up an online facility.
However, Agnes was strongly opposed to this. She thought
that the main strength of Dandenong business model
was the quality of customer service given in the stores.
Dandenong had always invested heavily in specialised
customer service training. This may have been one of
Agnes’s biggest mistakes.
In 2010, the company had started to lose money due
to falling sales. Agnes thought that the way to improve
performance, and prevent cash flow problems, was to open
stores in Western Australia, a region in which Dandenong
was not represented. This strategy needed investment of A$
5 million. Agnes drew up a business plan and approached
a number of lenders for finance. However, not a single bank
or investor was interested. They felt that online selling was
the way forward and Dandenong had ‘missed the boat’.
Too many businesses were running successful online
businesses oering quality furniture at much lower prices
than Dandenong. If Agnes had acted on the advice of her
marketing manager the business may have survived.
In September 2014, Dandenong closed down owing banks
A$ 9.5 million. Agnes told a reporter that the business
had failed due to a lack of finance. This was not really the
reason. The business did lack finance but it lacked finance
for a reason. It had failed to innovate by selling online and
no one was interested in funding a failing business. To
conclude, it could be argued that the business failed mainly
because of poor leadership. It was Agnes, the leader, who
refused to listen and innovate in 2010 and it was Agnes that
decided to buy Marigold and invest in television advertising.
These were very costly mistakes for the business.
CHAPTER 16
CASE STUDY: BUSINESS PRESS CONFERENCE
CASE STUDY: INTERNAL EMAIL
1
▶ Name the a sender, b receiver(s) and c message in
the two examples of communication shown in the
photograph and Figure 16.1.
Press conference
• The board of directors
• Members of the press – journalists, television, radio and
other members of the media
• Information relating to the company’s financial
performance for the year.
ANSWERS 27
communication between workers. ChoccoMate could
enjoy some specific benefits if it uses social media. It is
possible to gather personal data from huge numbers of
people. ChoccoMate can find out who they are, what
they like and what they think of their products. Customer
feedback can be obtained instantly from all over the world
and all this is free. Businesses are using social media to
connect and engage directly with their customers. For
example, 65 per cent of small or local businesses said they
used social media to communicate with customers, 50 per
cent of Facebook users under the age of 35 responded to
recommendations about products online and 51 per cent of
Facebook users and 64 per cent of Twitter users are more
likely to buy products they see advertised on their social
media platforms. Also the graph in Figure 16.5 shows the
enormous numbers of people that use the dierent social
media platforms. For example, over 1700 million people
used Facebook in 2015. This would give ChoccoMate
access to a large proportion of both its current customers
and also potential new customers.
ChoccoMate could use social media to run targeted
adverts. For example, with a Facebook advert, ChoccoMate
can target customers based on location, age, interests,
behaviours, and connections. It will also be possible to track
and measure the performance of adverts on social media.
ChoccoMate could also provide better customer service.
Around 67 per cent of customers use social media to
get their customer service. People expect to be able to
contact a business 24/7. A study by Aberdeen Group,
an IT research company, shows that businesses oering
customer service using social media enjoyed bigger annual
financial gains (7.5 per cent growth) compared with those
without (2.9 per cent).
Finally, ChoccoMate could increase website trac by
directing interested customers from a social platform
using a link and also monitor the behaviour of competitors.
For example, tools are available that allow a business to
‘flag-up’ key words used on social media such as ‘new
chocolate bar’.
However, despite these powerful benefits there are some
possible disadvantages of using social media. For example,
any negative feedback posted by customers would be there
for all to see. So while social media can be an extremely
powerful tool for building the reputation of the business, it
can also damage the reputation of a business. It also takes
time to develop a presence on social media. ChoccoMate
would have to decide which employees would be involved
in monitoring comments and recording, gathering and
presenting the huge amount of data that would be generated.
There would also be a need to decide what information and
other content should be fed onto the social media stream.
Finally, although it is free at the very basic level, costs would
be incurred such as the time it takes sta to manage media
presence and gather and present data in a meaningful way.
To conclude, Ju Kin Fung would probably argue that
the benefits of using social media as a means of
communication with customers are far greater than the
disadvantages. He might say, for example, that negative
feedback can be used in a positive way – by solving
problems and making improvements.
provided evidence of this: 11 people were absent. Either
they had not spotted the message on the board (because it
was too messy), had not read any notices on the board, had
not heard about the meeting on the grapevine or did not
want to come to the meeting. The main problem of using
noticeboards for important messages is that the method is
unreliable and open to abuse.
MULTIPLE-CHOICE QUESTIONS
1A, 2C, 3A, 4B
CHAPTER REVIEW
CASE STUDY: CHOCCOMATE
1
▶ What is meant by the term external communication?
External communication involves an exchange of
information between the business and those outside it such
as customers, investors or the authorities.
2
▶ Describe one benefit of using a presentation as a
means of communication in this case.
Using a presentation to communicate is a method of face-
to-face communication. In this case, Ju Kin Fung is going
to give a presentation to the board of directors that aims
to show the benefits to ChoccoMate of using social media
as a means of communication. A presentation is a formal
method of communication and will be taken very seriously.
This is an advantage. A presentation will also provide an
opportunity for the receivers, the board of directors in this
case, to ask questions and express their views on the
matter. This is because face-to-face communication allows
immediate feedback.
3
▶ Why is good communication important in business?
Give at least two reasons in your analysis.
Good communication is crucial in business because poor
communication can be very expensive. Poor internal
communication may cause eciency and profitability
to suer. It can lead to mistakes, wasted resources and
confusion. Poor internal communication can also lead
to workers misunderstanding what they have to do. This
might aect their motivation and increase sta turnover and
absence, for example. Poor internal communication can
also result in a duplication of eort – where two people do
the same task, for example.
Poor external communication can make the business look
foolish and may cost it money. For example, if prices on a
company’s website are set too low by mistake, this could
lead to a flood of online orders. These may have to be
accepted at a loss. Poor communication with outsiders
could also damage the image of the company.
Finally, if important information is slow to reach its
destination, there may be a delay in decision making.
This could result in a business missing out on a valuable
opportunity or damage relations with an important customer.
4
▶ Assess the benefits to ChoccoMate of using social
media as a means of communication.
An increasing number of businesses are using social media
as a means of communication. Many firms use it to help
market products, and more recently, to encourage more
28 ANSWERS
2 ▶ Why is clear communication very important on a farm?
One of the problems that can result from ineective
communication is a rise in work-related accidents.
Unfortunately, in agriculture, accidents and fatalities are
not uncommon. In 2015, there were 22 fatalities on farms in
New Zealand. This was over one-half of the total in all work-
related fatalities in the country. If communication about the
dangers of working in agriculture could be improved, there
might be a fall in accidents and fatalities. It is easy to see
why clear communication in agriculture is very important –
it could save lives.
3
▶ Discuss the possible barriers to communication on
farms. Include at least two barriers in your analysis.
In New Zealand, a few people each year are killed as a
result of a work-related quad bike accident. In addition,
around 60 people each year are seriously injured. A
spokesman for a Health and Safety Agency said ‘The
problem is people just don’t understand how dangerous
these bikes are. The message just hasn’t got across. Far
too many people ride these bikes without helmets. This
is so dangerous. These bikes also have limitations – they
can’t go everywhere. We need to improve communications
here and make sure everyone knows the dangers before
they ever take o on one.’
Clearly, there must be some barriers to communication
if fatalities are still occurring. One communication
barrier might be that messages are unclear. Perhaps
the instructions for using quad bikes are not adequately
communicated or misunderstood. Another barrier is that
instructions may be ignored. People listening to instructions
may be poor listeners or uninterested in listening. There
may also be a culture of poor communications on farms
in New Zealand, however, this is only speculation since
there is no information in the case to suggest this. Finally,
perhaps the wrong medium is being used to communicate
the dangers of quad bikes and other farm dangers. For
example, are there clear warning signs on quad bikes that
insist riders should wear helmets?
ACTIVITY 2
CASE STUDY: POOR COMMUNICATION
1
▶ Discuss the appropriateness of the method used
by Hutchinson Ports Australia to communicate the
information stated in the case.
Most people would agree that the use of a text to inform
workers that they are about to lose their jobs is highly
inappropriate, due to the restrictions on how much can
be written in this type of communication. Redundancy
notices are highly sensitive messages and need to be
communicated with care, which requires more than the
140-character limit of text messages. An employer might be
better advised to use face-to-face communication, where
a sensitive attitude can be used when giving the message.
Alternatively, a formal written letter might be written to
each individual, with plenty of notice before the end of the
employment contract.
CHAPTER 17
CASE STUDY: PARAPOWERCORP
1
▶ Describe the communication problems ParapowerCorp
customers are experiencing.
ParapowerCorp has been criticised in a national newspaper
for the poor quality of its customer service. It seems that
one of the main problems is its inability to communicate
with customers. For example, it could take up to 20 minutes
to get a telephone call through to the organisation. This
would be very frustrating for callers with urgent problems or
queries. Frustration levels would also rise if ParapowerCorp
does not answer queries sent in by email; according to
the report, emails are sometimes left unanswered. Sta
at ParapowerCorp also had poor knowledge of customer
details and often blamed computer problems for their
lack of information. Finally, it was reported that some sta
were rude when talking to customers; sta rudeness is
unacceptable and cannot be justified.
2
▶ Discuss the impact these communication problems
might have on ParapowerCorp.
Poor communications between a business and its
customers can have adverse consequences. In this case,
the report claimed that around 39 per cent of the customers
they spoke with when gathering information for the report
had now switched suppliers. This loss of custom to rivals is
a serious matter for ParapowerCorp. If it were to continue,
revenue and profit could both fall.
3
▶ Suggest how these communication problems might be
overcome.
First, the communication problems at ParapowerCorp
suggest that the customer services department is under-
resourced. If it takes so long to answer the telephone and
emails are being left unanswered this suggests that there
are not enough employees to deal with the workload.
Therefore ParapowerCorp should take on more workers in
the department. Second, if sta cannot access customer
details eectively this suggests that either records are not
up-to-date or sta are not able to access them. Information
in the case suggests that computer problems are the cause
here. If this is the case, then the IT systems need to be
updated or repaired. Finally, there is no excuse for rudeness
to customers. Sta guilty of this may be disciplined or
retrained. If sta are frustrated because they cannot do their
jobs eectively, then they should find other ways of dealing
with their frustration.
ACTIVITY 1
CASE STUDY: WORK-RELATED FATALITIES
1
▶ Work out the percentage of work-related fatalities in
agriculture as a proportion of the total in 2015.
The percentage of work-related fatalities as a proportion of
the total in 2015 is given by:
22
___
43
× 100 = 51.2 per cent
ANSWERS 29
4 ▶ Assess the measures Mendis Holdings might take to
improve the communications culture at the business.
Make a clear judgement in your evaluation.
In addition to the specific communication problems
already mentioned at Mendis Holdings, it is also suggested
in the case that the communications culture in the
business is poor. A spokesperson for the employees said
‘Communications problems here go much deeper than
“wordy reports” and “edgy telephone conversations”. The
communication culture at the business is depressing. There
is no formal upward communication channel, the chain
of command is too long, the senior management team is
secretive and fail to make their goals and plans clear and
people are developing a silo mentality. The oce layout
does not help communication either – everyone works in
their own little ‘cubby hole.’ This view does seem critical,
and if true, will have a negative impact on the performance
of the business. Consequently, measures need to be taken
to improve the communications culture.
One immediate issue is the layout of the oce. If people are
working in ‘cubby holes’ the layout needs to be changed.
The physical barriers between sta need to be removed
so that people can see each other and work in a more
open environment. This should help to improve internal
communications.
Mendis Holdings might also need to introduce some
formal communication systems. This is because there is
no formal upward communication channel. It might mean,
for example, that more meetings have to be held so that
sta can express their views, ideas and concerns to senior
managers in an open way. It might also be necessary to
end the separation of workers according to job status and
perhaps introduce an ‘open door’ policy where sta are
encouraged to communicate with their seniors.
It might also be necessary to make the organisation
flatter. It states in the case that the chain of command
is too long. Therefore Mendis could remove some of the
management levels in the organisation. A shorter chain of
command means that information can pass through an
organisation more quickly. Flatter organisations also lead to
empowerment where employees take more responsibility
for their own work. This can help to improve motivation.
Finally, it is clear that workers are worried about the
rumours of a merger and the possible loss of jobs. It is very
important for the senior managers or the board to clarify
the situation. The representative accuses them of being
too secretive. A business must avoid withholding important
information. Generally, Mendis Holdings will need to create
a climate of openness and trust in order to improve the
communications culture.
CHAPTER 18
CASE STUDY: ANKARA HAULAGE COMPANY (AHC)
CASE STUDY: KARACHI COATINGS
1
▶ What is the purpose of the Ankara Haulage Company
advert?
The main purpose of the advert shown here is to attract
applications from HGV drivers for driving vacancies at
Ankara Haulage Company.
2
▶ Describe the possible impact on the business of this
method of communication.
The use of texting to sack employees is unprofessional
and insensitive. It is likely to have a negative eect on
Hutchinson Ports Australia. The sackings were reported
in the media so this would have reflected badly on the
company in the view of the general public. Such negative
publicity could damage the image of the company and
result in lost customers. Regular customers might want to
distance themselves from a company engaging in such a
practice. It is also possible that the motivation of the other
workers would be negatively aected. They might fear for
their jobs. Finally, in the case it says that industrial action
was taken. There were protests and two physical barriers
were put up. This would have aected Hutchinson’s port
operations and possibly caused some expensive disruption.
MULTIPLE-CHOICE QUESTIONS
1B, 2C, 3D, 4B
CHAPTER REVIEW
CASE STUDY: MENDIS HOLDINGS
1
▶ Describe what is meant by a barrier to communication.
Communication is only eective if the receiver understands
the message sent. Things that get in the way of good
communication are called communication barriers.
2
▶ Suggest two examples of barriers to communication at
Mendis Holdings.
A number of communication barriers can be identified in
the case of Mendis Holdings, including sta with poor
communication skills, a long chain of command, poor
oce layout (partitions between workers – that is, physical
barriers) and possibly a culture of poor communication in
the whole organisation.
3
▶ Discuss how Mendis Holdings might improve the
communications skills of its sta.
If it is true, and sta at Mendis Holdings lack
communication skills, then it is important to ensure that
sta acquire the necessary skills as soon as possible. One
way is to train sta in communication. For example, sta
can be trained to improve verbal communication skills
when dealing with customers on the telephone. This might
prevent the apparent anger and rudeness that was detected
by at least one client. Sta might be sent on specialised
courses to improve their telephone manner.
Some complaints centred on the quality of report
writing. Two clients mentioned that some of the reports
it was receiving were too long and contained what they
considered to be too much jargon. One way of removing
the barriers created by poorly written communication is
to provide standard company reports, which can be used
by all sta. Templates for letters and reports to customers
can be stored easily in IT systems. Generally, written
communication should be ‘short and simple’ whenever
possible and avoid the use of jargon; sta should be taught
this skill. Finally, in the future, Mendis Holdings should also
ensure that it recruits sta with good communication skills.
30 ANSWERS
ACTIVITY 2
CASE STUDY: PALLABI GARMENTS LTD
1
▶ What are the advantages to the business of recruiting
internally for the job of purchasing manager?
In this case, the job of purchasing manager is being filled
internally. The new purchasing manager will be recruited
from the existing purchasing team. It is expected that
three suitable people from the department will apply. The
advantages of internal recruitment are that it is cheaper
because it saves on advertising. Internal recruits are also
familiar with company policy and working practices. In
addition, sta may be more motivated if they know there
is a chance of promotion. Finally, the ability, personality,
attitude and potential of the person appointed will be more
predictable. This reduces the risk of recruitment.
During interviews at Pallabi Garments Ltd, open
questions are used.
2
▶ What is meant by an open question?
An open question is one that requires an answer of more
than just one word, such as yes or no. An example, might
be ‘Why have you applied for this particular job?’
3
▶ What is the main advantage of using open questions in
interviews?
Open questions encourage interviewees to talk more. This
helps the interviewers to gather more information about the
applicant. When an applicant opens up and talks in more
detail, it is easier to assess their personality. It may also be
possible to judge their attitudes, opinions and commitment.
4
▶ Discuss how the vacancies for the machinists might be
advertised.
The jobs for machinists could be advertised in a number of
ways. They might be advertised by word-of-mouth. Current
employees may tell their friends and relatives about the
jobs. The jobs may also be advertised in a local newspaper
or on the company website. Finally, Pallabi Garments Ltd
may use an employment agency or rely on a list of past
applications, which have been stored by the business. All of
these methods are suitable for jobs like machinists.
MULTIPLE-CHOICE QUESTIONS
1C, 2B, 3B, 4B
CHAPTER REVIEW
CASE STUDY: ONLINE JOB ADVERTISEMENT
1
▶ What type of employment will be used to fill the vacancy
advertised?
The advert states that the job is full time. Therefore a full-
time employee is sought.
2
▶ What sort of person is the business trying to attract?
Ankara Haulage Company is trying to attract experienced
Class 1 HGV drivers. Drivers must be prepared to travel
overseas, work weekends (1 in every 3), stay out 3 nights
in 5. The company would also prefer drivers who can
speak some English and have some forklift truck driving
experience.
3
▶ How much pay is the company oering successful
applicants?
The Ankara Haulage Company is paying TRY 500 per week
with an extra TRY 30 a night for staying out overnight.
4
▶ How does Karachi Coatings recruit many of its
managers?
Karachi Coatings recruits a lot of its managers internally.
This means they try to promote people who already work at
the company.
5
▶ Suggest two advantages of recruiting managers in this
way.
There are some advantages of recruiting people from within
the business. For example, promoting from within is safer.
The people who are appointed are known to the business.
As Umar Iqbal, the human resources manager at Karachi
Coatings, says ‘We know what these people are like and
what their potential is. They are proven workers. It is also
cheaper and quicker to recruit in this way.’
ACTIVITY 1
CASE STUDY: NUJUMBA CEMENT
1
▶ Draw up a job description for the production worker
jobs at Nujumba Cement.
Job Title: Production Worker
General role: Work as a member of the production team.
Responsibilities and duties:
– Heavy manual work
– Handling heavy machinery
– Driving a fork lift truck
– Cleaning machinery and equipment
– Heavy lifting in a harsh working environment
Pay: Rs400 per hour
Hours and conditions of work:
– 40 hours per week
– 4 weeks holiday
– Free protective clothing
– Free lunches
2
▶ Discuss two reasons why a business draws up a job
description.
The main purpose of a job description is to show clearly
what is expected of an employee. Extracts from it are likely
to be used in a job advert. It might also be used during
appraisal to see how well an employee has performed in
relation to what was expected of them.
ANSWERS 31
even overseas, may apply for the job. A new person may
be very talented and have some fresh ideas that could help
the business become more competitive. However, external
recruitment is more expensive than internal recruitment
and there is an element of risk because the new employee
is unknown to the business. In this case, the job is quite a
senior position. It is probably wise to recruit externally to
get the best possible person for the job.
CHAPTER 19
CASE STUDY: AGE DISCRIMINATION IN A RESTAURANT
1
▶ How does this case illustrate the need for protection at
work?
In this case an employer has mistreated an employee.
Without legal protection, a larger number of employees
might be subject to exploitation, abuse, discrimination or ill
treatment.
2
▶ What do you think is meant by age discrimination?
Age discrimination occurs when a business makes a
specific decision on grounds of age. In this case, an
employee, despite having a perfectly good employment
record, was told on his 65th birthday that he would no
longer be allowed to work full time. He was also told, after
returning from long-term leave in 2011, that the company
did not employ people over the age of 65. However, he
was oered a part-time post. This is an example of age
discrimination.
3
▶ How might laws aimed at preventing age discrimination
aect a business?
To start with, if a business does not follow legislation
they can be fined. It will cost them money. In this case,
two Thai restaurants near Brisbane, Australia, were fined
around AS$30 000 for their treatment of an employee.
Laws preventing age discrimination will also mean that
businesses must take measures to ensure that they do
not break the law. For example, they would have to take
care with job adverts to ensure that they do not exclude
applicants on grounds of age.
ACTIVITY 1
CASE STUDY: WORKPLACE DISCRIMINATION
1
▶ What is meant by racial discrimination?
Racial discrimination occurs when a business makes a
decision on the grounds of a person’s colour, race, ethnic
origin, religion or nationality. Such discrimination is illegal
in most countries around the world. Businesses should not
show preference to any particular race, colour, nationality,
ethnic origin or religion when oering a promotion, for
example.
2
▶ Describe the possible evidence that suggests racial
discrimination has taken place in this case.
In this case, co-owners of Khaira Enterprises Ltd, illegally
discriminated against 55 African tree planters at a work
camp in Golden, Canada. The 55 workers, who originated
from Democratic Republic of Congo, Burundi, Guinea
and Rwanda, were treated extremely poorly compared to
2
▶ Draw up a simple person specification for the job of
sales and marketing director. (You do not need to show
whether details are essential or desirable).
Qualifications and
Education
Degree in appropriate field
Experience Minimum five years experience in
similar role
Has carried out competitor analysis
Experienced in new business
development
Knows how to develop marketing
plans
Communication
skills
Strong presentation skills
Monthly report writing skills
Leadership skills
Other skills Strong analytical skills
Motivational skills
Ability to chair meetings
Personal attributes Ability to travel regularly and work
in the UK
Ability to develop a team
3
▶ How might a business use a person specification?
The main purpose of the person specification is to help with
the shortlisting process. Applications that do not match the
person specification can be left out of consideration. This
might save a lot of time in the shortlisting process.
4
▶ Suggest two important details that should be included
in any job advertisement.
Some of the important details likely to be included in a job
advert are:
job title
name and address of employer
brief details of the job description
skills, qualifications and work experience required for the
job
Applicants for the job shown have to apply with a CV.
5
▶ What is meant by a CV?
CV stands for curriculum vitae. It is used by jobseekers to
apply for jobs when an application form is not provided. It
contains personal details, qualifications, experience, names
of referees, hobbies and reasons why they are suitable for
the job.
6
▶ Assess whether the business was right to recruit
externally for this post.
External recruitment is when a business recruits new
employees from outside the business. There are some
advantages of external recruitment. For example, a
business will have a much larger pool of potential
employees to choose from when attracting a new employee
from outside the business. In this case, the job has been
advertised on the Internet. People all over the country, or
32 ANSWERS
diculties and allow more time for training.
In this case, Starbucks had not made reasonable
adjustments for Meseret’s disability, and had discriminated
against her because of the eects of her dyslexia,
according to the tribunal. However, after the incident
Starbucks said they were having discussions with Meseret
about making adjustments to help her cope. Starbucks also
made a statement which said the company was committed
to having a ‘diverse and inclusive workforce’ that make
people ‘feel welcome and comfortable in our stores’.
MULTIPLE-CHOICE QUESTIONS
1C, 2B, 3A, 4B
CHAPTER REVIEW
CASE STUDY: GENDER DISCRIMINATION AND THE
MINIMUM WAGE
1
▶ What is meant by the term equal opportunities?
Equal opportunities are where everyone has the same
chance. In business, it may mean, for example, that
everyone has the same chance of selection or promotion.
People should also get the same pay rates whether they are
male or female providing they are doing the same job.
2
▶ Discuss two measures a business might have to take
to ensure that gender discrimination is avoided in the
workplace.
Legislation designed to prevent gender discrimination
is likely to have an impact on businesses. For example,
advertisements for jobs must not specify a particular
gender. A business is not allowed to target job adverts
at either a man or a woman. Both genders must have an
equal opportunity in appointments. Secondly, references
to work titles in job adverts must be genderless. For
example, a business could not advertise for a ‘policeman’
or a ‘salesman’ – the job titles must be ‘police ocer’ or
‘salesperson’. Businesses should also avoid promoting
people in the workplace on grounds of gender.
3
▶ Assess whether discrimination is the reason for so
few women sitting on the board of directors at top
companies.
Some statistics relating to women at work suggest some
serious imbalances. For example, in the UK, despite the
Equal Pay Act 1970, there is an 18 per cent pay dierence
between men and women. Women are also more likely to
be employed in low paid jobs and less than 10 per cent
of executive directors at the top FTSE 100 companies are
female.
The cause of these gender imbalances may be partly or
entirely due to discrimination. However, other reasons
may also explain the gender ‘gaps’. For example, one of
the reasons why there are so few women on the board of
directors is because the number of women available to
take up such posts is very small. Another reason is that
women at the level below the board may not be as well-
connected as men at this level, possibly because talented
females tend to stay with the same employer for longer.
Consequently, they do not get the chance to meet as many
dierent business professionals. Also, once women leave
their non-African colleagues. For example, the bathroom
facilities at the campsite were terrible. One worker as
similar to those on ships transporting slaves described the
conditions. Toilet paper was not provided and most of the
55 workers were subjected to racial insults There was also
evidence that wages were not given to the African workers
while South Asian and Caucasian white workers were paid
in full. There is clear evidence of racial discrimination here,
as the court found.
3
▶ How does this case illustrate the protection given by the
law against discrimination?
Without legal protection, the 55 African workers in this
case may not have received any payment. The BC Human
Rights Tribunal in Canada found that the co-owners of
Khaira Enterprises Ltd illegally discriminated against a
group of workers on the grounds of race or colour. As
a result, the owners were ordered to pay each of the
employees US$10 000 plus US$1000 for every month
that they had worked at Khaira. The total payment came
to around US$600 000. Therefore as a result of the law
the African workers eventually received some money. The
ruling and fine might also serve as a warning to any other
businesses in Canada that they will be punished if found to
be discriminating on the grounds of race, religion, colour,
nationality or ethnic origin.
4
▶ Design a poster that could be used in the workplace to
warn employees that racial discrimination is forbidden.
ACTIVITY 2
CASE STUDY: DISABILITY DISCRIMINATION
1
▶ How was the employee in this case a victim of disability
discrimination?
In this case, Starbucks was found guilty of disability
discrimination. Starbucks accused one of their employees,
Meseret Kumulchew, of falsifying documents. One
of Meseret’s duties during her shift was to record the
temperature of fridges and water at specific times.
However, she was accused of falsifying the documents
after mistakenly entering wrong information. Meseret, who
has dyslexia, said that she had always made it known to
her employer that she had diculties reading, writing and
telling the time and had to be shown how to do tasks.
Following the accusation made by Starbucks, Meseret was
given a less important job at her branch and told to retrain.
This was discriminatory action and left the employee feeling
that she may kill herself.
2
▶ Describe the possible measures businesses like
Starbucks might have to take to help avoid disability
discrimination.
Generally, employers are now obliged to make reasonable
adjustments to the workplace to help accommodate
disabled employees. For example, they may need to
improve access to the workplace by widening doors and
providing ramps for wheelchairs. They may need to permit
disabled workers time to attend medical appointments such
as physiotherapy sessions. They may also need to alter
equipment such as telephones and computers (software
and hardware) to accommodate those with sight or hearing
ANSWERS 33
However, there may be some benefits to businesses of a
minimum wage. People on low pay may be better motivated
and more productive when they receive a pay rise resulting
from the introduction of a minimum wage. Low wage
earners across the nation will have more disposable income
so demand for many goods and services will rise. This
will help drive up sales and profits for some businesses.
Finally, businesses may experience lower levels of sta
absence and better reliability. This might be because low
paid workers, who often have to have more than one job to
survive, will be more committed to a single employer.
To conclude, in this case the new minimum wage is
considerably higher than the current wage being paid. As
a result the business might be negatively aected – it will
depend on the profitability of the business.
CHAPTER 20
CASE STUDY: ALBERTA FARMING CORPORATION (AFC)
1
▶ Work out the average annual fatality rate in agriculture
in Canada between 2005 and 2014.
Average = total fatalities ÷ number of years = 177 ÷ 10 =
17.7 fatalities per year
2
▶ Why is training in health and safety is so important to
AFC?
Training in health and safety is important in most
occupations. However, in agriculture it is very important.
This is because farms are dangerous environments for
workers. The graph in Figure 20.1 shows that an average
of 17.7 workers are killed on farms every year. Of these
70.9 per cent of these fatalities result from the use of farm
machinery. If the lives of workers are at risk, then training in
health and safety must be very important.
3
▶ Suggest three other reasons for training at AFC.
Other reasons for training at AFC include:
• learning how to operate the dierent machines on the
farm so that workers can operate them eectively and
avoid causing damage to machines
• improving employee flexibility by training workers in a
wide range of dierent jobs
• training people how to do their jobs properly so that
workers are confident in themselves – this will improve
motivation and productivity
• keeping workers up to date with new developments and
new machinery.
4
▶ Carry out some research (online if possible) to see
what training is oered by some large businesses in
your area. Try to decide which business oers the best
‘training package’.
ACTIVITY 1
CASE STUDY: GOOGLE
1
▶ What is the purpose of induction training?
The main purpose of induction training is to help new
recruits become more comfortable and familiar with their
new surroundings.
corporate life to have children, they are sometimes not
readily welcomed back. Plus, many of the very talented
women become disappointed with companies and prefer
to start their own businesses. Finally, it may be that male
dominated boards prefer to recruit men like themselves for
image reasons.
Unfortunately it may be that gender discrimination is
dicult to prove, or perhaps much discrimination goes
unreported. The extent of the gender imbalances in many
countries does suggest that governments should be
concerned.
A business pays 1340 of its employees US$9 per hour.
Each of these employees works 40 hours per week and is
paid for 52 weeks of the year.
4
▶ Work out the financial impact on the business if the
government introduces a minimum wage of US$14
perhour.
Before the minimum wage the annual wage bill would have
been:
US$9 × 1340 × 40 × 52 = US$25 084 800
After the introduction of the minimum wage the annual
wage bill would be:
US$14 × 1340 × 40 × 52 = US$39 020 800
This represents an increase of US$13 936 000
5
▶ Assess the likely impact on businesses, such as the
case in 4, of the introduction of a minimum wage.
One reason why governments introduce minimum wage
laws is to help low paid and disadvantaged workers. It
is argued that people such as women, ethnic minorities
and low-income families benefit from minimum wages.
For example, it is estimated that if the UK introduces a
mandatory living wage (very similar to a minimum wage)
female workers will benefit more. This is shown in Figure
19.2 where the impact of new minimum wage (the living
wage) is expected to benefit both full-time and part-time
female employees more than men.
In many countries, minimum wages are often part of a
broad strategy to end poverty. In the USA, increasing
numbers of poor families have to rely on their earnings from
low-paying jobs. Therefore, a minimum wage increase will
help reduce poverty. The minimum wage raises the wages
of low-income workers in general, not just those below
the ocial poverty line. Many families move in and out of
poverty, and therefore near-poor families will also benefit.
An increase in the minimum wage, or the introduction of
a new minimum wage, is likely to raise the annual wage
bill for a business. In this case, the business is paying
its workers US$9 per hour before the introduction of
the minimum wage. The wage rate rises to US$14 per
hour when the minimum wage law is introduced. As a
result the annual wage bill rises from US$25 084 800 to
US$39 020 800 – this represents an increase of US$13 936
000. This is a significant increase – more than 50 per cent.
This could have very negative eects on the finances of
the business. The business may have to lay o workers if it
cannot aord to pay the higher hourly rate. Alternatively, the
business may have to take a cut in profit.
34 ANSWERS
3 ▶ Discuss two benefits to Emirates of using o-the-job
training.
One of the main advantages of o-the-job training is that
mistakes made by new and inexperienced recruits do not
have any impact on the quality of the product. In this case,
if one of the cabin crew trainees drops a service tray into
a passenger’s lap, there will be no impact on the airline.
This is because there will be no ‘real’ passengers since the
training takes place in simulators. This can help Emirates to
maintain a high quality service.
Another benefit is that trainees can learn good practice and
not be distracted from their training by the work itself. New
recruits can focus on learning and not worry about whether
their training work will impact on the airline. Trainees may
be more relaxed and learn more quickly.
MULTIPLE-CHOICE QUESTIONS
1C, 2A, 3C, 4D
CHAPTER REVIEW
CASE STUDY: PESHAWAR PRINTWORKS
1
▶ Why is training needed at Peshawar Printworks?
Training is needed at Peshawar Printworks because some
new technology has been introduced. There have been
some problems and the production manager thinks they
can be overcome with proper training. Without training, the
new system will take up to six more months before it is up
and running.
2
▶ Discuss two reasons why businesses like Peshawar
Printworks may be reluctant to spend on training.
Training is often very expensive. As a result, some
businesses are unwilling to invest in training. In this case,
the CEO of Peshawar Printworks seems unwilling to invest
in training – one of the main reasons is the cost. The CEO
complains that the amount needed by the production
manager, US$120 000, is double the annual training budget
for the entire company. Another reason that explains the
unwillingness is that when workers leave, the training
has been wasted. The CEO says ‘I know that training is
necessary but it’s so expensive. Plus, what happens when
the trained workers leave and go and work for someone
else?’ However, the production manager points out that
Peshawar Printworks often employ workers that have
been trained elsewhere. Finally, it appears from what the
CEO says that he does not value all types of training.
For example, he refers to o-the-job training as ‘training
holidays’. This may be another reason for not wanting to
meet the high cost of training.
3
▶ What are the advantages of on-the-job training to
Peshawar Printworks? Discuss two advantages in your
analysis.
On-the-job training means that workers are trained in
the workplace while the job is being done. One of the
main advantages of this is that output is being produced.
Although the productivity of a worker may be low while
being trained, at least it is positive and the trainee is making
a contribution to output. In this case, if training is given
on-the-job at least some printed materials will be produced
that can be sold to help generate revenue.
2
▶ Describe what new recruits might learn during the
induction programme at Google.
During an induction programme, new recruits are likely to
get a tour of the whole workplace, an introduction to senior
sta, some health and safety training and learn about the
company’s history, aims and objectives. Recruits are also
likely to learn about company policies such as dress code,
disciplinary procedures and holidays. They will also get an
introduction to the new job and meet their work colleagues.
New software engineers at Google are called Nooglers.
They attend an induction programme designed to introduce
new recruits to the ‘Google Way’. The programme starts
with a series of lectures and presentations about things like
Google’s culture, mission and products.
On the second day, Nooglers get involved in technical
exercises designed to teach recruits about developing at
Google. Google uses training tutorials called Codelabs.
These teach recruits about internal technologies that
help employees do their jobs. Examples include Bigtable,
Megastore, Protocol Buers and Unit Testing. These
tutorials last for about a week and this is how recruits start
to learn about their new job.
3
▶ Discuss why induction training is so important to
businesses like Google.
If businesses fail to provide adequate induction training,
sta may feel anxious. This might lead to poor productivity,
and at worst, sta may leave because they have not settled.
At Google, induction is important because recruits have to
understand the ‘Google way’. Most of the information given
out is highly confidential and the importance of secrecy
and sensitive treatment of information is emphasised.
The importance of change is also a priority at Google. All
employees are expected to be excited by change since
much of their work is involved in future technology and
new products. Most of the lectures and presentations
for Nooglers are given by senior sta at Google. This
suggests that Google attaches a great deal of importance
to induction.
ACTIVITY 2
CASE STUDY: EMIRATES
1
▶ What is meant by the term o-the-job training?
O-the-job training is training that takes place away from
the work area. In the case of Emirates, all new cabin crew
recruits get o-the-training in a special cabin crew training
centre.
2
▶ Describe the method of training used at Emirates.
New recruits at Emirates attend a seven-week initial training
course. The training is given o-the-job in a specialised
training centre. The course provides a mixture of both
theoretical and practical elements. To make the practical
training realistic, it takes place in machines that simulate
the movement of all aircraft types. This helps to give new
recruits a taste of the experience required to deliver the
best possible customer service to passengers. The training
course addresses a range of work related issues such
as safety and emergency procedures, first aid, service,
uniform, fitness and nutrition and security procedures.
ANSWERS 35
• She never really wanted to work in banking – she wanted
to go to medical school.
• She is being paid less than one of her close colleagues.
• She may be less driven than other people.
(NB. Other answers may be appropriate.)
2
▶ Why is motivation important to businesses?
If workers are motivated, they likely to be more productive,
they will be committed and work harder. For example, Anju
is well motivated. She is always on time, reliable, enjoys
solving problems and often gives up her own time to help
new recruits. Businesses will benefit from having a well-
motivated workforce. It will be easier to attract and retain
sta and profits should be higher.
3
▶ In pairs, discuss whether you are a well-motivated
individual. Provide a list of evidence to support your view.
ACTIVITY 1
CASE STUDY: ANDRIS ZJUZINS
1
▶ What is meant by a well-motivated employee?
Motivation is the desire to achieve a goal. If employees are
well motivated, they will be driven and have the desire to
reach aims that have been set by employers. They will be
productive and committed to the business.
2 ▶ What evidence in Figure 21.1 suggests that workers
were poorly motivated?
The information in the bar charts shows that worker
motivation at Andris Zjuzins was falling between 2010 and
2015. For example, sta turnover rose from 28 per cent
to 33 per cent and the rate of sta absence rose from 6.7
per cent to 7.4 per cent. At the same time productivity at
the business fell from 1230 to 1200 units per worker. In
2014 and 2015, after the factory had been re-equipped,
worker motivation seemed to improve. For example, labour
productivity rose to 1530 units per worker.
3
▶ Describe the possible eect on the working
environment if workers are not motivated.
If workers are poorly motivated the working environment
and atmosphere is likely to be unpleasant. Workers are
less likely to be cheerful, polite, supportive and positive.
This can be quite important because many workers have
to deal with customers. A business may lose customers if
the attitudes of poorly motivated workers create a negative
impression. In this case, it has been dicult for Andris
Zjuzins to attract and retain sta. This may be because the
working environment is being negatively aected by low
morale and poor motivation.
ACTIVITY 2
CASE STUDY: INCHCAPE
1
▶ What is meant by hygiene factors in Herzberg’s two-
factor theory?
Frederick Herzberg said that certain factors could leave
workers dissatisfied. He called these hygiene factors and
explained that if things like pay, working conditions and
job security were insucient then employees would be
dissatisfied which would lead to poor motivation.
The training received on-the-job is also relevant. This is
because it is directly connected to the job. There is no
simulation. In this case, workers will be trained on the
new digital technology that is actually installed at the print
works. On-the-job training is also generally cheaper and
easier to organise than o-the-job training.
4
▶ Assess the benefits of training to Peshawar Printworks.
Training has a number of important benefits to businesses
like Peshawar Printworks. The main reason for training is
to provide workers with the skills and knowledge needed
to do their jobs eectively. As a result, their motivation
and productivity should increase. However, there are
some other specific benefits. Workers will need training if
there are changes that might aect their jobs. In this case,
some new digital technology has been introduced and
employees need more training so that they can operate
the new technology. Training might also make a business
more flexible. In this case, Kamran informs the CEO that
if all 30 sta are trained the workforce is more flexible and
the company will not have to spend on training again for
quite a while. Peshawar might also benefit from investment
in training if workers feel more secure and can to do their
job eectively. Not being able to do a job properly will be
a source of frustration and dissatisfaction for workers.
It is also argued that training can be used to motivate
sta. Finally, training is usually needed when workers are
promoted. At each stage of the promotion process, sta will
need to learn new skills and methods; this allows them to
handle the dierent duties and new responsibilities.
However, training does have some limitations. For example,
training can be very expensive. Businesses will have to
pay training providers if they use external training. Even
internal training can be expensive if specialist training sta
and equipment is needed. In this case, the CEO is worried
about the cost. Some businesses might argue that training
is limited because workers do not really start learning how
to do the job until they actually arrive at their workstations.
In some jobs, the actual work environment, with all its
stresses and distractions, cannot be easily simulated. Also,
if workers are involved in o-the-job training they will not be
producing anything. This will result in lower output levels.
The CEO in this case is against o-the-job training, which
he regards as a ‘training holiday’. Finally, businesses are
likely to get very frustrated if employees leave and join a
rival company after they have invested in training them. The
CEO makes this point but Kamran says ‘… we often get
workers that have been trained elsewhere’.
To conclude, training is felt necessary at Peshawar
Printworks because the CEO has oered US$60 000 to cover
the cost of extra training. Clearly, the CEO believes that the
benefits of training are greater than the costs and limitations.
CHAPTER 21
CASE STUDY: ANJU SHARMA AND JAYA DHAR
1
▶ Suggest two possible reasons why Jaya is poorly
motivated.
Jaya may be poorly motivated for a number of reasons.
• She may find the work boring, unfulfilling or insuciently
challenging.
36 ANSWERS
good reputation for employing a happy and well-motivated
workforce. Chess has done this by winning an award for
the Best Employer in Cheshire. This will encourage people
to apply for jobs in the first place. It might also attract good
employees from rivals.
Well-motivated employees will work harder. They are likely to
take more pride in their work, complete tasks quickly and feel
that their jobs are important. As a result, they will produce
higher levels of output. Businesses also need workers to
cooperate. For example, Chess organises employees into
teams. Therefore, if workers do not cooperate with each
other, teamwork will be disrupted. At worse, conflict might
result if a team member is uncooperative. However, well-
motivated employees are likely to be cooperative, so a
good team spirit is likely to develop which will help to raise
productivity. Certainly this is the case at Chess.
3
▶ Suggest two examples of Herzberg’s motivational
factors as used at Chess.
Recognition is one motivational factor evident at Chess.
Sta have a ‘gimme 5 praise page’ on a website which
enables them to award each other virtual thanks.
Employees are also encouraged to vote for each other to
win employee of the month.
Personal development is another motivational factor. Chess
invests in training for sta. For example, it launched a
customer service academy for new recruits. It also delivered
customer passion training that teaches Chess teams how to
deal with dierent customer personality types.
4
▶ Assess whether Chess satisfies any of the employees’
needs outlined by Maslow’s hierarchy. Make a clear
judgement in your evaluation.
Maslow identified a hierarchy of needs. At the bottom are
the physiological needs – these are basic human needs
such as food, water and shelter. Businesses can satisfy
these needs by providing workers with adequate pay. In this
case, it can be assumed that Chess pays their workforce
adequately. For example, only 12 per cent of workers left
the company last year. This is a very low sta turnover rate.
The second level of needs identified by Maslow was safety
and security – this means that people need protection
from any form of danger and physical and psychological
threats. Businesses can satisfy these needs by providing a
safe working environment. In this case, Chess provides a
very pleasant working environment. For example, it is well
designed with plenty of space, light, plants and fish tanks.
The third level of needs in Maslow’s hierarchy is social
needs – this means that people are social animals and need
love, aection, trust and acceptance. They also want to
belong to a recognised group. Chess makes extensive use
of teamwork. For example, it delivered customer passion
training that teaches Chess teams how to deal with dierent
customer personality types. Teamwork is important at
Chess and in a sta survey 92 per cent of employees said
that teammates were helpful. Also, Chess encourages
its sta to interact socially. For example, the company’s
summer conference closed with a sociable evening out
and last September Chess included employees’ families
and friends in festivals with a barbecue, bouncy castle and
football-focused entertainment.
2
▶ Describe some examples of Herzberg’s hygiene factors
oered by Inchcape.
Inchcape appears to provide its employees with a wide
range of benefits. Some examples include holiday benefits
(where sta get more holidays the longer they work at the
company) and a save as you earn scheme (where sta can
buy discounted company shares). Other benefits include
a customer introduction award, an advantage scheme and
childcare vouchers. These are all examples of hygiene
factors. According to Herzberg, these alone will not serve to
motivate sta.
3
▶ Assess whether Inchcape manages to meet the social
needs of sta, as described by Maslow.
Maslow pointed out that people are social animals and
need aection, trust, acceptance and to be cared for. They
also want to belong to a recognised group. Employers can
help to meet these needs by providing opportunities for
sta to communicate with colleagues and work in teams.
Businesses could also provide sta with social facilities
such as a sta canteen.
In this case Inchcape’s employees get involved in charity
events where groups can interact socially.
For example, one employee, Rachael Mullard, said ‘The
charity work is lovely. Last year we did the Three Peaks
Challenge. It’s a change and nice to know you are doing
something good. We were in a minibus for three days with
the general manager, bundled up, freezing cold, aching and
stinking, but we felt the love.’
MULTIPLE-CHOICE QUESTIONS
1C, 2B, 3A, 4D
CHAPTER REVIEW
CASE STUDY: CHESS
1
▶ Why do people need to work?
People go to work because it provides the means to satisfy
many human needs. For example, the main reason why
people go to work is to earn money to pay for food, drink,
clothes and shelter. However, work can meet other needs
because employers provide opportunities for workers
to meet new people, develop skills and reach their full
potential. Without work most people would feel aimless,
bored, dissatisfied, unfulfilled and lonely.
2
▶ Discuss two reasons why sta motivation is important
to businesses such as Chess.
If a business has a well-motivated workforce, it will perform
better. People will be happier in the workplace, the working
environment will be more agreeable and labour productivity
will be higher. Attracting sta will be easier if workers are
better motivated. If a business can recruit highly capable
and reliable workers, it might gain a competitive edge on its
rivals. If employees are motivated, the working environment
and atmosphere is likely to be pleasant. Workers are more
likely to be cheerful, polite, supportive and positive. This is
important when interviewees are being shown around the
work environment. Good candidates will be more likely to
accept the job if they are impressed with what they see and
feel about the workplace. A business might also develop a
ANSWERS 37
4 ▶ Describe one possible disadvantage of this method.
One problem with this method of motivation is that Johanna
might not have the skills to carry out the extra tasks and
responsibilities. As a result, she might get frustrated which
could have a negative impact on her performance. Another
problem is that after she becomes familiar with these extra
duties she may get bored again and want to leave.
5
▶ In pairs, decide what would motivate you to work
harder at school. Draw up a list of these things in order
of priority.
ACTIVITY 1
CASE STUDY: TOP RANK SERVICE CENTRE
One of the mechanics worked 50 hours during a busy
week in September.
1
▶ Work out the gross pay earned by this mechanic.
Gross pay = US$20 × 35 + US$30 × 15 = US$700 +
US$450 = US$1150
2
▶ What is meant by the term salary?
Some employees are paid a salary, which is expressed in
annual terms and paid monthly. Salaries are usually paid to
non-manual workers. Salaried workers are not always paid
overtime. In this case, the manager of the Top Rank Service
centre is paid an annual salary of US$62 000.
3
▶ Describe one possible reason why the Top Rank Service
Centre chooses not to use piece rates as a method of
remuneration.
Some workers are paid according to how much they
produce. This system is called piece rate. This system
helps to motivate workers and businesses are likely to
‘get more’ out of their employees. However, one problem
with piece rates is that they are not suitable if work cannot
be measured. In this case, it may be dicult to measure
the work done in standard units. This is because many of
the tasks completed by mechanics may be dierent. For
example, one mechanic may spend time carrying out a
routine service while another might be fitting a new engine.
These tasks are dierent and cannot be easily compared or
measured. Therefore piece rates would probably not work
in this business.
ACTIVITY 2
CASE STUDY: TATA STEEL
1
▶ What is meant by the term job rotation?
Job rotation involves training employees in a range of
dierent tasks and then switching them from one task to
another over a period of time – perhaps a day or a week.
2
▶ Discuss one possible advantage of job rotation to a
Tata Steel and b its employees.
Tata Steel will benefit from job rotation because workers
will be better motivated. They are less likely to get bored
and therefore they will be more productive. This will help
produce more output leading to more revenue and higher
profit.
The next level of needs is esteem needs. This means that
people need to be recognised and respected and their
achievements praised. They also want self-respect and
self-esteem. At Chess, sta have a ‘gimme 5 praise page’
on a website that enables them to award each other virtual
thanks. Employees are also encouraged to vote for each
other to win employee of the month. David Pollock also
mentioned recognition in his statement at the awards night.
He said ‘It is with great pride that Chess has been named
as Employer of the Year, we continually strive to create a
happy working environment where everyone can progress
their career, develop knowledge and skill, gain reward and
recognition and maximise their potential.’
Finally, at the top of Maslow’s hierarchy is self-actualisation
– this means that people need to reach their full potential
and feel some fulfilment in what they do. At Chess,
there is evidence that suggests that workers feel some
fulfilment. Employees attend monthly ‘ideas lunches’ where
employees meet, chat, bond and eat together. They are
encouraged to be creative and come up with ideas.
Generally, information in the case suggests that Chess
makes every eort to meet the needs of employees.
Evidence of this commitment is the awards won for Best
Employer.
CHAPTER 22
CASE STUDY: GVS LIFE ASSURANCE
CASE STUDY: THE HERNING CARE HOME
1
▶ Work out how much Nasir would earn if he sold 11
insurance policies during a month.
Nasir would earn US$2600 (that is, 11 × US$200 +
US$400).
2
▶ Suggest one advantage and one disadvantage of the
payment system used by GVS Life Assurance.
Sta at GVS Life Assurance are likely to sell more policies
with this system. This is because there is a significant
financial incentive to sell. They get US$200 for every policy
sold. This should mean that sales of policies will be high and
the company only incurs labour costs if a sale is made (apart
from the low basic salary of US$400). However, some sta
are not happy with the system. They lack the charm and
selling skills possessed by Nasir and are often under a great
deal of stress trying to earn a living. This might result in a
high labour turnover for the company. This means GVS might
have to spend a lot of time and money recruiting new sta.
3
▶ Describe the method used to motivate Johanna at the
Herning Care Home.
The Herning Care Home is trying to make Johanna’s job
more interesting to improve her motivation. Johanna was
bored and unfulfilled in her managerial post and was
thinking about leaving. However, her employers decided
to make her job more interesting and challenging. She
was asked to organise monthly meetings with other care
home managers in the group and report back to the senior
management team. She was also asked to design a formal
induction programme for new recruits and represent the
group at international care conferences. This is an example
of job enrichment.
38 ANSWERS
gym or sports facilities. Finally, some benefits help to
attract and retain better-qualified employees for a business.
This was the aim of Santiago Diseño.
5
▶ Assess whether the use of non-financial methods of
motivation such as autonomy were eective at Santiago
Diseño. Make a clear judgement in your evaluation.
It was recommended to Santiago Diseño by a consultant
that they use non-financial rewards to help motivate their
sta. Businesses use non-financial rewards for a number of
reasons. Some people are not motivated by money; some
workers attach more importance to non-financial rewards
and an increasing number of people work in teams where
individual financial rewards are less appropriate. In this
case, Santiago Diseño divided their designers into teams
and gave each team complete autonomy.
Each team was responsible for carrying out their work in
any way they chose. Their only aim was to meet the design
briefs they were given. Teams were free to order resources,
choose their individual approaches to providing design
solutions and communicate with clients directly. After this
reorganisation, and giving teams autonomy, the financial
performance of the business improved significantly. Profits
rose from US$11.4 million to US$23.1 million between 2012
and 2015. This suggests that giving sta autonomy had a
huge impact on motivation.
However, it is also important to take into account the
impact that fringe benefits had on performance when they
were introduced. Since both changes took place at the
same time, it is dicult to tell which had the biggest impact.
However, one thing is certain, together they worked well to
improve motivation if profitability is a guide to motivation
levels.
CHAPTER 23
CASE STUDY: THE ZETA HOTEL
1
▶ Who is in control of the Zeta Hotel?
Anil Karmi is responsible for running the hotel. He is in
control and accountable to an area manager.
2
▶ Describe briefly how the Zeta Hotel is organised.
Sta at the Zeta Hotel are divided into five dierent
departments. These are front of house, reservations and
marketing, housekeeping, the kitchen and the restaurant.
Each department has a leader who is accountable to Anil
Karmi, the general manager.
3
▶ What is Kajal’s role in the organisation?
Kajal Verma is head of the reservations and marketing
department. He must ensure that all rooms in the hotel
are sold out each night at the best possible price. He
is responsible for nine other people employed in the
department which maintains the hotel’s website and
promotes the hotel.
4
▶ To whom is a Basanta b Pradeep accountable?
a Basanta is accountable to Aarif Vesawkar, the executive
chef.
b Pradeep is accountable to Anil Karmi, the general
manager.
Employees will also benefit from job rotation. They will
learn a much wider range of skills, for example. This might
make them more fulfilled and perhaps help them develop a
desirable career path.
MULTIPLE-CHOICE QUESTIONS
1B, 2C, 3A, 4C
CHAPTER REVIEW
CASE STUDY: SANTIAGO DISEÑO
1
▶ What is meant by the term bonus?
Bonuses are paid in addition to the basic wage or salary.
They are usually paid if targets are met. In this case, sta at
Santiago Diseño received a bonus if they met a design brief
within an agreed time limit.
2
▶ How might bonus payments benefit Santiago Diseño?
Bonus payments are only given out if targets are met. In
this case, employees in a team were only paid a bonus
if they managed to complete a design brief in an agreed
amount of time. This means that bonus payments are
linked to employee performance. If teams take too long to
meet a design brief then they lose out on the bonus and
the business does not incur any extra cost. Consequently,
bonus payments at Santiago Diseño motivate employees to
work quickly.
3
▶ Describe how giving workers more autonomy might
motivate workers at Santiago Diseño.
Workers with autonomy are set a goal or task by
management and then left to decide for themselves the
best way to achieve the goal. This gives workers control
and suggests that they can be trusted. In this case, workers
were split into teams and each team was given a design
brief to complete. Teams were responsible for carrying
out their work in any way they chose. Their only aim was
to meet the design briefs they were given. Each team
was free to order resources, choose their own methods
of work and communicate with clients directly. Autonomy
can give employees more self-confidence and is a way
of recognising their achievements. This should help to
motivate workers.
4
▶ Discuss two benefits to Santiago Diseño of giving sta
fringe benefits.
Some employees receive fringe benefits in addition to
their normal pay. They are often described as the ‘perks’
of the job. Examples of fringe benefits used by Santiago
Diseño include an attractive company pension scheme,
a free canteen, a free bicycle to encourage employees to
cycle to work and subsidised childcare. There are some
good reasons for rewarding workers with fringe benefits.
One benefit is that it may be cheaper to give employees
US$2000 of fringe benefits than US$2000 in cash.
Employees may also pay less tax if they take fringe benefits
instead of cash. Another benefit is that productivity may
improve because there is less sta absence. Many benefits
provide protection and security for workers and their
families. This might help to improve worker satisfaction,
such as free private health insurance. Workers may be
healthier due to private healthcare and using the company
ANSWERS 39
because people can make decisions further down the
chain of command without seeking approval from those
higher up. Seeking approval whenever a decision has
to be made can be very time consuming and result in
ineciency. Also, decisions relating to customer service
can be made onsite, which means that customers
should get a better service.
b One possible drawback of decentralisation to Mphasis
is that senior managers lose some of their control. For
example, they may lose control of some resources used
by the business. In this case, a decision made by a junior
executive onsite might involve using up some money to
help meet a customer need. Senior managers would no
longer be able to prevent this since the decision to spend
more has been passed down the hierarchy.
MULTIPLE-CHOICE QUESTIONS
1C, 2A, 3B, 4D
CHAPTER REVIEW
CASE STUDY: TAUKIR MEDICAL SUPPLIES
1
▶ Draw an organisational chart for the finance department
at Taukir Medical Supplies.
Assistant
Clerks Clerks
Assistant Assistant
Clerks Clerks
Clerks Clerks
Supervisor
Clerks Clerks
Financial
director
Financial
accountant
Cost
accountant
Purchase
manager
Credit
controller
2 ▶ What is the span of control for a the credit controller b
the cost accountant?
a The span of control for the credit controller is two.
b The span of control for the cost accountant is just one.
3
▶ What is meant by the chain of command? Use this case
study as an example.
Organisation charts show the chain of command in a
business. This is the path through which orders are passed
down in the hierarchy. Orders will pass down through the
layers from the top to the bottom. For example, in this case,
an order would pass from the chairman, to the finance
director, to the purchasing manager, on to the supervisor
and finally to the clerk. This is the chain of command.
The financial accountant often delegates work to the
assistant accountants.
4
▶ What is meant by delegation?
In some situations, it is appropriate for a manager, such as
the financial accountant in this case, to hand a task to a
subordinate; this is called delegation. Although the assistant
accountant will be carrying out the task, the manager
will still have responsibility. However, the accountant’s
time can be saved if a subordinate completes the task.
Some workers might enjoy carrying out delegated tasks.
They might think that more trust is being placed in them.
However, others think that managers are just avoiding work.
ACTIVITY 1
CASE STUDY: YU XIAOTING MOTORS
1
▶ Name two examples of operatives at Yu Xiaoting Motors.
According to the organisation chart, the machinists and
technicians are examples of operatives at Yu Xiaoting Motors.
2
▶ What is meant by the terms a formal organisation
bhierarchy?
a When businesses grow, tasks such as planning, decision
making, coordination and communication are easier
if people are organised into a structure made up of
several dierent departments. This internal structure
is known as the formal organisation of a business. It
can be represented by an organisation chart. In this
case, an organisation chart is shown for the production
department at Yu Xiaoting Motors. It shows how sta in
the department are formally organised. For example, it
shows that the 40 machinists on Line A are accountable
to the four supervisors on that line.
b Many organisational structures are hierarchical. This
means that there are dierent layers of responsibility
in an organisation. The lowest is usually at the
bottom and the highest at the top. For example, in Yu
Xiaoting Motors, the chairperson, who has the most
responsibility, is at the top of the hierarchy. Those at the
bottom include machinists, packers and cleaners, who
have very little responsibility.
3
▶ Describe the roles of a the production director b line
supervisors at Yu Xiaoting Motors.
a Directors are members of the senior management team
and appointed by the owners to run the business. The
production director of Yu Xiaoting Motors is responsible
for the whole of the production department and will work
closely with the production manager. The production
director will attend board meetings with the chairperson
and other directors to plan the direction of Yu Xiaoting
Motors.
b Supervisors monitor and regulate the work in their
area. They have authority over operatives and general
workers. At Yu Xiaoting Motors there are eight
supervisors according to the organisation chart. For
example, four supervisors are employed on line A. They
are responsible for the work of 40 machinists on the line.
ACTIVITY 2
CASE STUDY: MPHASIS
1
▶ What is meant by the term decentralisation?
Decentralisation is a type of organisation system where
decision making is pushed down the chain of command
and away from the top. At Mphasis, the plan was to allow
17 executives in a management layer lower down in the
hierarchy to make decisions without approval from a higher
level.
2
▶ Discuss a one benefit and b one disadvantage of
decentralisation to Mphasis.
a One of the main benefits of decentralisation is that
it speeds up the decision-making process. This is
40 ANSWERS
Marketing departments play an increasingly important
role in businesses today.
2
▶ What might have caused this development?
Marketing departments are becoming more important
because of changes in the approach made by businesses.
Firms are now more market orientated. This means that
they focus sharply on the changing needs and wants of
customers. Much of marketing is about identifying these
needs and satisfying them. Consequently, marketing
departments are important.
3
▶ Describe Monica’s role in the marketing department.
Monica has quite a specialised job in the marketing
department at her company. She is responsible for PR. This
involves dealing with the media by answering questions and
providing a range of company information. She might also
organise company presentations to shareholders, potential
investors and customers.
Monica is also employed to negotiate sponsorship deals
on behalf of the company. For example, she recently
negotiated a contract for her company to sponsor a
national football competition in Brazil.
MULTIPLE-CHOICE QUESTIONS
1C, 2D, 3A, 4C
CHAPTER REVIEW
CASE STUDY: JAKAC
1
▶ Draw a simple organisation chart for the management
team at JakAC.
Chairman
(Wan Ng)
Production
manager
Marketing
manager
DEPUTXMA NA GE RS
Human resources
manager
Finance
manager
2 ▶ Which departments at JakAC would be responsible for
the following activities?
a Chasing customers for late payment.
b Dealing with the dismissal of an employee with a
very poor attendance record.
c Using social media to get customer feedback on a
new maintenance service.
d Setting output targets for production lines.
a Finance – Chasing customers for late payment.
b Human resources – Dealing with the dismissal of an
employee with a very poor attendance record.
c Marketing – Using social media to get customer
feedback.
d Production – Setting output targets for production lines.
3
▶ How might the marketing department find out the
reasons for the trend in sales of AC Power?
The graph in Figure 24.2 shows that sales of AC Power
fell quite sharply in 2014. This fall continued into 2015 and
The HR manager has suggested to the board that Taukir
Medical Supplies would benefit from having a flatter
organisation structure.
5
▶ Discuss the benefits of a flatter organisation structure.
Give at least two benefits in your analysis.
With a flatter organisational structure there will be fewer
layers in the hierarchy. One of the benefits of this is that
there will be fewer managers and therefore money will
be saved. Managers often command higher salaries than
non-managerial employees so the savings could be quite
significant. The money saved might be spent on something
more productive in the business – product development, for
example.
Another benefit of a flatter structure is that communication
in the organisation might be improved. This is because
the chain of command is shorter and there is less distance
for messages to travel. This might encourage more
communication, particularly from the bottom up. It might
also speed up communications since there will be fewer
layers of management for messages to pass through. This
might allow a business to serve its customers more easily.
For example, a request from a customer for a special
delivery might be granted more quickly if approval is faster
to obtain.
CHAPTER 24
CASE STUDY: ZUZZY SOLUTIONS
1
▶ Describe the role of the human resources department at
Zuzzy Solutions.
The human resources department is responsible for the
welfare of employees in a business. It has a wide range
of duties and responsibilities. For example, at Zuzzy
Solutions, Patricia Renard is head of the human resources
department. Her job is to supervise the recruitment and
selection process and ensure that employees’ welfare
needs are met. She also meets with other heads of
department on a regular basis and is responsible for the six
sta who work in her department. Another employee, Andre
Duval, also works in the human resources department.
Examples of the tasks carried out by Andre include
organising and delivering induction training, helping Patricia
with interviews and selection, dealing with sta grievances
and communicating with trade unions.
2
▶ Discuss in groups why it might be an advantage to
divide a business like Zuzzy Solutions up into dierent
departments. Produce a poster showing your ideas and
present them to the rest of the class.
ACTIVITY 1
CASE STUDY: MARKETING AND PR
1
▶ Describe two other activities that might be carried out
in the marketing department.
Other activities that might be carried out in the marketing
department include market research, advertising, sales
promotion, product planning, public relations, packaging
design, distribution and sales.
ANSWERS 41
CHAPTER 25
CASE STUDY: MAURICE OBUYA
CASE STUDY: TRIBAL GROUP
1
▶ What are the sources of finance used by a Maurice
Obuya and b Tribal Group?
Maurice used two sources of finance to set up his airport
taxi service. He used a bank loan to raise KES 2 million and
he also used KES 2 million of his own savings.
Tribal Group raised money by selling some shares to
existing shareholders and by selling of part of their business,
Synergy, to another company called Servelec Group.
2
▶ Work out the monthly instalment Maurice would have
to make in order to repay the five-year bank loan
(including interest).
Calculate the monthly instalments Maurice would have to
make in order to repay the five-year bank loan.
Interest on the loan = KES 2 000 000 × 8 per cent × 5
= KES 800 000
Total amount to be repaid = KES 2 000 000 + KES 800 000
= KES 2 800 000
Monthly instalments = KES 2 800 000 ÷ 60
= KES 46 667 per month
3
▶ Work out the amount of money raised by Tribal Group
by selling shares to existing shareholders.
Share capital raised = 94.8 million × £0.22 = £20 856 000
4
▶ Why did Tribal Group need to raise more money?
Tribal Group had run into financial diculties and built up
some debt. In 2015, its revenue fell to £106.7 million down
from £123.7 million. The group also made losses of £47.3
million and £6.3 million in 2015 and 2014, respectively. In
2016, the company decided to raise more money to reduce
its debt and provide some financial stability for the future.
The group raised a total of £41 156 000 by selling some new
shares and selling o part of the group to another business.
ACTIVITY 1
CASE STUDY: WEDDING PLANNING
1
▶ Work out the percentage of the funding provided by the
bank.
Percentage provided by bank:
Rs30 000 ÷ Rs90 000 × 100 = 33.3 per cent
2
▶ What is meant by internal sources of finance?
Internal sources of finance come from within the business.
Before a business can start trading the owners have to
provide some capital. This is an internal source of finance
and in this case Nikki has raised Rs60 000 from personal
savings, gifts and family loans. The bank is also providing
some external finance.
3
▶ Describe one advantage to Nikki of using an internal
source of finance.
One of the main advantages of using internal sources of
finance is that they are cheap: there is no interest to pay and
no administration charges. This will help to keep business
costs down and reduce the financial burden on the business.
came after a steady growth in sales for four years. It is
important to find out reasons why sales have fallen. One
approach that the marketing department might take is
to carry out some market research. They might interview
customers who have suddenly stopped buying the product.
The department could use telephone surveys, for example,
to gather information from customers. They might also use
social media to get up-to-date information from customers.
They may be able to engage them in conversations.
Possible reasons why demand has fallen might be because
the price is too high, a new competitor has entered the
market or the quality of the product has deteriorated.
2010 2012 20132011
Year
2014 2015
Sales (units)
9,000
10,200
11,200
12,500
9,600
8,100
4 ▶ Discuss two possible functions of the JakAC production
department in addition to making AC units.
In addition to making air conditioning units, production
activities at JakAC might include research and
development. This involves the investigation and discovery
of new ideas for materials, processes and products. In
many industries, research and development is important
because new technologies can arrive on the scene very
quickly. For example, JakAC might trying to develop AC
units that use less energy to help reduce global warming.
Another production activity at JakAC is likely to be
purchasing. This involves buying in all the resources such
as raw materials, components, energy, tools, equipment
and packaging that are needed by the business.
5
▶ Discuss the importance of interdependence between
departments in a business. Use examples from this
case study in your analysis.
There appears to have been a breakdown in communication
between the production department and the finance
department at JakAC. This is because the production
department is overspending on its labour budget. The
production department argues that more skilled labour
is needed to maintain quality. However, the finance
department argues that expenditure budgets should not
be exceeded. This breakdown in communication is having
a negative eect on the business because the production
department has not provided some important data needed
for a financial report. Sales of a leading product are also
falling – there may be a link between poor communications
in the business and the drop in sales of AC Power (although
there is nothing in the case information to suggest there is).
Conflict between the dierent departments in a business
will generally have a negative impact on the company’s
overall performance.
42 ANSWERS
Blakely Motor Scooters often uses retained profit to fund
business activity.
3
▶ What is the main reason for using this method of
financing?
Retained profit is popular because it is cheap. There are
no interest or administration charges when using retained
profit. It is a free source of finance. However, if profit is
retained it cannot be returned to the owners. This may
sometimes result in conflict.
Blakely Motor Scooters uses trade payables to buy
components and parts.
4
▶ Discuss one advantage and one disadvantage of trade
payables as a source of finance.
Trade payables (or trade credit) involves buying goods
and paying for them later – perhaps up to 60 to 90 days
after the goods were purchased. It is a popular source
of finance because it is cheap and easy. There is often
no direct charge for using trade credit. However, many
suppliers encourage early payment by oering discounts so
a business may miss out on cheaper goods. Also the cost
of goods is often higher if firms buy on credit and delaying
payment can also upset suppliers since they have to wait
longer for their money.
5
▶ Assess whether Blakely Motor Scooters should fund the
new factory through share capital or a mortgage. Make
a clear judgement in your evaluation.
All sources of finance have their advantages and
disadvantages. In this case, two particular sources are
being considered to raise TNB 700 million for a new
production line equipped with new technology – share
capital or a mortgage. A mortgage is a long-term source
of finance and could be used for the construction of a
production line. However, the borrower must use land or
property as security for the loan. Presumably here the new
production line could be used as security for the loan.
Mortgages are popular because the interest rates are much
lower than those on unsecured bank loans. Provided the
bank is happy for the production line to be used as security,
a mortgage may be granted. However, if the business is
not able to keep up with the repayments, the lender could
repossess the property used as security.
For limited companies, share capital is an important source
of external finance. The sale of shares can raise very large
amounts of money. In this case, raising TNB 700 million
is not an unusual amount. A rights issue may be used to
raise more share capital. This is where a company gives
the existing shareholders the right to buy the new shares at
a discount. The main advantage of selling shares to raise
capital is that interest payments are avoided. However,
shareholders will expect to be paid dividends if the
business is successful. The main disadvantage of issuing
shares to raise capital is the cost of administration. There
are the costs of promoting the issue, communicating with
potential buyers, processing application forms, distributing
the shares and possibly underwriting fees. This whole
process can use up a significant proportion of the amount
raised.
ACTIVITY 2
CASE STUDY: CROWD FUNDING
1
▶ What is meant by the term crowd funding?
Crowd funding is a relatively new source of finance for
businesses. It is similar to peer-to-peer funding (where
banks are excluded and individuals can lend money via the
Internet to others without previous knowledge of them).
However, the fund-raisers tend to be businesses or groups
who are involved in a particular venture such as putting
on a concert, building a school or setting up a community
project. The lenders or investors will be large numbers of
individuals who together represent ‘the crowd’. Transactions
are conducted online. In this case, Marine Techno used an
online crowd funding platform called CrowdNet to raise
KRW 127 million.
Crowding funding is an external source of finance.
2
▶ What is meant by this?
External sources of finance are those from outside the
business. Businesses often have to raise money from
outside because the business is not able to generate
sucient funds on its own. In this case crowd funding is an
example of an external source. The lenders or investors will
be large numbers of individuals outside the business who
collectively represent ‘the crowd’
3
▶ Discuss why Marine Techno used crowd funding to
raise finance.
Marine Techno needed some finance to help fund further
product development. However, the company was
struggling to get the finance it needed. According to the
CEO, this was because most of the finance available
to businesses ends up in Seoul or the surrounding
provinceofGyeonggi. When the CEO heard about a new
crowd-funding site, CrowdNet, he thought it might be
wortha try.
MULTIPLE-CHOICE QUESTIONS
1A, 2D, 3B, 4C
CHAPTER REVIEW
CASE STUDY: BLAKELY MOTOR SCOOTERS
1
▶ What is meant by short-term finance?
Businesses often need to borrow money for a short period
of time. This is called short-term finance and is money
borrowed for one year or less. Short-term finance is often
used to boost working capital. For example, Blakely Motor
Scooters uses short-term finance to pay for raw materials
and wages to meet a large order. Short-term finance is also
likely to be used to meet emergency expenditure.
2
▶ Why is retained profit an internal source of finance?
Profit is generated by a business. Some of this is returned
to the owners and the rest is retained by the business.
Retained profit can be used in the future as a source
of finance. It is an internal source because it has been
generated inside the business through its trading
activities.
ANSWERS 43
will still owe money. Therefore, profit is greater than cash.
Similarly, a business may receive cash during that period
from credit sales made in the previous period. This would
increase the cash balance, but not aect profit. In this
case, the laundry does receive US$5400 from customers
who had their laundry cleaned 60 days before. Therefore,
the cash received for those sales does not aect the profit
for July but for the month 60 days ago. The laundry would
have made some credit sales during July but these are not
recorded because the cash is yet to be received.
ACTIVITY 2
CASE STUDY: CASH FLOW FORECASTS
1
▶ Complete the cash flow forecast for Priscila Landa’s
bookshop to show:
a the total cash outflows for each month
b the net cash flows for each month
c the closing balance for each month
d the opening balance for February and March.
Jan Feb Mar
Cash inflows
Book sales 3000 3500 3100
Fresh capital 2000
Interest 150
Total cash inflows 3000 3650 5100
Cash outflows
Stock 1700 1790 1900
Casual labour 500 500 500
Rent 1000 1000 1000
Other expenses 230 240 230
Total cash outflows 3430 3530 3630
Net cash flow –430 120 1470
Opening balance 230 –200 –80
Closing balance –200 –80 1390
It is suggested that Priscila Landa’s bookshop is
struggling.
2
▶ What evidence is there in the forecast to support this
view?
Although the cash flow forecast for Priscila Landa’s
bookshop shows that the closing balance improves from
–200 in January to 1400 in March, the reason for this
is because 2000 of fresh capital was injected in March.
Without the cash injection the closing balance in March
would be –600. This shows a worsening situation over the
three-month period.
MULTIPLE-CHOICE QUESTIONS
1B, 2D, 3A, 4B
If the business can aord the interest payments, a
mortgage may be preferable because once the new
production line is up and running the existing shareholders
will get to keep all the profit generated by the new
investment. However, if interest rates are high, the interest
payments over the 25-year period would eat into profits.
There is also the chance that interest rates could rise to
very high levels.
CHAPTER 26
CASE STUDY: AGA BRICK MAKING
1
▶ Suggest ways in which cash is flowing into and out of
the Agas’ brickmaking business.
Cash is flowing into the business from customers.
KES 155 000 flowed into the business in June 2016. In
the same month, cash also flowed out of the business.
Examples include KES 43 000 for raw materials, KES 20 000
for rent and KES 12 000 for fuel.
2
▶ Work out the net cash flow (cash inflows − cash
outflows) for Aga Brick Making.
Net cash flow = KES 155 000 – (KES 43 000 + KES 20 000 +
KES 12 000 + KES 11 000 + 2 × KES 20 000)
Net cash flow = KES 155 000 – KES 126 000 = KES 29 000
3
▶ What does the answer in question 2 show?
The calculation in (2) shows that the business received
more cash than it paid out. There was a positive net cash
flow of KES 29 000.
ACTIVITY 1
CASE STUDY: CASH FLOWS
1
▶ Suggest one example of a a cash inflow and b cash
outflow, for Abdul Hassan’s laundry.
A cash inflow would be the US$1400 cash payments
received during the month.
A cash outflow would be the US$2500 wages paid during
the month.
2
▶ Work out the net cash flow for July 2016 for the laundry
business.
Calculate the net cash flow for July 2016 for the laundry
business.
Net cash flow = Total cash inflow – Total cash outflow
= (US$1400 + US$5400) – (US$2500 + US$400 + US$700 +
US$400 + US$100 + US$500 + US$1000)
= US$6800 – US$5600
= US$1200
Therefore the business had a positive net cash flow of
US$1200 in July 2016.
3
▶ Why might the net cash flow above not represent the
value of profit made in July?
It is quite normal in a specific trading period for the net
cash flow to be dierent from the profit made. One reason
for this is because some goods are sold on credit (trade
payables). So, at the end of the period, some customers
44 ANSWERS
will be –€700 (€2100 – €2800) if all the outflows remain the
same as in December.
CHAPTER 27
CASE STUDY: AMPAT CONSTRUCTION
1
▶ Suggest four costs incurred by Ampat Construction that
will rise when more houses are built.
Examples of costs that will rise when more houses are built
include bricks, sand, cement, timber, pipes, glass, electrical
wire, glass, plastic window frames, insulation materials and
labour.
2
▶ Suggest four costs incurred by Ampat Construction that
remain unchanged when more houses are built.
Examples of costs that will remain unchanged when more
houses are built include machinery such as cement mixers,
lifting gear, vehicles; tools and equipment such as spades,
trowels, wire cutters, saws, power tools and protective
CHAPTER REVIEW
CASE STUDY: LINARI GARDEN DESIGN
1
▶ Describe what a ‘cash flow forecast’ shows.
A cash flow forecast is a financial document, usually
produced on a spreadsheet, which shows the likely receipts
and payments of a business for a future time period. All
expected payments and receipts are listed month by month
and the expected cash balance is calculated at the end of
each month.
2
▶ Prepare a nine-month cash flow forecast for Linari
Garden Design. (Use a spreadsheet if possible.)
APR MAY JUN JUL AUG SEP OCT NOV DEC
Cash inflows
Bank loan 3000
Own capital 2000
Predicted revenue 2000 2100 2000 2500 2500 2000 1000 500 0
7000 2100 2000 2500 2500 2000 1000 500 0
Cash outflows
Van 2000
Tools and equipment 3400
Laptop 600
Business directory 100
General overheads 400 400 400 400 400 400 400 400 400
Advertising 100 100 100 100
Drawings 800 800 800 800 800 800 800
Loan repayments 200 200 200 200 200 200 200 200 200
Total payments 6600 800 1400 1500 1400 1500 1400 1500 1400
Net cash flow 400 1300 600 1000 1100 500 −400 −1000 −1400
Opening balance 0 400 1700 2300 3300 4400 4900 4500 3500
Closing balance 400 1700 2300 3300 4400 4900 4500 3500 2100
3
▶ Comment on the cash position of the business during
the nine-month period.
The expected cash position for Linari Garden Design looks
quite promising. In the first month of trading, when all the
setting up costs are incurred, the business is still expected
to have a positive cash balance at the end of the month.
After that, the cash position improves every month up until
September when it is expected to be €4900. In the next
few months, the cash position worsens because revenue
starts to decline. But even in December, when there is no
revenue, the closing cash position is still positive.
4
▶ What would you expect to happen to the cash position
of the business in early 2016?
The cash position of the business in early 2016 is expected
to worsen. This is because revenue is likely to be zero for
a few months. Garden design is likely to be aected by
seasonal demand and people will not be thinking about
their gardens until the growing season begins in the spring.
If the cash payments stay at €1400 each month and there is
no more revenue, the cash position at the end of February
ANSWERS 45
In 2016, fixed costs and the price charged remained
the same. However, variable costs rose to US$140 per
system.
4
▶ Work out the profit made in 2016 if 5200 systems were
sold.
Profit = Total revenue – Total cost
= US$250 × 5200 – (US$160 000 + 5200 × US$140)
= US$1 300 000 – (US$160 000 + US$728 000)
= US$1 300 000 – US$888 000
= US$412 000
MULTIPLE-CHOICE QUESTIONS
1B, 2C, 3A, 4D
CHAPTER REVIEW
CASE STUDY: MODAL METAL PRODUCTS
1
▶ What is meant by variable costs?
Variable costs are those costs that change when the level of
output changes. They will rise for example when output is
increased. An example in this case is the cost of the metal,
pipes and paint that Modal Metals uses for the road sign
order.
2
▶ For the new order, work out a total variable cost and
btotal cost.
Total variable cost = Rs1400 × 1000 = Rs1 400 000
Total cost = Fix cost + Variable cost
= Rs600 000 + Rs1 400 000 = Rs2 000 000
3
▶ Plot fixed cost, variable cost and total cost on a graph.
Use a range of output of 0 to 1000 units.
200 400 600 800 1000
1000
1500
2000
RS 000
Number of signs
FC
VC
TC
500
0
4 ▶ Work out the profit made on the order.
Profit = Total revenue – Total cost
= (Rs2500 × 1000) – Rs2 000 000
= Rs2 500 000 – 2 000 000
= Rs500 000
5
▶ Work out the average cost of each sign.
Average cost = Total cost ÷ Quantity
= Rs2 000 000 ÷ 1000 = Rs2000
clothing and computers smartphones and oce furniture at
the company oce.
3
▶ Work out the profit made by Ampat Construction in 2016.
Profit = Total revenue – Total cost
= US$64 340 700 – US$56 450 200
= US$7 890 500
ACTIVITY 1
CASE STUDY: KANDASAN CRICKET BATS
1
▶ What is meant by fixed costs? Use examples from the
case study in your explanation.
Fixed costs are costs that do not vary with output. If output
is increased, for example, fixed costs will remain exactly
the same. In this case, examples of fixed costs include
rent, business rates and other fixed costs. These are annual
costs and do not vary with output.
In 2015, Kandasan Cricket Bats produced 4800 bats.
2
▶ Work out the total cost of production.
Total cost = Fixed cost + Variable cost
= (Rs50 000 + Rs5000 + Rs25 000) + 4800 × (Rs30 + Rs10 +
Rs50 + Rs10)
= (Rs80 000) + 4800 × (Rs100)
= Rs80 000 + Rs480 000
= Rs560 000
In 2016, the rent increased to LKR 60 000 and 6000 bats
were produced.
3
▶ Work out the eect of this increase on total costs.
Total cost = Fixed cost + Variable cost
= (Rs60 000 + Rs5000 + Rs25 000) + 6000 × (Rs30 + Rs10 +
Rs50 + Rs10)
= (Rs90 000) + 6000 × (Rs100)
= Rs90 000 + Rs600 000
= Rs690 000
ACTIVITY 2
CASE STUDY: JENKINS LTD
In 2015, Jenkins produced and sold 4500 control
systems.
1
▶ Work out the total cost.
Total cost = Fixed cost + Variable cost
= US$160 000 + (4500 × US$120)
= US$160 000 + US$540 000
= US$700 000
2
▶ Work out the total revenue.
Total revenue = Price × Quantity
= US$250 × 4500
= US$1 125 000
3
▶ Work out the profit.
Profit = Total revenue – Total cost
= US$1 125 000 – US$700 000
= US$425 000
46 ANSWERS
3 ▶ What would happen to the breakeven point if fixed costs
were reduced to Rs80 000?
Break-even point = Fixed cost
___________________________________
Selling price – variable cost per unit
= Rs80 000
___________________________________
Rs100 – Rs50
= 80 000
___________________________________
50
= 1600
When fixed costs fall, the break-even point is lower. Galle
Ice Cream Ltd now only needs to produce and sell 1600
kilograms to break-even.
ACTIVITY 2
CASE STUDY: THE GRAND HOTEL
1
▶ What is the value of fixed cost for the Grand Hotel?
The fixed costs incurred by the hotel are SGD 15 000.
2
▶ How many rooms need to be occupied to break even?
The hotel will break even when 300 rooms are occupied.
This is where total cost and total revenue intersect.
3
▶ What is total revenue at the break-even point?
Total revenue at the break-even point is SGD 30 000.
4
▶ What is total cost at the break-even point?
Total cost at the break-even point is SGD 30 000.
5
▶ If 500 rooms are occupied, what is the a amount of
profit and b margin of safety?
a Profit is the dierence between total cost and total
revenue on the break-even chart. In this case the profit
made by the Grand Hotel when 500 rooms are occupied
is SGD 10 000. When 500 rooms are occupied, total cost
is SGD 40 000 and total revenue is SGD 50 000.
b The margin of safety when 500 rooms are occupied is
200. It is the dierence between the break-even point
and current output.
MUTLIPLE-CHOICE QUESTIONS
1D, 2D, 3A, 4C
CHAPTER REVIEW
CASE STUDY: GRAFTON DINGHIES
1
▶ Construct a break-even chart for Grafton Dinghies.
100 200 300 400 500 600 700 800
1000
1500
2000
2500
%
000
Number of dinghies
Grafton Dinghies break-even chart
TR
TC
500
0
Six months later, Modal Metal Products gets another
order for 1500 speed limit signs. The variable costs
remain the same but fixed costs are only Rs200 000.
However, the government will only pay Rs1500 for each
sign.
6
▶ Assess whether Modal Metal Products should accept
the order. Show all your calculations. Make a clear
judgement in your evaluation.
Profit = Total revenue – Total cost
= Rs1500 × 1500 – (Rs200,000 + Rs1400 × 1500)
= Rs2 250 000 – Rs2 300 000
= –Rs50 000
Since Modal Metals would make a loss of Rs50 000 on the
new order, it might be refused. However, if Modal Metals
was short of business, it might take on the order to keep its
resources occupied and retain the customer. Although this
particular order might make a loss, future orders from the
government might be more profitable.
CHAPTER 28
CASE STUDY: UNIVERSAL MUSIC GROUP
CASE STUDY: CONE STREET CYCLES
1
▶ Show whether the firms in the above examples are
making a profit, loss or breaking even.
In 2016, Universal Music Group made a profit of €644
million (€5 260 000 million - €4 616 000 million)
Cone Street Cycles broke even in 2015. Its total costs were
Rs40 million (Rs20 million + Rs2,000 × 100 000) and its total
revenue was also Rs40 million.
ACTIVITY 1
CASE STUDY: GALLE ICE CREAM
1
▶ How many kilos of ice cream must the business sell to
break even?
Break-even point = Fixed cost
___________________________________
Selling price – variable cost per unit
= Rs100 000
___________________________________
Rs100 – Rs50
= 100 000
___________________________________
50
= 2000
So, Galle Ice Cream Ltd would need to sell 2000 kilograms
to break even.
2
▶ What is total cost and total revenue at the break-even
point?
Total cost = Rs100 000 + (Rs50 × 2000)
= Rs100 000 + Rs100 000 = Rs200 000
Total revenue = Rs100 × 2000 = Rs200 000
Total revenue and total cost are both Rs200 000 at the
break-even point. This shows that the business does not
make a profit or a loss.
ANSWERS 47
3 ▶ How might Musab Assad use the statement of
comprehensive income?
The statement of comprehensive income will show Musab
Assad and his family how well the business has performed
during the year. The profit made by a business for the year
is a measure of business performance. Musab might also
use the statement to make decisions. For example, he may
decide to invest some of the profit made by the business in
the future.
ACTIVITY 1
CASE STUDY: FORMAT 66
1
▶ Work out a gross profit and b operating profit.
a Gross profit = revenue – cost of sales
= US$12.56 million – US$7.6 million = US$4.96 million
b Operating profit = gross profit – expenses
= US$4.96 million – US$2.56 million = US$2.4 million
Format 66 distributes US$0.8 million to shareholders.
2
▶ How much profit is retained?
Retained profit is the money left after any distribution to
the owners. Therefore in this case retained profit is US$1.6
million (US$2.4 million – US$0.8 million).
3
▶ What is likely to happen to the profit retained by the
business?
Retained profit is kept by the business. This means it may
be used to help fund investment projects. It may also
be kept as a reserve in case trading conditions become
dicult in the future.
ACTIVITY 2
CASE STUDY: SANCHEZ SUPERSOFT
Look at the statement of comprehensive income for
Sanchez Supersoft.
1 ▶ Work out the missing values for a cost of sales in 2015,
b profit for the year after tax in 2015 and c the operating
profit for 2016.
a Cost of sales in 2015 = US$18.1 million.
b Profit for the year after tax in 2015 = US$3.1 million
c Operating profit for 2016 = US$5.1m
2
▶ Comment on the performance of the business over the
two years.
It could be argued that the Sanchez Supersoft’s
performance has worsened since 2015. Revenue has
fallen from US$29.2 million to US$26.9 million. This is
a fall of about 10 per cent. Gross profit has fallen by a
similar amount. Profit for the year has fallen by a larger
percentage. It has fallen by 29 per cent from US$3.1 million
to US$2.2 million. A possible reason for this is a slowdown
in global growth. When economic growth is low, demand
for non-essentials such as computer games is likely to fall.
However, at least the business is still trading and making a
profit. If the global economy picks up then the performance
of Sanchez Supersoft is likely to improve.
2 ▶ a What is the break-even point for Grafton Dinghies?
b What is the total cost and total revenue at the break-
even point?
a Reading from the graph the break-even point is 400
dinghies.
b At the break-even point, reading from the graph:
Total cost = €1 200 000
Total revenue = €1 200 000
Grafton plans to make 600 dinghies during the year.
3
▶ How much profit will be made?
Reading from the graph, when output is 600 dinghies,
profit = €200 000
4
▶ Describe what would happen to the break-even point
for Grafton Dinghies if variable costs were to increase.
If Grafton’s variable costs increase, the total cost function
would become steeper. This means that the business would
break even at a higher level of output (the break-even point
shifts to the right). This is a negative eect for the business
because the business has to produce and sell more
dinghies to break-even.
5
▶ What are the limitations of break-even analysis to Grafton
Dinghies? Discuss at least two limitations in your analysis.
Although break-even charts can provide a business with
some useful information, break-even analysis does have
some limitations. One of the main limitations is that the
total costs and total revenue are shown as straight lines.
In practice, they may not be straight lines. For example, a
business may have to oer discounts on large orders, so
total revenues fall at high outputs. In this case study, the
total revenue line would rise and then fall. A business can
lower costs by buying in bulk, so unit costs may fall at high
outputs and total cost will be curved.
Another problem is to do with the information used to
construct the chart. The accuracy of the break-even chart
depends on the quality and accuracy of the data used to
construct total cost and total revenue. If the data is poor
and inaccurate, the conclusions made on the basis of the
data may be incorrect. Therefore, Grafton must use break-
even analysis with some care.
CHAPTER 29
CASE STUDY: DOHA FOOD STORE
1
▶ What do you think is meant by the terms a cost of sales
and b finance costs?
a Cost of sales in this case is the cost to the Doha Food
Store of buying stock or inventory to sell in the shop.
b Finance costs of US$600 000 is interest paid on any
loans or overdrafts that the business has.
2
▶ Suggest three possible expenses that the Doha Food
Store might incur.
Examples of expenses might include wages, electricity,
advertising, insurance, accountancy fees, telephone, motor
expenses or business rates.
NB. Other examples are possible.
48 ANSWERS
Over the two years, revenue was fairly stable at around
£13 700 million – there was just a slight drop in 2015. This
shows that Rolls-Royce is getting plenty of orders and has
enjoyed a solid year’s trading. However, the company may
be disappointed in its profitability. With such a high revenue,
many would argue that it should make more profit. One of
the reasons why profitability is low is because of the high
costs of financing. In both 2014 and 2015, financing costs
are over £1400 million. This shows that Rolls-Royce has a lot
of debt. It is possible that the business is borrowing to invest
heavily for the future. There is some evidence of this in the
statement of comprehensive income. The statement shows
that research and development costs were £818 million
in 2015 and £793 million in 2014. This is a large sum and
suggests that Rolls-Royce is committed to research and new
product development. Sometimes research and development
expenditure takes time to bear fruit. Shareholders in Rolls-
Royce will hope that much higher profits are generated in
the future as a result of this investment. Finally, one of the
reasons why Rolls Royce made a loss in 2014 was because
of a relatively high tax charge – it was about double the size
of the tax paid in 2015.
CHAPTER 30
CASE STUDY: AZORA DINING FURNITURE
1
▶ What is the value of all the assets owned by the
business?
Total assets = US$395 900
2
▶ How much money does the business owe to a the
owners and b all other creditors?
Owed to owners = US$200 000 + US$104 900
= US$304 900
Owed to other creditors = US$91 000
3
▶ What do you notice about the value of assets and the
total amount owed by the business?
The value of the assets is exactly the same as the amount
owed. Both values are US$395 900.
ACTIVITY 1
CASE STUDY: TESCO
1
▶ What is the dierence between assets and liabilities?
Use examples from this case study.
Assets are the resources owned by a business. For
example, Tesco had £43 904 million of assets in 2016. A
significant proportion of this (£17 900 million) was property,
plant and equipment. Liabilities are the debts of a business,
that is, the amount of money owed to outsiders. The value
of Tesco’s liabilities was £35 288 million in 2016. £10 711
million of this amount was owed to banks and other
financial institutions.
2
▶ Work out the value of capital for Tesco.
Assets = capital + liabilities
£43 904 million = capital + £35 288 million
£43 904 million – £35 288 million = capital
£8616 million = capital
MULTIPLE-CHOICE QUESTIONS
1D, 2A, 3B, 4C
CHAPTER REVIEW
CASE STUDY: ROLLS-ROYCE
1
▶ What does a statement of comprehensive income show?
Businesses use the statement of comprehensive income to
calculate the profit at the end of the financial year. In this
case, the profit made by Rolls-Royce at the end of 2015
was £84 million.
2
▶ Work out a taxation and b gross profit for 2015.
a Taxation in 2015 = £76 million
b Gross profit in 2015 = £3266 million
3
▶ What is meant by operating profit?
Operating profit is the profit made by a business after all
business costs and expenses have been subtracted (except
for finance costs). It can be calculated by subtracting
expenses from gross profit. In this case, the operating profit
for Rolls-Royce is £1499 million.
4
▶ Describe two ways in which the statement of
comprehensive income might be used by a business
like Rolls-Royce.
The statement of comprehensive income shows business
owners and managers the amount of profit made by a
business in a financial year. However, the information
contained in the statement might be used to help make
some important decisions. For example, a business might
use the statement of comprehensive income to decide how
much money to invest in the business. For example, if the
statement shows that profits are rising, this might encourage
decision makers to use more funds for investment. In
contrast, if the statement shows that the business is
struggling, investment plans might be postponed in the
hope that the business will pick up in the near future.
The statement of comprehensive income will show a
business what has happened to costs during the year.
It might show, for example, that the cost of sales has
increased sharply. As a result a business can identify
reasons for this and take measures to bring costs under
control. A business might decide that cheaper suppliers of
raw materials must be found or that the wages of production
workers must be brought under control. For example, in this
case Rolls-Royce has managed to reduce its administrative
costs from £1124 million in 2014 to £1059 million in 2015.
The business may have analysed costs in 2014 to see if
there were certain costs that could be reduced.
5
▶ Assess the performance of Rolls-Royce over the two
years. Make a clear judgement in your evaluation.
The ‘bottom’ line shows that Rolls-Royce has moved from
a loss making position in 2014 to a profit making position
in 2015. In 2014, the business made a loss of £84 million.
However, in 2015 it made a profit of £84 million. This is a
positive development over the time period. However, the
size of profit in relation to revenue is quite small. Its profit
for the year in 2015 is only 0.6 per cent of the company’s
revenue.
ANSWERS 49
The liquidity of an asset is how easily and how quickly it
can be changed into cash. Examples of current assets
for Hashan Bathroom Supplies include inventories
(US$459 000 000), trade receivables, which is money owed
by customers (US$230 300 000) and cash (US$67 000 000).
Current liabilities are business debts that must be repaid
within 12 months. For Hashan Bathroom Supplies they might
include trade payables, which is money owed to suppliers.
And taxation, which is money owed by the business to the tax
authorities. This might include tax on company profits, VAT
or tax that has been deducted from employee wages which
must be passed on to the authorities. Hashan Bathroom
Supplies owes US$560 000 000 and US$230 000 000 to
suppliers and the tax authorities respectively.
4
▶ What is the approximate value of Hashan Bathroom
Supplies?
The value of a business is given by the value of net assets.
This is shown in the statement of financial position.
The value of Hashan Bathroom Supplies in 2016 was
US$236 300 000. However, this is only an approximate value.
5
▶ Describe two uses that a statement of financial position
might have to Hashan Bathroom Supplies.
The statement of financial position shows the capital
structure of a business. A business can raise funds from
many dierent sources, such as shareholders’ capital,
retained profit and long-term and short-term sources. For
example, Hashan Bathroom Supplies has raised a total of
US$236 300 000 from the owners of the company, while
US$300 000 000 comes from long-term borrowings and
US$790 000 000 from short-term sources. It might be
argued that quite a large proportion of Hashan Bathroom
Supplies’ finance is from short-term sources.
The statement of financial position also shows the asset
structure of a business. This means that we can see
where all the money that the business has raised has been
distributed between dierent types of assets. For example,
Hashan Bathroom Supplies has US$570 000 000 invested
in non-current assets such as stores, and fixtures and
fittings. It also has US$756 300 000 invested in current assets
such as inventories, trade receivables and cash. Note that
the value of assets US$1 326 300 000 (US$570 000 000 +
US$756 300 000) is the same as the value of money owed
US$1 326 300 000 (US$236 300 000 + US$300 000 000 +
US$790 000 000). This will always be the case for a business.
6
▶ Assess the main financial changes that have taken
place over the two years at Hashan Bathroom Supplies.
A number of key changes have occurred in the financial
position of Hashan Bathroom Supplies over the two years.
First of all, the value of the company has increased from
US$201 600 000 to US$236 300 000. This is a significant
increase and the owners of the company may be pleased
with this performance. This is a 17 per cent increase and
suggests that the business has performed well between
2015 and 2016. However, it must be remembered that the
value of net assets is only a rough guide to the value of a
business because assets are dicult to value exactly and
other non-physical assets such as goodwill (the amount
paid for regular customers to the business) may not be
included on the statement.
3
▶ Write a letter to a shareholder explaining what a
statement of financial position shows.
ACTIVITY 2
CASE STUDY: QETTER TOYS
1
▶ What is the value of a net current assets, b share capital
and c plant and equipment for 2016?
a Net current assets = US$4 390 000
b Share capital = US$10 000 000
c Plant and equipment = US$9 120 000
2
▶ What is meant by the term inventories in the statement
of financial position?
Inventories are a current asset for a business. They include
stocks of raw materials, components and finished goods
ready for sale. In this case, ERCO had US$4 560 000 of
inventories in 2016. As a toymaker, examples might include
raw materials such as plastics, paint and packaging. It
could also include stocks of toys ready to sell to customers.
3
▶ What is the dierence between current assets and non-
current assets?
Current assets are assets that will be changed into cash
within one year. They are liquid assets. The liquidity of an
asset is how easily and how quickly it can be changed
into cash. Examples of current assets for ERCO include
inventories (£4 560 000), trade receivables, which is
money owed by customers (US$6 990 000), and cash
(US$2 110 000).
Non-current assets are those that last for more than one
year. They are the most productive resources of a business.
ERCO has two main non-current assets – factory and plant
and equipment. The total value of ERCO’s non-current
assets at 31 December 2016 is US$43 770 000.
MULTIPLE-CHOICE QUESTIONS
1C, 2B, 3A, 4D
CHAPTER REVIEW
CASE STUDY: HASHAN BATHROOM SUPPLIES
1
▶ What is meant by the term capital employed?
Capital employed is the amount of money invested in the
business by the owners. For Hashan Bathroom Supplies it
is US$236 300 000 for 2016.
2
▶ What is meant by borrowings in the statement of
financial position?
Borrowings are an example of a non-current liability. It
is money that the business has borrowed and does not
expect to pay back for at least a year – possibly a lot
longer. For example, long-term loans could be for 5 years,
10 years, 20 years or longer. Hashan Bathroom Supplies
owed US$300 000 000 at the end of 2016. However, this
was US$50 000 000 lower than the previous year.
3
▶ What is the dierence between current assets and
current liabilities in the statement of financial position?
Current assets are assets that will be changed into cash
within one year. They are the liquid assets of a business.
50 ANSWERS
construction projects in 2013 and 2014. This appears to
have had an impact on the profits for 2013 and 2014. Both
gross profit and operating profit doubled between 2012 and
2014.
3
▶ Work out for both years a gross profit margin and b
operating profit margin.
2010 2011 2012 2013 2014
Gross profit
margin
39.5% 40.6% 40.9% 49.5% 51.0%
Net profit
margin
8.1% 8.7% 8.7% 10.6% 10.8%
4
▶ Discuss possible reasons for the changes in question 3
between 2010 and 2014.
Between 2010 and 2012 both the gross and operating profit
margins are fairly stable. They have increased slightly but
not by much. However, in 2013 and 2014 they both rise
sharply. This occurred at the same time as the flood of
orders. The gross profit margin rises from 40.9 per cent to 51
per cent between 2012 and 2014. This may be because the
business has been able to buy raw materials more cheaply.
They will have increased production for the orders and may
have enjoyed cheaper materials through bulk buying. The
operating profit margin has increased from 8.7 per cent to
10.8 per cent. This may be because the business has been
able to benefit from economies of scale, that is, perhaps
by making better use of their machinery when increasing
production. The operating profit margin will usually rise if
a business keeps control of its expenses. It appears that
Santos Metal Products has done this in 2013 and 2014.
ACTIVITY 2
CASE STUDY: COMPARING ASSETS AND LIABILITIES
1
▶ Calculate for both companies and for both years the a
current ratios and b acid test ratios.
Patel’s Uzzy Plastics
2016 2015 2016 2015
Current ratio 1.16 0.96 1.76 1.58
Acid test ratio 0.37 0.36 0.89 0.85
2
▶ Which is the more liquid of the two companies?
According to the calculations in (1), Uzzy Plastics is the
more liquid of the two companies. The current ratio in
both years for Uzzy Plastics lies in the preferred range of
1.5 to 2. The acid test ratio in both years is just below 1.
Patel’s figures are significantly worse. The current ratios
in both years are well below 1.5 and the acid test ratios
are well below the preferred target of 1. Between 2015
and 2016, both companies have improved their liquidity
position slightly. For example, the current ratios for both
companies have increased.
There may be a reason why Patel’s appears to have a
poorer liquidity position than Uzzy Plastics. Patel’s is a car
retailer; it sells cars from car showrooms. Consequently,
its main asset will be inventories (the value of cars in the
showroom). This would explain the low acid test ratios. It is
also possible that Patel’s is paid immediately when a sale
One worrying change is the fall in the value of net current
assets. It was low in 2015 but in 2016 it became negative
(at US$33 700 000). This means that current liabilities are
greater than current assets. This could be a problem for
Hashan Bathroom Supplies because it might struggle to
pay some immediate bills. The main reason for this position
is that there has been a big build-up in inventories; more
money is owed by customers than in the previous year
and the value of cash has fallen. This would be a cause of
concern for Hashan Bathroom Supplies. However, during
the year it managed to pay o US$50 000 000 in long-term
debt. This might part of the reason for the position. If the
business is able to sell its high levels of stocks fairly quickly
and put pressure on customers to pay their debts, the
position would improve significantly.
CHAPTER 31
CASE STUDY: ORIENT PLUS
1
▶ What evidence is there to support the view that Orient
Plus is starting to struggle?
Both the statement of comprehensive income and the
extracts from the statement of financial position show that
Oriental Plus was hit by the arrival of a new competitor.
The revenue of the business fell from US$1 231 500 to
US$890 600; this is a fall of about 28 per cent. The profit
for the year made by the business also went down. In
2015, Orient Plus made a profit of US$158 600. However,
in 2016 this turned into a loss of US$2400. This is only a
small loss but it is a big drop from the previous year. The
extracts from the statement of financial position show that
working capital (net current assets) has fallen sharply from
US$239 300 to US$14 300. This may well mean that the
business has diculties in paying day-to-day bills.
2
▶ How might the redundancies improve financial
performance at Orient Plus?
Making sta at Orient Plus redundant could improve the
financial performance of the business. This is because if
people are made redundant the wage bill will be reduced.
With lower wages, costs will fall and the company may
return to profit again. However, making sta redundant may
result in production diculties.
ACTIVITY 1
CASE STUDY: SANTOS METAL PRODUCTS
Look at the revenue figures for Santos Metal Products
between 2010 and 2015.
1
▶ How has the company performed?
Revenue has increased significantly between 2010 and
2014. It has increased by nearly 100 per cent from US$12.4
million to US$24.1 million. This suggests that Santos Metal
Products has performed very well indeed.
2
▶ What impact has the flood of orders had on Santos
Metal Products?
Table 31.4 shows that both gross profit and operating profit
rose sharply in 2013. This occurred at the same time as
the flood of orders resulting from the Rio Olympic Games
ANSWERS 51
CHAPTER 32
CASE STUDY: O’JAR BUILDING SUPPLIES
CASE STUDY: PARK FARM FOODS
1
▶ Which stakeholder is interested in the financial
information in Tabl 32.1?
The information in Table 32.1 shows current assets and
current liabilities for O’Jar Building Supplies. A supplier will
use the information to decide whether to give the company
trade credit. If a business is not financially secure it would
be risky selling goods on trade credit.
2
▶ What conclusion might the stakeholder in question 1
draw from the information shown in the statement?
The information in Table 32.1 shows that the working
capital position for O’Jar Building Supplies is worsening
over the time period. Current assets fall between 2012 and
2015 while current liabilities rise. Indeed, in 2015, working
capital is negative because current assets are less than
current liabilities. This suggests that the company will
struggle to pay its immediate bills. As a result, the supplier
is not likely to grant the O’Jar Building Supplies trade credit
because they might not get paid.
3
▶ How will Marcus van Zyl use the statement of
comprehensive income shown in the statement of
comprehensive income to make an important decision?
Marcus van Zyl is going to use the statement of
comprehensive income for 2016 to make an important
decision regarding his future. He has decided that if the
farm does not make a profit of ZAR 500 000 in 2016, he
will retire from farming. Unfortunately, the statement shows
that the farm’s profit in 2016 is only ZAR 211 000. This is
even lower than the profit made in 2015 (ZAR 344 000).
Presumably Marcus will retire from the business.
4
▶ Obtain the accounts of two large businesses in your
area and compare their performance. (The accounts of
PLCs can be obtained very quickly online.)
ACTIVITY 1
CASE STUDY: BIBBLINGTON PHARMACEUTICALS
1
▶ What is the main reason why the owners of Bibblington
Pharmaceuticals use accounts?
The owners of businesses will obviously be interested in
the performance and the financial position of the business.
Shareholders in limited companies will also be interested
in the performance of the business. They may look at the
size of dividends; they may use ratio analysis to see how
their investment in the business is performing; and they
might also make comparisons with other companies in the
same industry. In this case, the shareholders of Bibblington
Pharmaceuticals set targets for return on capital employed.
The shareholders aim to get a 10 per cent return on capital
employed. They use the accounts each year to check
whether this target has been achieved.
2
▶ Discuss whether Bibblington Pharmaceuticals has
reached the targets set by the shareholders over the
time period shown.
is made – it may not have to wait for customers to pay.
Therefore, it does not have to wait for cash. This means
they can operate with much lower current and acid test
ratios. BBG Plastics is a manufacturer and probably allows
its customers trade credit. This means they have to wait for
cash and therefore need higher liquidity ratios to be safe.
MULTIPLE-CHOICE QUESTIONS
1B, 2C, 3A, 4B
CHAPTER REVIEW
CASE STUDY: AL-DHABIT SHIPPING
The return on capital employed is a performance ratio.
1
▶ What is meant by this?
Performance ratios show how profitable a business is. The
ROCE shows how much profit the money invested in the
business generates.
2
▶ Work out a operating profit margin b current ratio c
ROCE for Al-Dhabit Shipping in each of the three years.
2013 2014 2015
Operating profit margin 9.04% 3.54% 9.83%
Current ratio 1.49 1.02 1.64
ROCE 11.30% 2.83% 9.75%
3
▶ Discuss the benefit of using ratios to compare the
performance of a business over a period of time.
Ratios can be used to assess the performance of a business
over time. This means that the performance can be tracked.
Calculating a ratio in one particular year may not be very
helpful because there is no basis for comparison. Also,
the particular year used might be an unusual year so the
result would be misleading. However, looking at ratios for a
period of time, three years in this case, it is possible to make
comparisons and identify patterns or trends in performance.
This is much more helpful.
4
▶ Assess the performance of the Al-Dhabit Shipping
between 2013 and 2015. Make a clear judgement in your
evaluation.
Over the three years, the operating profit margin has
risen from 9.04 per cent to 9.83 per cent. This is a small
improvement but, during 2014, the operating profit margin
fell to 3.54 per cent when both the price of oil and demand
fell. This does not suggest that there is a problem with the
business, just that trading conditions were dicult. The
current ratio has also improved over the time period from
1.49 to 1.64. If the current ratio lies between 1.5 and 2, a
business is said to have adequate working capital. Since
1.64 lies in this range, Al-Dhabit Shipping appears to have
enough working capital to fund its day-to-day activities.
However, the current ratio did fall to nearly 1 in 2014, which
provides further evidence that trading was dicult. Finally,
the ROCE has fallen over the three years from 11.3 per
cent to 9.75 per cent. The company is still recovering from
the dicult trading conditions and in 2014 the amount of
capital employed was increased when the owners injected
another US$2 million of capital. Clearly, the operating profit
has not risen enough yet to recover the lost returns.
52 ANSWERS
price reductions have been too severe. Consequently the
business may decide to review this strategy.
3
▶ Assess the performance of Varl Town Pools between
2015 and 2016. Make a clear judgement in your
evaluation.
One of the main uses of financial documents is to assess
the performance of a business. A number of stakeholders
such as the owners/shareholders, potential investors,
employees and managers will be interested in the
performance of a business. In this case, the information in
Tables 32.4 and 32.5 shows that the performance of Varl
Town Pools has taken a turn for the worse between 2015
and 2016. For example, in 2015, the business made a profit
after tax of A$6 900 000. However, in 2016, this became a
loss of A$3 500 000. This is a significant worsening which
none of the company’s stakeholders would welcome.
The statement of comprehensive income shows that
revenue has fallen by 8.4 per cent and both cost of sales
and expenses have risen significantly. Falling revenues
and rising costs are a bad sign for a business. In this
case, the likely reason for the outcomes is the arrival of
new competition in the market. In an eort to improve
competitiveness, Varl Town Pools has lowered the prices of
its maintenance services and taken on some construction
work at a loss in 2016. This strategy does not appeared
to have worked very well. By lowering prices the business
would have expected to raise revenue. But this hasn’t
happened, in fact, revenue has fallen.
The statement of financial position also shows a downturn
in performance. For example, the amount of working
capital (net current assets) has fallen by nearly 34 per cent.
A particular problem is the fall in the cash balance from
A$5 300 000 to A$1 200 000. This is in spite of borrowing
more money (non-current liabilities have increased by
A$900 000). Also, the value of the business has fallen
sharply. The net assets fell from A$13 300 000 in 2015 to
A$9 800 000 in 2016. This means that the business is worth
A$3 500 000 less.
To conclude, the performance of Varl Town Pools has
worsened significantly as a result of new competition in the
market. The outlook is also poor. After lowering prices and,
carrying out some construction work at a loss, the business
is still struggling. It may not survive much longer!
CHAPTER 33
CASE STUDY: TOURISM IN SRI LANKA
1
▶ What was the size of the Sri Lankan tourist market in
2016?
In 2015, a total of 1 798 410 tourists arrived in Sri Lanka.
2
▶ What is expected to happen to the size of this market in
2017?
The size of the market appears to be growing. In every
month in 2017, the number of tourists arriving in Sri Lanka
is higher than the corresponding month in the previous
year.
3
▶ How might a tour operator selling adventure holidays in
Sri Lanka use the information in Figure 33.2?
According to the information in Table 32.3, the return on
capital employed has exceeded the shareholders’ targets
every year except for 2016. In 2016, ROCE was only 8.3
per cent. Although this is below their 10 per cent target,
it may not be too disappointing. For example, it may be
acceptable if trading conditions were dicult during this
time. It is possible that the performance in 2016 was
caused by unusual circumstances and that in the future
trading conditions will return to normal and the performance
of the business will improve.
MULTIPLE-CHOICE QUESTIONS
1B, 2C, 3C, 4A
CHAPTER REVIEW
CASE STUDY: VARL TOWN POOLS
1
▶ Describe one reason why employees at Varl Town Pools
might be interested in the financial documents shown in
the tables above.
Employees might need financial information during
wage negotiations. For example, information about
the profitability, liquidity and financial prospects of the
business could be used to decide whether a business can
aord to raise wages. They may also look at accounting
information to see whether their jobs are secure. The
information in Tables 32.4 and 32.5 is not very encouraging
for employees. Revenue has fallen over the two years and
in 2016 the business made a loss. This suggests that their
jobs are not entirely safe and that a wage increase is very
unlikely at the moment.
2
▶ Discuss two ways in which Varl Town Pools might use
financial documents to make decisions.
Businesses will make better-informed decisions if they have
access to financial documents. Since financial documents
contain quantitative information, they can be very helpful in
the decision making process. For example, Varl Town Pools
may need up-to-date financial information to help run the
business and make key decisions such as how to reduce
costs. The statement of comprehensive income for the
company shows that both cost of sales and expenses have
increased between 2015 and 2016. For example, cost of
sales has increased by around 17 per cent. Varl Town Pools
could examine the dierent costs to help identify problems.
For example, if the cost of raw materials is rising, Townsville
Pools might decide to find some cheaper suppliers.
In 2016, Varl Town Pools made a loss of A$3 500 000. This
is shown clearly in the statement of comprehensive income.
The business may use the financial documents to try to
find ways of improving profitability. For example, if the
gross profit margins are small in relation to competitors, it
may be because prices are too low or costs of sales are
too high. Therefore prices can be raised or new suppliers
might be found for raw materials and other key resources.
Perhaps wage costs need more control. Profitability might
also be improved if revenues are falling behind those of
competitors. For example, perhaps a business should try
to find new markets to help increase sales – overseas for
example. In this case, Varl Town Pools has been lowering
prices to fight o new competition. It is possible that the
ANSWERS 53
have definite answers. In Figure 33.3, Questions 1 to 5 are
all closed questions – there is a definite answer to all of
them, either yes or no. Open questions have many dierent
possible answers, so when answering open questions,
respondents can give a wide variety of answers. In this
case, Figure 33.4 might be answers to the question ‘Why
haven’t you been on a Manzini Safari Tour?’ Each one
of the responses shown is dierent. There could also be
many other answers to this question. Closed questions can
be used to generate quantitative information while open
questions tend to generate qualitative information.
4
▶ Look at the data for Manzini Safari Tours and suggest
reasons why the number of visitors has fallen in recent
years. Give at least two reasons in your analysis.
There could be more than one reason why the number
of people going on safari tours to the Manzini Wildlife
Sanctuary has fallen in recent years. Only 7 per cent of
people in the survey had been to the sanctuary although
61 per cent had been on safari tours, which would suggest
that there is some interest in such trips. It is possible that
Manzini Safari Tours are too expensive. Of people 44 per
cent said they would go if it was cheaper; this is nearly
half of those interviewed. Also, one of the respondents’
comments in Figure 3346 says, ‘It’s too expensive – it
would cost me and my family over £300 to go for the day.’
Another possible reason for the fall in visitor numbers is that
the Park’s advertising has not reached many people. Only
7 per cent of respondents had seen adverts for the tours.
Also, one response in Figure 33.4 said ‘I have never heard of
Swaziland’. Perhaps consumer awareness needs to be raised.
Finally, some of the comments shown in Figure 33.4 might
suggest other reasons for the fall in visitors. These include
that the tours appear too supervised and that there are
no tigers. However, unless a lot of people made similar
comments, these may not be very important.
ACTIVITY 2
CASE STUDY: NESCAFÉ
Nescafé uses Tumblr to gather qualitative data.
1
▶ What is meant by qualitative data?
Some of the data gathered by market researchers is
qualitative. This means that the information is about the
attitudes, beliefs and intentions of consumers. It is usually
written down in words or recorded – in a video clip,
perhaps. Nestlé uses social media to gather qualitative
data about what people think of Nescafé. It uses the Tumblr
platform to develop consumer-led communications. This
information will appear as text as consumers send their
messages. Some consumers may also post photos and
other images during their interaction.
2
▶ Assess the benefits to Nescafé of using social media to
help gather information from consumers.
In 2015, Nescafé became the first global brand to transfer
all of its websites to the social media platform, Tumblr.
Social media is playing an increasing role in marketing. It
can provide a cheap way of gathering information about
a firm’s customers, market, brand appearance and other
market issues. For example, most social media platforms
Information in the case states that adventure travel has
been growing at over 65 per cent a year since 2009. It is
now a US$263 000 million industry and is still growing.
This would be encouraging news for a tour operator
selling adventure holidays. The information in Figure 33.2
might suggest to a tour operator that an online presence
would be very important when attracting customers. For
example, 69 per cent of adventure travellers researched
adventure holidays online. This means that the tour
operator could advertise its holidays on appropriate
websites. The data also shows that adventure tourists are
more likely to book their own trips online rather than visit a
travel agent. This information also supports the view that
an online presence would be important.
4
▶ In groups, discuss what other information might be
useful to a European tour operator selling holidays to
Sri Lanka. List your results on a poster and present
them to the rest of the class.
There could be many responses to this question. Some
examples might include:
• The age profile of tourists to Sri Lanka
• The countries that those interested in Sri Lanka live in
(that is, which particular European country, if any)
• The type of accommodation tourists prefer when visiting
Sri Lanka
• The amount people are prepared to pay for a holiday in
Sri Lanka
• The reasons why people choose Sri Lanka as a
destination
• How people book their trips to Sri Lanka
ACTIVITY 1
CASE STUDY: MANZINI SAFARI TOURS
Manzini Safari Tours has used primary research to gather
information.
1
▶ What is meant by primary research?
Manzini Safari Tours is carrying out primary research
because the tour operator is collecting new information
– data that has never been collected before. It is phoning
potential customers and asking them questions about the
tours. This data does not already exist; it is new data and
therefore primary research.
2
▶ Describe one advantage and one disadvantage of using
telephone surveys.
Telephone surveys involve interviewing people over the
telephone. The main advantage of interviewing people
over the telephone is that it is cheaper. People from a
wide geographical area can be covered. In this case, the
customers may be spread all over the world. However,
many people are becoming irritated by telephone interviews
because they may be unwelcome and uninvited. They may
refuse to take part in the interview.
3
▶ What is the dierence between open questions and
closed questions in a survey?
A good questionnaire will usually contain an appropriate
balance of closed and open questions. Closed questions
54 ANSWERS
4 ▶ Discuss the possible benefit to Ford of the information
in Figure 33.7.
Ford recognises the diculty in judging the accuracy and
authenticity of people’s online comments. This is because
many users admit that they lie on their social media profiles
to make themselves appear better than they are. With this
in mind, Ford has established social media guidelines to
ensure that its employees are truthful and realistic when
discussing the company on social media. The amount of
money that Ford invests in the development and launch of a
new product is so big that the reliability of data it collects is
of crucial importance.
The pie chart in Figure 33.7 shows sales of cars by
geographical region. This is an example of quantitative data
and may be of use to Ford, for example by showing that
nearly one-half of global sales are made in Asia (mainly
China). This suggests that the Asian market is important.
Therefore, Ford might channel more resources into the
development of products suitable for this market. Ford
should spend more time and money finding out exactly
what people’s needs are in this market to ensure that the
right sorts of products are developed. It might also suggest
that Ford should locate more production units in this market
so that transport costs are as low as possible. Also, people
in Asian markets may prefer to buy Ford cars if they know
that they are produced by factories close to, or actually
inside, their own country.
5
▶ Assess the possible benefits to Ford of using market
research before launching new products.
Ford will be more successful if it can supply cars that meet
customers’ needs. This means that a business has to
gather information to identify these needs. Once this data
has been gathered, Ford can design a car that meets the
specific needs of customers. The data gathered by market
researchers needs to be as detailed as possible. Ford will
try to anticipate customer needs; this means they try to
predict what customers want in advance and respond
to changes very quickly. Businesses operate in a rapidly
changing environment and have to keep up with the latest
trends, fashions, technology and designs. The technology
used in car design and manufacture is a particularly
important issue when meeting customer needs.
Launching a new product is risky. Also, as markets get
larger and competition gets fiercer, launching new products
gets even riskier. The probability of failure is high but
investment in eective market research can help reduce the
risk of failure. Ford will want to avoid costly product failures
that may result from misreading the market or failing to
carry out eective market research.
Gordon Platto, Ford chief designer, says that the
company is very influenced by the data gathered from
market research. He said ‘We go to customer immersion
events and spend time with customers in their homes to
understand how they use their vehicles. It enables us to
better meet the customer needs. You can see the influence
in our new vehicles.’
Finally, although Ford is committed to gathering market
research data and is prepared to make good use of it, it must
understand the importance of data reliability. Evidence in the
case does suggest that Ford is aware of this. For example,
oer numerous ways to analyse trends and conduct market
research. One of the main benefits of using social media
is the broad reach it has. In this case, Tumblr claims that it
hosts around 315.3 million blogs and 150 300 million posts
a year. This means that Nescafé can access huge numbers
of customers and potential customers using the platform.
Another benefit is that social media allows specific groups
of people to be targeted. In this case, one of the main
reasons why Nescafé switched to social media was to build
stronger relationships with younger consumers.
Nescafé can also gather information from consumers
instantly. Interaction takes place in real time so information
is always up-to-date. This means that Nescafé can respond
to any helpful suggestions resulting from their research very
quickly. Finally, the use of social media is not technically
dicult and therefore is cost eective to use. Over the
last six months, Nescafé says the Tumblr websites have
generated an extra US$200,000 in sales. Users can make
instant purchases by clicking on to ‘buy now buttons’. Also,
total monthly visits have risen by 29 per cent with users
now staying 18 per cent longer per visit. Nescafé clearly
values the use of social media in marketing.
MULTIPLE-CHOICE QUESTIONS
1A, 2C, 3D, 4A
CHAPTER REVIEW
CASE STUDY: FORD
1
▶ Using the data in Figure 33.6, calculate Ford’s share of
the global car market in 2015.
Ford’s market share
= Ford market share ÷ total market × 100
= 6.64 million ÷ 72.37 million × 100
= 9.18 per cent
2
▶ Describe two benefits of using online surveys to gather
information from customers.
Like many businesses, Ford uses online methods to gather
information from customers. The main benefit of online
surveys is that they can be completed and processed
quickly – the person types in the data, which is then fed
straight back for immediate analysis. Survey costs are lower
because there is no need for printing, postage and typing
in. Online surveys are often fun to complete because they
may be interactive. They can also be accessed 24/7 and be
completed at the convenience of the respondents. Online
surveys also make it easy to give feedback. Results can be
e-mailed to back to the respondents if this is appropriate.
3
▶ Discuss the importance of the reliability of market
research data to a company like Ford.
Although carrying out market research can reduce the risk
of products failing in the market, it is important to ensure
that the data gathered is reliable. If market research data
is inaccurate or out of date, any decisions based on the
data are likely to be unsound. A business also needs to
appreciate that human behaviour is unpredictable. People
might also change their minds or misunderstand the
questions. They might also give answers that they think the
interviewers wanted to hear.
ANSWERS 55
for bookings, exclusive rates when staying in a hotel,
extended checkout times and free newspapers.
2
▶ Describe one important benefit to IHG of using the IGH
Rewards Club.
The use of customer loyalty schemes help businesses to
retain customers. This can be very important because if
customers remain loyal and continue to make purchases in
the future, the financial benefits can be high. Many studies
in the past have concluded that the cost of retaining a
customer is about 10 per cent of the cost of acquiring a
new one. Clearly, the costs of customer retention are less
substantial than the benefits. If IHG customers join the
Rewards Club, and start to enjoy the rewards, they are
likely to book IHG hotels whenever they travel.
3
▶ In pairs, design a customer loyalty scheme for a small
guest house. Present your ideas on a poster to the rest
of the class.
ACTIVITY 2
CASE STUDY: FERRARI
In 2015, 72.37 million cars were produced globally.
1
▶ Work Ferrari’s share of the global market.
Ferrari’s market share = 7664 ÷ 72 370 000 × 100
= 0.01059 per cent.
2
▶ What is meant by a niche market? Use this case study
as an example.
A niche market is a small part of a much larger market.
In this case, Ferrari targets its cars at a niche market. In
relation to the total global car market of 72 370 000 cars,
Ferrari had just 0.01059 per cent of the total market. This
is a very small proportion and is a classic example of a
niche market. Ferrari targets the prestige segment of the
car market where performance, quality and exclusivity are
highly valued. The prices of its cars are very high and only a
small number of consumers can aord to buy one.
3
▶ Describe one advantage of operating in a niche market.
A niche market is often left ‘untouched’ by most of the
large producers in a market. Although Ferrari does have
competition, it is not from the giant car producers like
Ford, Honda, Nissan, VW and Toyota. Consequently,
there is more opportunity for raising prices and focusing
on production quality. It is also easier to meet the needs
of customers in a niche market. This is because the small
group of consumers that make up the niche probably have
very similar needs.
MULTIPLE-CHOICE QUESTIONS
1C, 2B, 3A, 4D
CHAPTER REVIEW
CASE STUDY: THE GLOBAL MARKET FOR OIL
1
▶ What is meant by the term mass market?
Mass markets are huge markets where the same product is
sold to huge numbers of people. The global market for oil is
an example. Oil producers can produce large quantities at a
Ford appreciates the diculty in judging the accuracy and
authenticity of people’s online comments. This is because
many users admit that they lie on their social media profiles
to make themselves appear better than they are.
CHAPTER 34
CASE STUDY: HASAN’S
1
▶ Why is Hasan’s a successful business?
Hasan’s is a successful business for two main reasons.
First of all, Aftab serves high-quality reasonably priced
food. The restaurant industry is highly competitive so any
outlet that oers quality at a reasonable price is likely to
enjoy success. However, another important reason is the
quality of customer service delivered at Hasan’s. About 80
per cent of Hasan’s customers are regulars and evidence
suggests that a good proportion of them value the quality
of customer service oered by Aftab and his family. The
quality of customer service is good because Hasan’s meets
customers’ needs.
Aftab says ‘I have worked very hard to build a
relationship with my customers.’
2
▶ What is meant by this?
An increasing number of businesses try to build relationships
with customers. This involves getting to know them
at a personal level. Businesses try to establish a bond
with customers through eective communication and
do everything possible to meet their needs. Businesses
can adopt a number of practices to help build customer
relationships. They can personalise communication, say
thank you, build trust and connect with them regularly, for
example. In this case, Aftab says that he treats customers
like his friends and goes out of his way to meet their
needs. People are made to feel welcome. For example, the
restaurant stays open very late every Thursday night to serve
12 regular customers that come straight from a local factory
after a late shift for something to eat. Clearly Aftab has built a
sound business relationship with these customers.
3
▶ Describe the benefit to Hasan’s of having loyal customers.
Every business wants loyal customers. This means that
they keep coming back to spend more money. Therefore
a business does not have to invest as much money in
expensive marketing such as advertising and promotion.
The cost of retaining existing customers is much less than
the cost of acquiring new ones. Hasan’s will enjoy more
revenue, lower costs and higher profits if it can continue to
hold on to its loyal customers.
ACTIVITY 1
CASE STUDY: INTERCONTINENTAL HOTELS GROUP
1
▶ What is meant by a customer loyalty scheme?
A customer loyalty scheme rewards customers for repeat
purchases. Customers are given benefits when they increase
the number or value of their transactions with a business.
In this case, the IHG Rewards Club rewards customers
according to the number of nights they stay in IHG hotels.
Some of the benefits of building up a booking history include
the accumulation of points or miles which can be exchanged
56 ANSWERS
therefore want to recycle their waste. In this case, it might
be argued that the drop in demand for oil might be partly
caused by more energy being generated using renewable
sources.
Businesses must monitor markets, identify changes in
customer needs and be prepared to develop new products
in order to meet these new needs. Failure to do so may
mean that market share is lost to more responsive rivals.
Businesses can also gather information about spending
patterns in markets. They can carry out their own research,
use statistics generated by the government or purchase
market research reports from specialist market research
agencies such as Mintel.
Changes in the market might be the result of increased
competition. The behaviour of competitors in the market
needs to be monitored very carefully. For example, the
arrival of a new competitor in the market could have
a dramatic eect on sales if their products are more
advanced or more eectively marketed. Competition puts
businesses under some pressure. It means that they have
to encourage customers to buy their products in preference
to those of rivals. They will use a range of methods to
attract customers. They might do this by lowering prices or
making their products appear dierent to those of rivals, for
example.
Finally, if businesses do not respond to market changes,
they are likely to lose market share. At worst they could
collapse. In the market for oil, demand has fallen, new
competition has arrived in the form of US shale gas
producers and prices have fallen sharply. Unfortunately,
due to the nature of the product, there is not a great deal oil
producers can do. It is not possible to develop the product,
firms have no control over price and the promotion of oil as
a product is not really appropriate. The only way businesses
can respond to changes in the market is to cut costs and
hope that the price recovers in the future. However, one
possibility is for oil companies to diversify. For example,
some large oil companies have started to invest in wind
farms, electric battery storage systems and carbon capture
and storage (CCS) to generate new revenue streams. One
of the world’s largest oil producers, Saudi Arabia, has said
that it will sell o part of its large state-owned oil business
and diversify its economy away from oil.
CHAPTER 35
CASE STUDY: ACCOR
1
▶ How has Accor divided the market in this case?
Accor has a number of hotel brands that it targets at
dierent customer groups, each with dierent needs.
For example, some customers, the young and low-
income travellers, may only be able to aord ‘budget
accommodation’. Therefore, the Hotel F1 brand might
suit their particular needs. Rooms only cost from €19 per
night. Another group of customers targeted by Accor are
very wealthy and look for luxury; the Raes brand will
provide for this group. There are just 12 Raes hotels and
each one is unique in style. The brand also oers unique
features including the famous Long Bar and Writers Bar
(which come from the original Raes Singapore), Raes
lower unit cost by exploiting economies of scale. This might
result in higher sales and higher profits. According to the
information in Figure 34.5, the market for oil is dominated
by just a few countries which includes the US, Saudi Arabia
and Russia.
The global price of oil fell from around US$115 a barrel in
2014 to US$45 in 2016.
2
▶ Work out the percentage change in the price between
2014 and 2016.
Percentage change in price = US$80 ÷ US$125 × 100
= 64 per cent
3
▶ Do you think the oil industry is product or market
orientated?
The oil industry is product orientated. This is because oil
producers focus their eorts on extracting as much oil as
possible and as cheaply as possible. Their major concerns
are production costs. Oil producers engage in little
marketing since their output is sold into a global market
where the price is already determined. Each oil producer
makes little or no eort to conduct market research or
understand their customers’ needs since one company’s
crude oil is exactly the same as another. The need for oil
already exists since it is an essential source of energy so
there is little opportunity for advertising and promotion.
4
▶ Discuss one important change that has occurred in the
global oil market.
The price of oil has fallen dramatically since 2014. In less
than two years, it has fallen by 64 per cent. One of the main
reasons for the fall is the increase in supply of oil and other
energies. US production has nearly doubled recently which
means that the USA’s suppliers, such as Saudi Arabia,
Nigeria and Algeria, are trying to sell more of their oil in
Asian markets. Canadian and Iraqi oil production is also
rising and the Russians are also managing to maintain high
production levels.
Businesses in the oil industry have been hit hard. Revenues
and profits have fallen which has resulted in many
bankruptcies and forced oil companies to cease operation
at more than two-thirds of their production faculties.
Companies have also cut investment in exploration and
production quite sharply. It is estimated that 250 000 oil
workers – roughly one-half in the USA – have lost their jobs.
5
▶ Assess the importance to businesses of responding to
changes in the market.
Most markets are dynamic which means they are likely
to change. Markets may grow, shrink, fragment and
emerge. Some markets can completely disappear. One
of the reasons why markets change is because the
needs of customers change. These needs change for a
number of reasons. For example, consumers are better
educated and more sophisticated than ever before.
Owing to improvements in communications and the
greater availability of knowledge, people are more aware
of opportunities and have developed more sophisticated
tastes. Consumers have also been influenced by changes
in social habits. For example, more people are concerned
about the environment and resource depletion and
ANSWERS 57
3 ▶ Assess if these products are likely to be targeted at
particular a geographical areas and b income groups.
a Buyers of the AYGO may be segmented geographically.
This is because it is described as the ultimate city car. This
suggests that it will be targeted at people living in cities.
It might also be argued that the Land Cruiser is targeted at
rural customers because it is an ‘o-road’ vehicle. It may
be that many are sold to people who live in the countryside.
However, there is plenty of evidence to suggest that 4WDs
are also popular with drivers who live in towns and cities.
b The AYGO is likely to be targeted at lower income groups.
This is because it is a cheap car at just £8495. It is also
economical, which will appeal to lower income groups.
In contrast the Land Cruiser may be aimed at wealthier
drivers. This is because it is expensive – priced at £36 465.
It is also said to oer premium levels of comfort, which
would appeal to higher income drivers.
4
▶ Choose another well-known multinational car
manufacturer and look at the range of models it is
marketing (online if possible). Decide which market
segment each model is being aimed at. Record your
results on a poster and present to the rest of the class.
MULTIPLE-CHOICE QUESTIONS
1B, 2A, 3B, 4D
CASE STUDY: JQBC
1
▶ What is meant by market segmentation?
Markets can be divided into dierent sections or segments.
Each segment is made up of consumer groups that
have similar needs. Businesses recognise this and target
particular market segments with their products. For
example, JQBC targets at least one of its brands (TV
channels), JQBC Kidz, at young children.
2
▶ How does JQBC segment the market for television
according to a age, b lifestyle and c gender?
a Evidence in the case suggests that JQBC uses
demographic segmentation. This is because some of its
brands (TV channels) are targeted at specific age groups.
For example, JQBC Kidz is targeted at children. This
channel targets the 3–10-year-old age group. It provides
a range of cartoons, children’s films and learning
programmes. The schedule aims to follow the mood and
energy levels of young children throughout the day.
b Some products are targeted at consumer groups
according to their lifestyles. For example, JQBC has
JQBC Sport. This channel is aimed at sports enthusiasts.
It provides live coverage of a number of key sports events
around the world such as golf, association football, auto
racing and baseball. It also covers sumo wrestling, martial
arts, figure skating and rugby union in depth.
c Some businesses may target their products according
to gender. In this case, JQBC has a channel which is
aimed specifically at the female audience. JQBC Fem
It is aimed at female viewers and oers a wide range
of programmes including films, lifestyle series, quiz
and panel shows, drama series, reality series and talk
shows on varying topics including cooking, travel, cars,
relationships and sports.
Patisserie and Raes Spa. A room in Raes, Singapore
may cost at least €800. Accor also targets well-connected
and sophisticated travellers. Its Pullman brand has 100
four- and five-star hotels across Europe, Africa, the Middle
East, Asia-Pacific and the Americas. Prices per room will
start at around €120, however, they could be a lot higher
depending on the location. Finally, Accor has a brand that
meets the needs of people with a little more purchasing
power than low-income consumers. For about 60 euros
per night, the Mercure brand with 738 hotels in 51 dierent
countries, oers warm, personalised contemporary rooms.
They are welcoming, clean with high quality furniture. Accor
has divided the market according to dierent needs and
income levels.
2
▶ Discuss how Accor might benefit from having many
dierent hotel brands.
By targeting dierent customer groups, Accor will be able
to serve a wider range of customers. This will enable them
to increase their revenue. If Accor only oered, say, the
Mercure brand, it would miss out on the opportunity to
charge higher prices to those who are willing to pay for a
higher quality service such as Raes. It would also miss
out on a large budget hotel market if it did not operate
HotelF1.
ACTIVITY 1
CASE STUDY: TOYOTA
There are many dierent segments in the market for
cars.
1
▶ What is the main reason for this?
There is a very large number of dierent segments in
the market for cars because a wide range of dierent
consumers want dierent types of vehicles. For example,
there are small ‘low cost’ cars, environmentally friendly
cars that use electricity, ‘sporty’ cars, family cars, prestige
cars, mid-range cars, 4WDs and commercial vehicles.
These dierent types of cars, and others, are likely to be
purchased by dierent consumer groups that have dierent
needs and wants.
2
▶ Describe the market segment that Toyota is likely to
target with the vehicles described here.
The Toyota Prius is likely to be targeted at people who
are concerned about the environment. It produces lower
emissions than normal petrol driven cars because it relies
more on electricity for its power. The Toyota Prius has
become well known among eco-conscious drivers.
The Proace is a commercial vehicle. It is a van and will be
targeted at businesses that require this type of transport.
The AYGO is a small, low cost car. It is not a family car
and is therefore likely to be targeted at single people on
relatively low incomes. However, families might buy it as a
second car. It is also said to be the ultimate city car so it
might also be targeted at single people who live in cities.
The Land Cruiser is an expensive 4WD and described as a
sports utility vehicle. It is likely to be targeted at wealthier
people who have an interest in sport. It might also appeal to
wealthier families because of its size.
58 ANSWERS
CHAPTER 36
CASE STUDY: PRODUCT DEVELOPMENT AT BESTHOME
1
▶ What is meant by product development?
Product development involves identifying opportunities
and ideas for new products and converting those ideas
into marketable goods or services. BestHome introduces
around 1 500 new products each year and is very
committed to product development.
2
▶ Describe BestHome’s approach to product
development.
BestHome claims that its approach to product development
is very thorough. For example, the development of new
products often starts with a visit to people’s homes to find
out the real needs of customers. The design process at
BestHome is then handled by a number of teams. Each
team contains a materials analyst, a product developer
and a technician or engineer - in addition to designers. All
the teams work transparently so that everyone can see
what everyone else is doing. Design work is carried out in
a huge aircraft hanger in Frankfurt where all products and
prototypes can be seen. This helps to inspire the designers.
The design facility has a prototype shop with craftsmen
providing a range of dierent skills and a 3D printing
facility. Finally, designers are encouraged to travel and
work with foreign designers to learn new techniques and
get fresh ideas. They are also required to attend all major
international trade fairs to observe developments in the
market and explore the activities of competitors.
3
▶ Discuss why BestHome brings out so many new
products each year.
BestHome stores typically stock 8000 products and each
year around 1500 new products are introduced. This will
help to keep the stores ‘fresh’ and encourage customers
to revisit to find out what is new. New products help to
generate more revenue and hopefully more profit. Also, a
business that continually updates its product lines is likely
to have a competitive edge in the market. This will help
BestHome to maintain or grow its market share.
ACTIVITY 1
CASE STUDY: PACKAGING
1
▶ What is the main role played by packaging in the
images?
The left image shows packaging that can be recycled and
a product that is eco friendly. This might attract customers
who care more about the environment. They will feel
happier buying products knowing that using recycled
materials in the packaging has saved resources. Using
recycled materials reduces the impact businesses have
on the environment. Some consumers might be prepared
to pay a higher price for such a product. Also, by using
recycled materials, the business might enjoy lower costs.
In the right image, packaging is used to help promote the
product. It is designed to be attractive so that customers
are drawn to the product. Arguably the bottle design for
the perfume is stylish, attractive and ‘classy’. It will help
3
▶ Discuss how a business might benefit from using the
socio-economic table in Figure 35.1
The table shown in Figure 35.1 is used to divide people
into dierent groups according to their social class. There
are six dierent groups. Those in group A, for example, are
described as ‘Upper middle class’. The group only accounts
for about 4 per cent of the UK population and is likely to
include doctors, lawyers, company directors and high
level administrators. In contrast, C2, the skilled working-
class group, is the largest in the population (33 per cent).
It includes skilled manual workers such as carpenters,
plumbers, cooks and train drivers.
A business might use this information when targeting products
at dierent market segments. For example, stores like
Poundland (UK) and Dollar Stores (US and Australia), where all
products are sold for a low currency denomination such as £1
and $1, may be targeted at Socio-economic groups D and E.
4
▶ Assess the possible benefits to JQBC of using market
segmentation.
Generally JQBC will be better placed to meet the needs
of dierent customer groups if the market is segmented. It
can design TV channels for groups of customers that have
similar characteristics. By producing dierent channels
for dierent market segments JQBC can increase its
revenue. For example, JQBC has TV Channels like JQBC
Kidz for children, JQBC for women and JQBC for sports
enthusiasts. These are three distinct customer groups
with very dierent needs. By catering for these dierent
needs JQBC can generate more revenue. For example,
JQBC Fem is an important channel for the broadcaster
since it attracts the most advertising revenue. Advertising
revenue is attracted from a large number of businesses
and increasingly from businesses that save time for busy
families. For example, online grocery retailers are currently
targeting working parents who have increasingly less time
for family grocery shopping trips.
Another benefit of market segmentation is that customers
may be more loyal to a business that provides products
which are designed specifically for them. In this case, once
consumers become familiar with a particular TV channel,
if it meets their needs exactly, they are likely to continue
watching it. Also, when a new channel is launched and
directed at the same group, they are more likely to try it.
Market segmentation might also help JQBC to maximise
advertising revenue. This is because clients buying
advertising space on their channels can target their adverts
at specific customer groups. For example, a business that
wants to advertise its sportswear is likely to place adverts
on JQBC Sport. This will make their adverts more cost
eective because a larger proportion of the audience is
likely to be interested (than the same advert placed on a
general TV channel).
However, JQBC probably has to invest very heavily in
production and programming to support the wide range of
TV Channels it targets at the dierent market segments.
This will be expensive and eat into profits. However, since
JQBC has been broadcasting for 19 years and in 2017
made a profit of JPY12 000 million on a revenue of JPY140
000 million, the eective segmentation of the market must
make a substantial contribution to its success.
ANSWERS 59
MULTIPLE-CHOICE QUESTIONS
1D, 2C, 3B, 4C
CHAPTER REVIEW
CASE STUDY: CHEESY SNAX
1
▶ What is meant by the term marketing mix?
The marketing mix is the dierent elements of a firm’s
marketing that are designed to meet the needs of
customers. Often called the 4Ps, they include product,
price, promotion and place. In this case, the product is
particularly important for Cheesy Snax. It focuses heavily
on the quality of its products.
2
▶ What are the features of a cash cow in the Boston
Matrix?
In the Boston Matrix, cash cows are mature products with
a high market share. There is little potential for growth in
the market but the products generate significant amounts
of cash for a business. In this case, Cheesy Crackles and
Cheesy Pops, are cash cows enjoying annual sales of
around 30 million packets each.
3
▶ What is the position of Cheesy Pus in the Boston
Matrix?
Cheesy Pus, was introduced in 2014 and targeted
at children. It has a low market share but is showing
some potential. This is an example of a question mark
in the Boston Matrix. It sold 5 million packets in 2015.
The marketing manager thinks that with the right sort of
promotion the product will flourish.
4
▶ Discuss how Cheesy Snax might use the Boston matrix
in the management of its product portfolio.
The Boston matrix may be used to help analyse the
products marketed by a business. The matrix enables a
business to place their products into dierent categories
according to their market share and position in the life
cycle.
When managing its product range, Cheesy Snax must try to
make sure it has the ‘right balance’ of products. This means
that it must avoid having too many dogs and try to increase
the number of stars and cash cows. Arguably, Cheesy
Snax has two cash cows in Cheesy Crackles and Cheesy
Pops. Some of the income from these cash cows might be
invested in new product development. Another product,
Cheesy Pus, was introduced in 2014 and targeted at
children. It has a low market share but is showing some
potential. It sold 5 million packets in 2015. This product
may be a question mark and may need some adjustment
in its marketing. Finally, Cheesy Nuts is in decline (a dog)
and may be replaced. The Boston Matrix can be used by
Cheesy Snax to help make marketing decisions about its
product portfolio.
5
▶ Describe the main features of the product life cycle for
Cheesy Nuts.
Cheesy Nuts was launched in 2009 after spending about one
year in development. The product was slow to take o and
only had annual sales of around 500 000 packets half way
through 2010. The product did grow for a two-year period but
to make the product appear more luxurious. It might also
mean that the business can charge a higher price for the
product.
Businesses might need to change their packaging when
selling goods abroad.
2
▶ Discuss why this might be necessary.
When businesses export their products, it may be
necessary to change the packaging. There may be a
number of reasons for this. In some cases, the names of
products on packaging may have to be changed. This is
because they may be misunderstood, inappropriate or
oensive in other languages. Dierent countries also have
dierent regulations relating to the packaging of products.
For example, in some countries all the fat and salt content
of food products have to be clearly shown on labels.
ACTIVITY 2
CASE STUDY: MICROSOFT
1
▶ What is meant by an extension strategy? Use examples
from this case study in your explanation.
Extension strategies are designed to lengthen the life of
an existing product. They may be introduced before the
product starts to seriously decline. If a product can be
successfully refreshed, sales levels, along with revenues,
may start to recover or even grow. In this case, Microsoft
has extended the life of Microsoft® Windows by continually
updating the product. Since Windows 1 was introduced in
1985, there have been 11 major updates (along with many
other versions of the list shown in Table 36.1). Each new
version is improved technically and usually contains new
features. The product has now been on the market for 31
years.
2
▶ Discuss benefits to Microsoft of using extension
strategies. Give at least two benefits in your analysis.
One of the main benefits of extension strategies is that
products will continue to generate revenues and profits
for a longer period of time. A product is likely to be
more profitable in the later stages of its life because the
research and development costs will have been recovered.
Consequently, provided the cost of the extension strategy
used is not too high, the longer the life of a product, the
more profit will be made. Although Microsoft might invest
quite large amounts of money in research and development
on the new versions of Windows, the benefits must be
greater than the costs because there have been 11 new
versions.
Another benefit of lengthening the life cycle of products
with eective extension strategies is that competitors will
find it more dicult to enter the market. If a business is able
to keep updating and modifying a product to make it even
better and more appealing, competitors know that they
will have to bring out something really special to make an
impact on the market. Each new version of Windows that
Microsoft launches has better technology and new features.
This helps to retain customer loyalty and makes it more
dicult for other software producers to take market share
away from Microsoft.
60 ANSWERS
starts to fall. For example, a new product called ‘Airdust’
was launched in India at a price of Rs 3600. However, a ten
months later, it was available for just Rs 2600. This is about
28 per cent lower than the original launch price.
In the second example, the Kowloon Gift Shop bases the
prices charged in her store on costs. Yvette Cheng uses a
very simple method to calculate the prices of all the gifts
sold in the shop: she adds 20 per cent to the cost of buying
them in.
2
▶ Describe one possible advantage of using the pricing
method in each case.
Selling new products at a high price when they are
first launched is a common pricing strategy for some
businesses – particularly those in the technology industry.
The idea is to generate high levels of revenue by selling to
early adopters. These are people that attach a great deal
of value to buying new technology when it first comes out.
They are prepared to pay the higher prices to be the ‘first’
with the new technology.
The method used by Yvette Cheng will ensure that her
business makes a profit. This is because the prices charged
are 20 per cent higher than costs.
3
▶ In groups, discuss the factors that might influence the
price charged for a a carton of milk and b an air ticket
to a far-away place. Record your ideas on a poster and
present them to the rest of the class.
ACTIVITY 1
CASE STUDY: COFFEE SHOPS
1
▶ Describe the pricing strategy being used by the
multinational.
The multinational coee chain in this case is using
predatory or destroyer pricing. The idea is that a very
low price is set to deliberately undercut competitors like
Eduardo Urondo. Once Eduardo’s coee shop goes out of
business, the chain will raise prices.
2
▶ How can the new rival aord to trade at a loss?
Predatory pricing is an expensive approach because it
usually means a business has to trade at a loss for a period
of time. However, in this case a large multinational is using
predatory pricing to drive out a small independent coee
shop. Large multinationals will have huge resources and
can aord for one outlet to trade at a loss for a period of
time.
ACTIVITY 2
CASE STUDY: PHARMACEUTICAL COMPANIES
1
▶ Name the pricing strategy used by Pfizer for
Atorvastatin.
Pfizer is using price skimming for its heart disease drug
Atorvastatin (40 mg). This involves setting a high price for a
period while a patent protects sales of the drug. Even when
non-branded versions of the drug enter the market, Pfizer’s
Atorvastatin was selling for US$191 per month in the USA.
In contrast, a non-branded producer of Atorvastatin (40 mg)
was selling it for US$160 per month. Another non-branded
sales only ever reached just over the 2 million mark. This is
significantly lower than the 30 million annual sales of Cheesy
Crackles and Cheesy Pops. After reaching their highest
point in 2013, sales of Cheesy Nuts started to decline. By
2016, sales were down to about 1 million packets. The cycle
suggests that the product has been unsuccessful. If the rate
of decline continues, sales could be close to zero by the
end of 2017. Cheesy Snax needs to take some action and
address the balance in the product portfolio.
6
▶ Assess whether Cheesy Nuts should be replaced with
Blue Cheesy Crackles in 2017. Make a clear judgement
in your evaluation.
As the product life cycle shows in Figure 36.5, sales of
Cheesy Nuts are in decline. The maximum level of sales for
the product was just over 2 million in 2013; since then they
have dropped consistently to about 1 million in 2016. If no
action is taken they will possibly drop to zero. Cheesy Snax
has a number of options in dealing with the problem.
One option is to relaunch the product. It has been suggested
that the product should be relaunched with a change in
packaging and targeted more aggressively at adults. This
might reverse the decline and get the product moving again.
A promotion clearly targeted at adults might be eective and
result in a new interest in the product. However, the cost of
this strategy is about US$1.5 million and some people have
said that this is just ‘a waste of money’; these people would
presumably withdraw the product.
The withdrawal of Cheesy Nuts might be an option if it
could be replaced. Cheesy Snax has another product, Blue
Cheesy Crackles, under development. The product is close
to the test marketing stage. However, there is a worry.
Although Blue Cheesy Crackles have a pleasant taste,
their bright blue appearance were unpopular with some
consumers during development. If the problem could be
quickly resolved, and the product launched, Cheesy Nuts
could be withdrawn.
Another alternative would be to invest in the promotion of
Cheesy Pus. This product currently has sales of 5 million
and is showing some potential even though it has a small
market share. Although the investment would cost £2.5
million, this might be the answer if there is going to be a
delay in the launch of Blue Cheesy Crackles.
To conclude, it does seem that Cheesy Nuts should be
withdrawn from the market. It would be a risk but so would
investing a further US$1.5 million in a relaunch. Assuming
that there are not enough funds to both invest in the
promotion of Cheesy Pus and relaunch Cheesy Nuts, this
might be the best option. It is not clear cut, but there is
always risk in business. Cheesy Snax will also hope that the
problem with Blue Cheesy Crackles can be solved quickly –
especially if Cheesy Nuts are withdrawn.
CHAPTER 37
CASE STUDY: GRANITE TECCO
CASE STUDY: KOWLOON GIFT SHOP
1
▶ How are prices set in the above examples?
In the first example, Granite Tecco sets a high price for
its new products. Then, after a period of time, the price
ANSWERS 61
This is called psychological pricing. Consumers are ‘tricked’
into thinking that AED 399 is significantly cheaper than
AED 400. Of course it is not, but this psychological eect
often works for businesses. In this case, Nassar’s has used
psychological pricing in an eort to increase sales. For
example, item 1 was priced at AED 280 using cost-plus
pricing but during the trial month it was AED 239.
5
▶ a Complete the tables by calculating the revenue before
and after the price change and b then assess whether
the sale using psychological pricing was eective for
Nassar’s.
To assess whether the new pricing strategy was successful,
it is necessary to calculate the revenues from the sales of
the four garments in the month before the trial and in the
month of the trial. This is easily done by multiplying the
sales volume by the prices in each month. These values are
shown in the revenue columns of both tables below.
Item Cost (AED) Cost + price
(AED)
Sales Revenue
(AED)
1 200 280 100 28,000
2 800 1120 50 56,000
3 400 560 80 44,800
4 120 168 200 33,600
Item Cost (AED) Psych. price
(AED)
Sales Revenue
(AED)
1 200 239 150 35,850
2 800 899 65 58,435
3 400 519 140 72,660
4 120 159 300 47,700
In the month before the trial, where cost plus pricing
was used, the total revenue from the sale of the four
items was AED 162 400. During the month of the trial,
where psychological pricing was used, total revenue
was AED 214 645. Therefore, both sales of the four items
and revenue have increased significantly. Revenue has
increased by AED 52 245, that is, 32 per cent. This suggests
that psychological pricing was eective during the month’s
trial and should be used across all of Nassar’s stores.
However, some caution is needed. Clearly the alternative
pricing strategy has increased revenue, however, Nassar’s
needs to look at profit as well. It needs to check that
business overheads have not increased by more than the
increase in revenue as a result of selling more items.
CHAPTER 38
CASE STUDY: UNILEVER
1
▶ What is meant by distribution in business?
Distribution is the movement of goods from the supplier to
the customer.
2
▶ Describe the method of distribution used by Unilever.
Unilever uses a number of dierent distribution methods.
Unilever has its own sales force but also uses independent
brokers, agents and distributors. It sells to chain stores,
wholesalers, cooperatives, independents, food service
distributors and institutions. Products are transported
product, Lovatstatin (40 mg), was selling for just US$51 per
month (although this was not exactly the same chemical as
Atorvastatin). Skimming is common in the pharmaceutical
industry.
2
▶ Discuss the main advantage to Pfizer of this pricing
strategy.
Pharmaceutical companies use skimming for a purpose:
in the pharmaceutical industry, businesses spend a lot on
research and development and this is a way to recover
some of that money. For example, in 2014, Pfizer, the
US drugs company, spent US$7200 million on R&D. In
order to encourage research on this scale, pharmaceutical
companies can obtain a patent when they launch a new
drug. This is a license that protects companies from
competition for a period of time. This means they can
charge very high prices until the patent runs out. This
allows companies like Pfizer to recover the heavy costs of
research and development and also make a profit.
MULTIPLE-CHOICE QUESTIONS
1D, 2B, 3A, 4D
CHAPTER REVIEW
CASE STUDY: NASSAR’S
1
▶ What is meant by cost-plus pricing?
Cost plus pricing is a simple pricing strategy. It involves
adding a mark-up (a certain percentage) to the cost of
producing or buying the goods for sale. In this case,
Nassar’s uses a mark-up of 40 per cent for most of its
clothing.
2
▶ Work out the price Nassar’s would charge for an item
costing AED 240.
Price = cost + (40 per cent × cost)
Price = AED 240 + (40 per cent × AED 240)
Price = AED 240 + AED 96
Price = AED 336
3
▶ Discuss one advantage and one disadvantage of cost-
plus pricing.
Businesses have to set prices that generate a profit. One
method that ensures that all costs are covered is cost plus
pricing. It is simple and involves adding a mark-up to total
costs. In this case, 40 per cent is added to the cost to
get the price. This method is common with retailers such
as Nassar’s. It is a simple pricing method, all of the sta
understand it and it ensures that profits are made.
However, one of the disadvantages of this method is that
it ignores market conditions. For example, the AED 336
price set by Nassar’s for the clothing in this case may be
far too high in relation to the prices charged by rivals. This
might result in low sales and a move in custom away from
all of Nassar’s stores over a period of time. Setting a price
without taking into account the market conditions could be
risky.
4
▶ What is meant by psychological pricing?
One common pricing strategy is to set the price slightly
below a round figure – charging AED 399 instead of AED 400.
62 ANSWERS
of manufacturing its own shoes is that the intermediary
is removed. This means that Bata makes more money
because it enjoys the profit margins that the intermediary
(perhaps a wholesaler) would normally take. This will
increase the profitability of the whole business. It also
means that Bata’s manufacturers have guaranteed outlets
for their output.
ACTIVITY 2
CASE STUDY: ROLEX
1
▶ Describe the method of distribution used by Rolex.
Rolex is very selective about where its wristwatches are
sold. Rolex watches are only available in a select number
of ocial Rolex retailers. It is important that each outlet has
the necessary skills and technical know-how to guarantee
the authenticity of each and every part of a Rolex, and to
help customers to choose the right model that will last a
lifetime. This helps to control the environment in which they
are sold and to avoid the sale of fake watches.
2
▶ Discuss one possible reason why Rolex watches cannot
be purchased online.
One reason why genuine Rolex watches cannot be purchased
online is because Rolex wants to reduce the number of fake
watches that are sold under its brand name. It is much easier
to sell ‘fake’ products online since customers cannot touch
and look at goods before they are purchased. Rolex claims
that none of their watches will be sold online. Therefore,
anyone that buys a Rolex from this source is taking a great
risk – it is unlikely to be a genuine Rolex.
MULTIPLE-CHOICE QUESTIONS
1C, 2D, 3A, 4B
CHAPTER REVIEW
CASE STUDY: NEIMAN MARCUS
1
▶ What is meant by the term distribution channel?
A distribution channel is the route through which goods
pass from the manufacturer to the consumer.
2
▶ Describe one factor that might aect the choice of
distribution channel for a business.
The distribution channel chosen by a business will depend
on a number of factors. One factor is the nature of the
product. Dierent types of products may require dierent
distribution channels. For example, most services are sold
directly to consumers. It would not be appropriate for window
cleaners, gardeners and hairdressers, for example, to use
intermediaries. Businesses producing high-quality ‘exclusive’
products such as perfume and designer clothes will choose
their outlets very carefully. The image of their products is
important so they are not likely to use supermarkets, for
example. In this case, Neiman Marcus, a luxury department
store, stocks some high profile brands such as Chanel, Gucci
and Prada. These manufacturers will be happy to see their
products stocked in such an exclusive outlet.
3
▶ Describe two features of a department store.
Neiman Marcus is a luxury department store. This is a
large store split into distinct selling departments such as
through a network of distribution centres, warehouses,
company-operated and public storage facilities and other
facilities. Their popular brands can be bought in a very wide
range of retail outlets from small independents to giant
supermarkets, all over the world.
3
▶ Discuss one reason for Unilever’s approach to
distribution.
Unilever appears to use a mass distribution approach.
It uses many dierent outlets to sell its products. This
approach allows Unilever to sell large volumes all over the
world. As a result, it is able to generate large revenues. For
example, in 2015, the company enjoyed sales revenue of
€53 300 million. If Unilever were more selective about its
distribution network, it would be more dicult to generate
such high levels of sales.
4
▶ In groups, make a list of all the dierent types of outlet
where a Magnum ice cream might be purchased.
Compare your results with other groups. Which group
has the longest list?
ACTIVITY 1
CASE STUDY: BATA
1
▶ What is the dierence between retailers and wholesalers?
Retailers are businesses that buy goods from
manufacturers or other suppliers and sell them to
consumers. Retailers provide manufacturers and other
sellers with some key services. They buy large quantities
from manufacturers and wholesalers and sell smaller
quantities to customers. This is called bulk breaking and
is the main function of retailers. However, they may add
value to products by providing other services. These
might include help with packing, delivery, repair services,
information about products, guarantees and gift-wrapping.
Wholesalers usually buy from manufacturers and sell to
retailers. Some wholesalers are called cash and carries. This
is because customers can come to the store, buy goods,
pay cash and take goods away with them. Wholesalers may
break bulk, repack goods, redistribute smaller quantities,
store goods and provide delivery services. A wholesaler
stocks goods produced by many manufacturers. Therefore
retailers get to select from a wide range of products.
2
▶ Describe two features of a chain store like Bata.
One approach to retailing is to develop a chain of stores.
This is where one owner or company opens multiple stores
selling the same range of goods in many dierent locations.
In this case, Bata has around 5000 stores selling footwear.
Each store in the chain will look very much the same and be
under the control of a central oce. Stores will usually have
a standardised product range. This means that each shop
will have almost exactly the same products for sale – shoes
and other footwear in the case of Bata. Another feature
of chain stores is that the facia and layout will be almost
exactly the same in every store wherever it is located.
3
▶ Discuss the main advantage to Bata of manufacturing
shoes and selling them through its own chain stores.
Bata also manufactures footwear. It has 26 manufacturing
units in 18 dierent countries. The main advantage to Bata
ANSWERS 63
of human contact, which might not suit some customers,
and there is heavy dependence on delivery services
where e-tailers often lack control of the quality of delivery.
However, since Neiman Marcus also has its chain of stores,
it can serve customers in two ways.
There may also be technical problems online. For example,
websites may crash, sites may be aected by malware and
Internet connections can go down. There is also a security
risk as computer hackers might gain access to sensitive
information. Neiman Marcus will need to develop systems
to deal with any technical issues encountered. This will cost
money but overall it seems that the business is benefitting
very favourably from its online venture.
CHAPTER 39
CASE STUDY: SKY TELEVISION
CASE STUDY: BLAKE STREET BLINDS
1
▶ Describe the methods used by Sky and Blake street
Blinds to promote their products.
Sky is using a giant image of the corporation’s name on one
of its studio buildings to promote the organisation.
Blake Street Blinds is using a small advert in a local
newspaper to advertise its products.
2
▶ Describe one possible advantage of each method.
For a large company like Sky, the use of posters to
advertise the company is a relatively cheap method of
promotion. The same poster design can be placed at poster
sites all over the country to get national coverage. Since it
is so large, the poster is likely to have an impact as people
pass by.
For a small family business like Blake Street Blinds,
advertising in a local newspaper is a common method of
promotion. It will be targeted at residents in the local area
that the business is happy to serve. It is an inexpensive
form of advertising for a small business.
3
▶ Discuss why Blake Street Blinds is likely to use a
dierent method to Sky when advertising.
Sky and Blake Street Blinds are very dierent businesses.
Sky is a very large PLC while Blake Street Blinds is a small
family business. Blake Street Blinds would not have the
resources to meet the cost of a national poster campaign.
Neither would it be appropriate since Blake Street Blinds
only serves a small market.
4
▶ Design a poster that could be used to advertise a
satellite television broadcaster.
ACTIVITY 1
CASE STUDY: TELEVISION ADVERTISING
1
▶ What is meant by above-the-line promotion?
Above-the-line promotion involves paying the owners of
media to place an advert. The amount of money spent
on advertising is huge. For example, the global spend on
advertising in 2016 was US$579 000 million, according to
media research agency Zenith Optimedia. This was 4.9 per
cent higher than in 2015.
menswear, nightwear, cosmetics, food, gifts and children’s
clothing. They usually aim to provide good quality products
with high levels of customer service. For example, sales
sta may receive training in the dierent products sold in
their particular department. Department stores are often
found in city centres. Neiman Marcus has around 40 stores
selling women’s and men’s clothing, accessories, jewellery
and dinnerware. Five of Neiman Marcus’s stores are located
in South Florida.
4
▶ Discuss the possible reasons for the growth in online
sales for retailers such as Neiman Marcus. Give at least
two reasons in your analysis.
One of the main reasons why online sales have grown so
rapidly in recent years is because of the benefits it oers
to consumers. Products can usually be purchased more
cheaply because e-tailers have lower set-up and operating
costs. For example, they do not have to invest in expensive
properties to locate shops. Consumers can also shop 24/7
and there is generally a lot more choice. Another benefit is
that people can shop from anywhere provided they have
access to the Internet.
Another possible reason for the growth is the development
of the technology that allows online retailers to operate.
People can use PCs, laptops, smartphones or tablets to
buy goods online. This provides consumers with a very
flexible method of shopping. For example, people could do
their weekly grocery shopping using a smartphone while
sitting on the train returning from work and so complete
an uninteresting household task in what would usually be
wasted time. Without reliable and sophisticated technology,
online shopping would not have grown.
5
▶ Assess the benefits of e-tailing to Neiman Marcus.
Neiman Marcus, like many other retailers, has taken up
online selling enthusiastically and begun to enjoy the
benefits. One of the main benefits is that e-tailers do not
have to meet the set-up and operating costs of opening
more stores. This will help to reduce both fixed and variable
costs and therefore increase profits. There will also be
savings because less paper is used for documents, such
as invoices and receipts. Transaction costs will be lower
because most transactions are automated. Payments
from consumers can be received online before goods are
sent to. This will help cash flow and avoid bad debts. B2C
businesses like Neiman Marcus will also be able to sell to
a global market using an online operation and serve their
customers 24/7.
Online sales are becoming more important to the business.
Neiman Marcus’s chief operating ocer Don Grimes said
that the company sold US$1300 million online in 2015,
an increase of 13 per cent. Web sales made up 25.5 per
cent of the company’s 2015 sales of US$.095 million, up
from 23.9 per cent a year earlier. The success of its online
operation was explained by to investment in technology
and the provision of a personalised shopping facility.
However, there are some disadvantages that need to be
recognised when selling online. Neiman Marcus will face
increasing competition since selling online is a relatively
cheap method of distribution and can be organised from
any location in the world. Consequently, the business will
face more competition from overseas. There is also a lack
64 ANSWERS
and sales revenue for businesses.
Coupons can also be targeted at those markets where price
competition is most intense. Since coupons oer products
at reduced prices, their use helps businesses to be more
competitive in markets where demand is price sensitive.
MULTIPLE-CHOICE QUESTIONS
1A, 2D, 3B, 4C
CHAPTER REVIEW
CASE STUDY: THE INDIAN PREMIER LEAGUE
1
▶ What is meant by sponsorship?
Sponsorship is where a business attracts publicity by
linking the name of the company, or a product, to a major
event. In return for a fee, a business is allowed to advertise
in key positions around an event. In this case, the Chinese
company Vivo Electronics became the title sponsor of the
IPL in 2016. Therefore the league is ocially known as the
Vivo Indian Premier League.
2
▶ Describe two advantages to sponsors of their
involvement in the IPL.
One of the key advantages of sponsorship is that the name
of the brand can be projected globally via television without
paying broadcasters. This is because most of the major
events targeted by sponsors are televised. Therefore it is
a cheap way to get television coverage. Major sporting
events, such as the Indian Premier League, are popular with
sponsors because the reach to television viewers can be
global. Each sponsor is given advertising boards around
the edges of the cricket pitch. These images are displayed
regularly by television cameras while a match is in progress.
Sponsors of the IPL, such as Vodafone, Yes Bank, CEAT
Tyres, Tata Sky, Coca-Cola, Amazon and OPPO, also get
their logos displayed during pre- and post-match interviews
and free tickets to each match. They also likely to get
priority on television adverts during matches to give them
maximum exposure.
3
▶ What is meant by viral advertising? Use an example
from this case study in your explanation.
Viral advertising involves any strategy that encourages
people to pass on messages to others about a product
or a business electronically. It creates the potential for
exponential growth in the exposure of a message. Like
a virus, these strategies exploit the process of rapid
multiplication that results from people sending messages
to family, friends and colleagues, who then send them
on again. Not only can people send text relating to a
marketing message, but they can also send images, such
as photographs and video clips. In this case, an advert
by smartphone maker Reliance Retail went viral on social
media. It featured Bollywood actress Kangana Ranaut and
the cricketers M.S. Dhoni, Virat Kohli and Ravichandran
Ashwin.
4
▶ Discuss one benefit to businesses of establishing a
brand name.
The aim of many businesses is to build a powerful brand.
Branding involves giving a product a name, term, sign,
2
▶ Work out the percentage increase in television
advertising expenditure in China between 2010 and 2016.
Percentage increase = US$7.87 – US$4.95 ÷ US$4.95 × 100
= 59 per cent
3
▶ Suggest one possible reason that might account for the
growth calculated in (2).
In China, television advertising is still growing and is
expected to continue growing into the near future. It is
expected to grow by 59 per cent between 2010 and 2016.
This is probably because China has a rapidly growing
economy and an increasing number of foreign businesses
are trying to penetrate the Chinese market. To get a hold
in this potentially highly profitable market, they may be
prepared to invest heavily in television advertising.
4
▶ Discuss two benefits to businesses of using television
advertising.
Television advertising is still a hugely important medium
for advertising in business. Although it is expensive, it
has a number of significant advantages. The main one is
that television adverts have a huge reach. A television ad
campaign on national television could reach the majority
of the population in a particular country. This means that
millions of people will see the advert.
Another advantage is that television adverts can now be
targeted at specific audiences. This is because there are
so many dierent channels that a particular customer
group can be targeted quite eectively. For example, a golf
equipment manufacturer could place adverts on a sports
channel when golf tournaments are being broadcast. A
toy manufacturer could target children with adverts on
specialist children’s television channels such as Disney
Junior India, an Indian television network aimed at Indian
pre-schoolers. The ability to target customer groups in this
way cuts down the waste in television advertising.
ACTIVITY 2
CASE STUDY: COUPONS
1
▶ What is meant by below-the-line promotion?
Any form of promotion that does not involve using the
media is called below-the-line promotion. Examples would
include coupons, merchandising and free gifts.
2
▶ Discuss the benefits to businesses of using online
coupons.
Coupons, which entitle the holder to discounts o specified
goods and services, can be found in a variety of places.
For example, they may be printed in newspapers and
magazines or attached to the packaging of products and
receipts. Also, in recent years, they have started to appear
on specialist coupon websites. They are an important
method of promotion for a business and most online
retailers make use of coupons. For example, the number of
US companies using mobile coupons is expected to grow
from 36.5 per cent to 48 per cent by 2017. One of the main
advantages of coupons is that they draw in price-conscious
customers who would otherwise go elsewhere. This means
that coupon-users are persuaded to buy products that they
would normally avoid. This helps to increase sales volume
ANSWERS 65
CHAPTER 40
CASE STUDY: GILLY’S SNACK SHACK
CASE STUDY: GRANT FINCH FOODS
1
▶ Which of the two businesses is the largest?
Grant Finch Foods is the largest business. It employs 110
people while Gilly’s Snack Shack is a sole trader. Grant
Finch Foods sells about 1 000 000 sandwiches a week to
supermarkets while Gilly’s Snack Shack sells about 900 to
shoppers, tourists and workers in the local area.
2
▶ Which business has the lowest costs?
Grant Finch Foods buys ingredients direct from farmers
and manufacturers. For example, it buys 1000s of loaves
of bread from a Chicago baker for US$1.10 each. It buys
tomatoes from a local farm for US$1.50 per kilo and cheese
for US$7.00 per kilo. Gilly’s Snack Shack buys supplies
from supermarkets and wholesalers. It buys about 20
loaves of bread at a cost of US$1.80 each. Tomatoes cost
US$2.50 per kilo and cheese US$7.00 per kilo. Clearly
Grant Finch Foods is buying supplies cheaper. Other
costs are lower as well. For example, Gilly’s Snack Shack
has a US$5000 loan and pays an interest rate of 8.9 per
cent. However, Grant Finch Foods pays 7.5 per cent on a
US$1 000,000 loan.
3
▶ Which firm is likely to be the most ecient?
Grant Finch Foods is likely to be the most ecient because
it has lower costs.
4
▶ How might Grant Finch Foods benefit from its cost
advantage?
Grant Finch Foods sells sandwiches at an average price of
US$1.40 per packet to its customers while Gilly’s Snack
Shack sells most of their sandwich range for US$2.00.
Gilly’s Snack Shack could never compete with Grant Finch
Foods on grounds of price. Grant Finch Foods might also
make more profit with its lower costs.
ACTIVITY 1
CASE STUDY: DIB (DO-IT-BETTER)
1
▶ Discuss how DIB is exploiting a technical economies of
scale and b risk-bearing economies of scale.
a One of the reasons for DIB’s success has been the
ability to keep costs down in manufacturing. DIB is
very large and able to exploit economies of scale. For
example, it is able to exploit technical economies.
Technical economies usually occur because larger plants
are more ecient than smaller ones. There can be more
specialisation and more investment in machinery.
In this case, DIB benefits from specialisation. It employs
specialist workers in dierent parts of the world to
produce dierent products and components. This
division of labour allows average costs to be reduced
since specialists are more ecient. DIB also invests
heavily in research and development. This allows the
business to develop cost eective products and money-
saving production techniques.
symbol, design or any feature that allows consumers to
instantly recognise the product and dierentiate it from
those of competitors. Some brand names are very well
known and worth a great deal of money. In this case,
the IPL brand was said to be worth US$4500 million in
2015. Branding can be used to dierentiate the product,
create customer loyalty, help recognition and develop an
image. In this case, the IPL brand helps recognition and
allows the IPL to charge higher rates for sponsorship and
broadcasting rights. All cricket supporters and most people
in the sub-continent are likely to be aware of the brand.
This means that businesses can project their adverts to
larger audiences if they are linked to the IPL in some way.
However, they have to pay more to receive these benefits.
5
▶ Assess the benefits to a business of using social media
in advertising.
The use of social media platforms, such as Facebook,
Twitter, Instagram and Tumblr, in advertising is growing at
a rapid rate. In 2015, the Internet had 3170 million users.
There are 2300 million active social media users and 91
per cent of retail brands use two or more social media
channels. Internet users have an average of 5.54 social
media accounts and social media users have risen by 176
million in the last year.
Social networks gather lots of information about users,
which allows businesses to target their adverts more
eectively. When people use the Internet, every click,
every view and every sign-up is recorded somewhere. This
behaviour is collected, processed and eventually ends up
with businesses.
In this case, the IPL generates an enormous amount of
social media activity. The 2016 Twenty20 saw close to 9
million Tweets, an increase of 122 per cent in Tweets-per-
match from 2015. The ocial IPL website has a ‘Social’ tab
which captures all online conversations including a leader
board for Tweets and mentions related to the tournament
and each IPL team.
One of the main advantages of using social media in
advertising is cost: it is easy and inexpensive relative to
other methods of advertising. Another key benefit is that
adverts can be targeted. This means that businesses
will direct their promotions, oers and other marketing
information only to those people who are likely to be
interested. As a result, there is much less waste in
advertising. Businesses can also respond immediately to
developments in the industry and the quality of customer
service can be improved because it is possible to
communicate instantly with customers. Another big benefit
is the ability to reach huge audiences – hundreds of millions
or even billions. Finally, links can be used by businesses
to draw trac into company websites. This should help to
increase sales.
The importance of social media to advertisers cannot be
overemphasised. Figure 39.6 shows that the amount spent
by businesses on digital advertising is about to overtake
that spent on television advertising. It seems that the use of
social media in marketing is here to stay.
66 ANSWERS
CHAPTER REVIEW
CASE STUDY: FLAMBOYANCE
1
▶ What is meant by the term scale in business?
The term ‘scale’ in business means size. If a business
increases the scale of operations, it means that the
business is getting bigger. For example, in this case,
Flamboyance increased its scale when it bought the chain
of shops in the Middle East.
2
▶ Describe the eect that economies and diseconomies of
scale are likely to have on Flamboyance’s average cost.
As a business grows and expands the scale of its
operations, average costs are likely to fall. Larger firms
can operate more eciently than smaller firms. This is
because a business begins to enjoy economies of scale.
As Flamboyance grew, it employed a specialist marketing
manager, which is a managerial economy. Flamboyance
bought more clothes and shoes so they would probably
enjoy purchasing economies as well. However, if a
business grows too big, average costs will start to rise.
This is because ineciencies slowly develop as a result
of diseconomies of scale. For example, in this case
Flamboyance bought a chain of shops in the Middle East
and it appears that problems started to occur after that
point. Communications became dicult due to language
and cultural diculties. Such a problem can result in higher
costs as a business tries to find solutions. As a result of
economies and diseconomies of scale, a firm’s average
cost curve is U-shaped.
3
▶ Why is employing a specialist marketing manager an
economy of scale?
As firms expand, they can aord specialist managers.
In this case, Flamboyance has employed a specialist
marketing manager. A small business may employ a
general manager responsible for finance, human resources,
finance, marketing and production. The manager may find
this role demanding and lack skills in some fields. A large
firm can aord to employ specialists in these fields. As a
result, eciency is likely to improve and average costs fall.
Through his or her expertise, the marketing manager was
able to raise the profile of the Flamboyance brand right
across Singapore. As a result, the company grew quickly
and became very profitable.
4
▶ Assess whether Flamboyance has benefited from
purchasing economies of scale.
Large retail chains like Flamboyance are very likely to
benefit from purchasing economies. Those that buy
large amounts of stock can get cheaper rates. Shoe and
clothes manufacturers will oer discounts to firms that buy
stock in bulk. This is similar to consumers buying multi-
packs in supermarkets – they are better value for money.
Flamboyance has expanded rapidly and now buys large
quantities of stock from China. Inevitably, the company will
benefit from purchasing economies.
5
▶ To what extent has Flamboyance experienced
diseconomies of scale?
Diseconomies of scale occur when average costs start
to rise because the firm has grown too big. In this case,
b DIB also exploits risk-bearing economies. Although the
business first began trading in painting and decorating
materials, DIB is now involved in other markets such as
kitchens, garden furniture, timber, tools, light machinery
and building supplies. It also operates restaurants and
food markets with many stores serving food throughout
the day. It also provides childcare with some stores
oering safe and supervised play areas. This growth in
the business means that DIB can benefit from boom
periods in dierent markets. It can also cope with
dicult trading conditions in one market by relying on
sales in others.
ACTIVITY 2
CASE STUDY: VOLKSWAGEN
1
▶ What is meant by diseconomies of scale?
If a business keeps on growing, it is likely to reach a point
where average costs start to rise. This is because the firm
suers from diseconomies of scale. In Figure 40.1, average
costs start to rise after output has reached 70 000 units
of output. Average costs start to rise because aspects of
production become inecient. For example, businesses
become too bureaucratic and more dicult to control and
co-ordinate. This raises costs.
2
▶ Assess whether VW has experienced diseconomies of
scale in its organisation.
There is some evidence in this case to suggest that VW
might be experiencing diseconomies of scale. In 2015, VW
was caught falsifying emissions data on its diesel cars. VW
had fitted some special software (a ‘defeat device’) in about
11 million diesel vehicles so that cars would pass the strict
emissions test. As a result, the value of VW fell by around
€30 000 million following a flood of bad publicity across the
world. Some analysts have suggested that the company is
now too big and suering from diseconomies of scale. This
is because big companies like VW, which employs over
500 000 employees, become huge bureaucracies rather
than commercial organisations. Controlling and monitoring
such vast operations, with factories, oces, warehouses
and other operational facilities all over the world becomes
a very serious challenge for managers. In this case, it is
possible that VW has grown too big to manage. It was
claimed that the CEO of VW did not know about this
activity. In such a large organisation, this might be true. It
is unlikely that any CEO, however capable, committed and
well organised, could be in complete control of such a huge
quantity of resources that are located all over the world. As
businesses grow, at some point, the costs of being big –
such as the loss of control, communications problems, the
need for more supervision and extra layers of management,
the increasing tendency for delegation, the geographical
spread of resources, the near impossibility of establishing a
common business culture and employing a fully integrated
IT system – are greater than the benefits. This is the eect
diseconomies of scale can have on a business and may
have been the cause of VWs current problems.
MULTIPLE-CHOICE QUESTIONS
1C, 2D, 3A, 4D
ANSWERS 67
ACTIVITY 1
CASE STUDY: SAUDI ARAMCO
1
▶ What is meant by flow production? Use this case study
as an example in your explanation.
Flow production is a highly ecient method of production.
It is organised so that dierent operations can be carried
out, one after the other, in a continuous process. Products
move from one operation to the next. In this case study,
process production, a form of flow production, is used
to refine crude oil. Crude oil is heated and the dierent
products are pulled out at dierent temperatures. For
example, lubricating oil, used for motor oil, grease and
other lubricants, boils at a temperature between 572 to
700ºC. After this, chemical processes are used to remove
impurities. A system of pipes is used to link all the dierent
processes so that refining continues unstopped.
2
▶ Assess the advantages and disadvantages to Saudi
Aramco of flow production. Make a clear judgement in
your evaluation.
Flow production is a highly ecient method of production
provided large quantities of output can be sold. In this
case, Saudi Aramco is the largest oil corporation in the
world. It has revenues of around US$1000 million per day.
This suggests that it produces vast quantities of oil. Flow
production requires large-scale production but results in
economies of scale, therefore unit costs will be low. Saudi
Aramco probably enjoys some of the lowest unit costs
in the industry. Another advantage of flow production is
that the speed of production can usually be varied. In
this case, oil refining could be slowed down if there was
a drop in demand by pumping less oil into the refinery.
Alternatively,to speed production up, more crude oil could
be pumped in. Some of the refining facilities operated by
Saudi Aramco might be quite flexible. For example, the
company may be able to produce many dierent products
from its refineries.
Flow production does have disadvantages. The cost of
building a large oil refinery is huge. Oil refining requires a
very large financial investment and many companies could
not aord the set up costs. However, a corporation like
Saudi Aramco is not likely to be restricted in its operations
by a lack of financial resources. Another problem might
be sta motivation. If the jobs done by people working
in refineries are boring, as they often are on production
lines, their motivation might suer. This might lead to
mistakes and a loss of output. Finally, businesses using
flow production are at risk if breakdowns occur. If there is a
breakdown in one small part of the refining process, it may
be necessary to stop the flow of production while repairs
take place. This could prove very expensive. Overall, in this
case, the advantages of using flow production are much
greater than any disadvantages.
there is some evidence that Flamboyance is suering
from diseconomies of scale. Since buying the chain
of stores in the Middle East, problems have occurred.
For example, communications became dicult due to
language and cultural diculties. There were also some
employee problems. There was a lack of employee
commitment; many of the sta did not seem to care
whether the company succeeded or not. This would result
in ineciencies and rising costs. Also, some of the store
managers complained that the company was becoming
too bureaucratic; rising bureaucracy is a common source
of diseconomies of scale. If a business becomes too
bureaucratic it means that too many resources are being
used up in administration. Too much time may be spent
filling in forms and writing reports. Also, decision making
may be too slow, communication channels too long and
too many managers may be employed. It could be argued
that Flamboyance is experiencing diseconomies of scale to
a significant extent since buying the chain of stores in the
Middle East.
CHAPTER 41
CASE STUDY: M.K. SIDDIQI
CASE STUDY: MARS, INCORPORATED
1
▶ Compare the two production methods used in the
above examples.
Mars is a mass producer. It makes millions of units of
chocolate bars, foods, cans of pet food and many other
brands. Its production methods are capital intensive. This
means that plant and machinery are used in large quantities
relative to labour. Many of its brands are produced on
automated production lines, which run continuously for
many hours. The photograph shows bars of chocolate on a
production line – this line will run continuously with millions
of units being produced. Every unit that comes o the end
of the production line will look identical.
In contrast, M.K. Siddiqi operates on a much smaller
scale. He produces handmade suits. Production is labour
intensive and involves him working alone making products
by hand. For example, he will use scissors, a sewing
machine, needles and other small items of equipment to
make the suits. All his suits are bespoke (that is, made
to specific customer orders). He learnt the trade from his
father and has been making suits in the same workshop
in Chittagong for 43 years. He oers customers a massive
choice in terms of dierent fabrics, designs and styles.
2
▶ Describe two reasons why the two businesses use
dierent production methods.
Mars produces on a very large scale. Its production
processes will be highly automated with little use of labour
on production lines. The products produced by Mars are
appropriate for mass production. For example, Mars could
not use the same production method as M.K. Siddiqi. It is
not practical to make millions of chocolate bars and millions
of cans of pet food by hand. However, the suits made by
M.K. Siddiqi require craft and skill are appropriate for being
handmade. The quality of finish could not be guaranteed
with mass production techniques.
68 ANSWERS
motivation for the workforce. If non-financial incentives are
used, workers’ jobs may become more interesting. This
will be a positive impact for the workers. However, some
measures might have a negative impact. For example, if
more new machinery is introduced, some workers might
lose their jobs. This could have a negative impact on the
business, particularly if workers take industrial action.
5
▶ Assess the benefits to GHF Ltd of switching from job to
batch production.
It is quite common for a business to switch production
methods as it grows and larger orders are received. In this
case, GHF Ltd switched methods to raise profit margins
by moving from costly ‘one-o special-project work’ to
reproducible standard products. The production manager
identified problems with the special one-o projects. They
often involved research, design and installation costs that
did not carry over into another project. For example, one
job for a large clothes retailer involved lots of design work.
In addition, some of the key parts of the system had to be
outsourced to another business. The job was a one-o with
no benefits for the next job.
Batch production is generally more ecient. Unit costs are
likely to be lower because output is higher, workers can
be more specialised and more use is made of machinery.
Production is also flexible because orders with dierent
measurements, styles or specifications can still be met. For
example, in this case, GHF Ltd started producing batches
of ducts using their new production system – a system so
flexible that 60 000 variations were possible.
As a result of the switch, GHF Ltd became more
competitive. Between 2009 and 2012, GHF Ltd reduced the
amount of special project work from 80 per cent to 10 per
cent. Producing standard systems in batches filled the gap.
It took a while for the factory to adjust to these changes in
working practices but even in the first year the company
made a small profit. This was largely down to an order for
85 standard silent fans.
However, the switch from job to batch production required
a significant amount of investment as the business began
to use more capital-intensive methods of production. GHF
Ltd had to borrow £900 000. This may have put a financial
strain on the business as it needed to pay interest on the
debt. However, there is no information in the case study
that suggests there were any serious financial problems.
To conclude, it seems that the switch in production from
job to batch was a successful strategy for GHF Ltd.
Costs are down and profit margins should be up. Further
improvements to productivity are planned in the future so
the business owners must be pleased with the outcomes.
CHAPTER 42
CASE STUDY: GOLDSTONE HOLDINGS
1
▶ How important was sta involvement at Goldstone
when trying to make improvements?
Sta involvement was recognised as being very important
when Goldstone began making improvements in its
operations. As a result of this, more training was organised.
Investment in training improved sta motivation. If a
ACTIVITY 2
CASE STUDY: HUBER
1
▶ Calculate the labour productivity in each of the four
factories.
Factory Output
Number of
employees
Labour
productivity
India 28,500 150 190
Germany 54,000 270 200
China 79,050 310 255
Brazil 46,000 200 230
2
▶ Which factory is Huber likely to close down?
Huber is likely to close the factory in India. This factory has
the lowest labour productivity at 190 containers per worker.
MULTIPLE-CHOICE QUESTIONS
1C, 2C, 3A, 4D
CHAPTER REVIEW
CASE STUDY: GHF LTD
1
▶ What is meant by the term capital-intensive production?
Capital-intensive production methods make more use of
machinery relative to labour. In this case, GHF Ltd switched
to more capital-intensive methods of production by
investing heavily in new machinery.
2
▶ Why was job production inecient at GHF Ltd?
Job production is where a business produces one product
from start to finish before moving on to the next. Each
item produced is likely to be dierent. Job production is
used when orders are small, such as ‘one-os’. It is often
an inecient method of production because it is slow. In
this case, M. Patel had noticed that job production was
inecient. For example, workers sometimes moved from
one job to another (if there was a delay in the supply of a
component for example). This would slow down employees
as they had to make adjustments to their pattern of work,
for example, catch up with what others had been doing,
rethink what they were doing and often switch tools and
equipment.
3
▶ Why are unit costs likely to fall when using batch
production?
Once batch production was adopted, with the introduction
of a small production line, eciency improved. Batch
production usually results in lower unit costs. This would
be because some of the fixed costs of production, such
as tools, machinery and equipment, would be spread over
more units of output.
4
▶ Discuss one possible impact on workers of making
further improvements in productivity at GHF Ltd.
GHF Ltd has already made improvements to productivity
by switching production methods from job to batch and
introducing more machinery to make production more
capital intensive. However, more improvements are planned
for the future. It hopes to make further investments in new
technology and introduce some non-financial methods of
ANSWERS 69
MULTIPLE-CHOICE QUESTIONS
1B, 2C, 3A, 4D
CHAPTER REVIEW
CASE STUDY: HERMAN MILLER
1
▶ What is meant by kaizen?
Kaizen is a Japanese word and refers to the practice of
continuous improvement. There is a belief in Japan that
everything can be improved. Even at work, the Japanese
believe it is possible to make small improvements
continuously. This means that the workers are always
coming up with ideas to improve quality, reduce waste or
increase eciency. The improvements may be very small
but over a long period of time they have a huge impact.
Kaizen was introduced at Herman Miller. One example of
a small change that was suggested was the position of a
bin containing washers. By moving it slightly employees
reduced the amount of reaching required by 6 inches.
Another was the adjustment in the height of the assembly
line. It was changed slightly so that workers did not waste
a few moments bending over. Such changes are extremely
small. But this is what kaizen is all about and if small
changes like this are made continuously over a period of
time significant improvements in eciency can be made.
Kaizen is usually driven by ‘good housekeeping’.
2
▶ What does this mean?
One of the key drivers in kaizen is ‘good housekeeping’. A
clean and well-organised working environment is needed
for continuous improvement to flourish. The Japanese use
a method called 5S to ensure that this is achieved. This
involves adopting five specific practices (all beginning
with ‘s’) The first one is ‘Sort’. This is about getting rid of
the clutter in the workplace. Only necessary items such
as tools should be stored at a workstation. All other items
such as excess inventory should be removed. The next,
‘Set in order’ means the work area should be organised
so that it is easy to find what is needed. ‘Shine’ is to do
with making the work area and equipment clean – make it
‘shine’. ‘Standardise’ means that once the most eective
working practices have been identified, they should be
adopted by everyone in the workplace. Finally, ‘Sustain’
means that systems should be adopted so that the previous
4Ss are locked into the way people work at all times on a
permanent basis.
3
▶ Discuss one advantage to Herman Miller of empowering
workers.
The aim of empowerment is to give employees more
control over their own work. In the past, most workers
have followed the instructions given to them by managers.
They were rarely required to think for themselves. However,
if workers are empowered they are given the authority
to make decisions, solve problems and work creatively.
At Herman Miller, one of the first steps when introducing
kaizen was to empower the workforce. Employees in the
factory were asked to suggest small changes that could
help to improve the speed or ease of working practices
around their workstations. Empowering people at work
business is prepared to spend considerable money on
training, it shows that sta involvement is highly valued.
Workers were also given more authority. They were
encouraged to make their own decisions and solve
problems. Sta were also given time to ‘tidy up’ the work
environment. They removed all the clutter, such as old
tools, spoilt work and items of un-needed stock that had
built up over the years.
2
▶ Discuss the possible benefits to Goldstone from
introducing Japanese production methods.
Goldstone enjoyed a wide range of benefits after adopting
Japanese production methods. Turnover increased by 50
per cent, production set-up time was reduced by 74 per
cent, machine down time was reduced by 73 per cent,
delivery targets were increased by 21 per cent and product
rejection fell by 50 per cent. The investment in sta training
also improved sta motivation.
ACTIVITY 1
CASE STUDY: DELL
1
▶ Describe how Dell adopted just-in-time methods.
Just-in-time (JIT) is an approach to production that involves
holding very low levels of stock – in some cases none at
all. Suppliers have to deliver inventories straight to the
production line at regular intervals. This might be several
times a day. JIT also means that goods are not produced
unless they have been ordered. This avoids the need to
hold stock of finished goods. In this case, Dell used direct
selling and all of its products were sold online. A customer
would place an order on Dell’s website listing the various
specifications that were required. Dell would then make that
computer and ship it out to the customer very rapidly.
Dell also developed special relationships with its suppliers.
It persuaded them to hold inventories of raw materials and
components and deliver them very quickly as and when
they were needed. This was key to Dell’s approach. Dell
was passionate about minimising stock levels. It relied
heavily on suppliers to bear the burden of inventory holding
and meeting very demanding lead times.
2
▶ Describe the benefits to Dell of using a just-in-time
approach to production.
The JIT approach allowed Dell to deliver a tailor-made
product at a lower cost. By manufacturing to order, Dell
was able to avoid the cost of buying too many components
and having to store them. Storage and handling costs were
reduced significantly. It also meant that computers were
not being stockpiled waiting to be sold. This enabled Dell
to put together and deliver products very quickly. It also
saved time, improved cash flow, helped to avoid waste and
damaged stock and did not waste space. It also allowed
Dell to pass on the savings to their customers. This helped
the business to become one of the market leaders in sales
of computers.
3
▶ Carry out some research to identify another business
that uses just-in-time methods. Produce a poster
to show how it is used and how the company has
benefitted. Present your findings to the rest of the class.
70 ANSWERS
then remotely controlled by an operator from a desktop
computer or other easily transportable device. The
tractor uses radar, on board cameras and LIDAR (light
imaging, detection and ranging) to find and update its
path when moving. If it detects a barrier in its path, it
will stop automatically until an operator reprograms the
machine. The tractor will also stop if the GPS signal is
lost. The machine can take on the traditional land work of
tractors such as tillage, planting, spraying and harvesting.
According to a spokesman for Case IH, a farm manager
can supervise several machines using a mobile device while
tending to other tasks or even operating another machine.
2
▶ Describe the possible benefits of the new technology to
a farmers and b consumers.
a The main benefit of the new technology to farmers is that
productivity will improve. This is because the quantity
of labour used in production will be reduced. This will
reduce costs and raise profitability. Another benefit
is that it will help farmers who struggle to find skilled
drivers during busy periods such as at harvest time. The
driverless tractors are also safe, which is beneficial since
farm accidents occur frequently when machinery is used.
b Consumers may benefit if food production becomes
cheaper as a result of improvements in technology.
Food prices might be lower and food may be more
plentiful. By 2050, the world’s population is expected to
grow to around 9 billion. So, in order to feed this rapidly
growing number of people, significant improvements
in productivity will be required in agriculture. The
introduction of driverless tractors might help here.
3
▶ In pairs, carry out some research to find out how
genetically modified crops are being used in agriculture.
Find out the advantages and disadvantages of their use
and present your results to the rest of the class using a
poster.
ACTIVITY 1
CASE STUDY: ROBOTS IN PRODUCTION
1
▶ What is the dierence between material handling robots
and processing operations robots?
Robots feature largely in assembly and on production lines.
They usually have a mechanical arm that moves according
to instructions given by a computer. However, there are
dierent types of robots in manufacturing. Material handling
robots are usually employed in the transport of goods,
parts or stock from one place to another, most often within
the same factory or plant. Automated warehouses are an
example of this. In contrast, processing operations robots
generally perform a specific task such as spot welding or
spray painting. These robots are fitted with a specialised
tool to perform the programmed task.
2
▶ Describe the new technology invented by Jonathan
Zornow in this case.
In the clothing industry, the role of robots has until now
mainly been only in cutting. They were not able to sew
because soft fabric is very dicult for robots to handle. It
requires a great deal of accuracy to feed a piece of soft
material through a sewing machine to create a straight
can improve their motivation. This is because workers feel
trusted and their work may be more interesting. As a result,
they should be more productive and cooperative. This will
help to improve eciency and make it easier to introduce
changes. Workers are also more likely to meet their full
potential which will help meet their higher level needs in
Maslow’s hierarchy.
4
▶ Assess the benefits to Herman Miller of implementing
kaizen and making more eective use of resources.
The introduction of kaizen at Herman Miller has had a
massive impact on the organisation. It has helped Herman
Miller to develop a more scientific approach to problem
solving and resulted in the introduction of numerous
standardised factory procedures. These changes, and many
others, have improved the eciency of operations. For
example, a new Aeron chair now comes o the production
line every 17 seconds compared with 82 seconds 13 years
ago. Production time has been reduced from 600 seconds
to 340 seconds. Safety metrics have improved by a factor
of six. Quality metrics have improved by a factor of ten and
the factory is ten times smaller.
Also, the labour time needed to make a single chair is
one-fifth of what it used to be, customer lead times have
fallen from two months to ten days, the product range has
increased from five standard designs to 17, reliability is 99.4
per cent and product faults have been reduced to less than
0.1 per cent.
The introduction of kaizen has resulted in Herman Miller
using its resources far more eectively. This also has clear
benefits. For example, if fewer resources are used, business
costs will be lower. Herman Miller uses less labour and
much less time in its operations. If costs are lowered then
businesses will make more profit. This will increase returns
for the owners and provide cheap funds for investment in
the future.
Lean producers will also have a competitive edge in the
market. Businesses that use their resources eectively will
be able to lower prices. This should help Herman Miller to
win a bigger share of the market. Customers are likely to
benefit if a business makes more eective use of resources.
For example, Herman Miller has reduced lead times and
improved product quality. This means that customers will
get their products more quickly and enjoy better performing
products. Also, some kaizen practices focus on customer
needs, therefore customers are likely to get a better service.
Finally, despite this impressive list of benefits, Herman
Miller are still getting improvements of a quarter to a half
of a second at a time, month by month as the practice of
kaizen continues. The introduction of kaizen has been a
great success at Herman Miller.
CHAPTER 43
CASE STUDY: DRIVERLESS TRACTORS (ROBOTRACTORS)
1
▶ Describe the new technology outlined in the case
above.
The new technology identified in the case study is a
driverless tractor – it features the Case IH Autonomous
Concept Vehicle. The tractor is pre-programmed and
ANSWERS 71
and safety in the plant and reduces some stress from
workers. The new packing machine ensures that all meat
is not in contact with air after the packaging process. It
can also oer a longer shelf-life for the products. This is
appealing to some of Alliance’s large retail customers.
It also has a much larger capacity, which makes the
packaging process more cost eective.
Generally, senior managers believe that the company will
gain a competitive edge in the market since Alliance is an
early adopter of some of this new technology.
3
▶ Assess the importance to businesses of balancing cost,
productivity, quality and flexibility when introducing new
technology.
It is often dicult businesses to make decisions regarding
when or whether to introduce new technology into
production. The financial cost of purchasing, installing
and maintaining technology can be very high. In this case,
Alliance Group has invested NZ$16 million in robots and
a packing machine. This is expensive and may require
the businesses to borrow. There is also the human cost
to consider. Introducing new technology often means
making people redundant. This too is expensive and can
also disrupt the workforce. Decision makers have to be
sure that the cost of the technology is greater than the
value of the productivity gains. The productivity gains may
only be achieved if large quantities of output can be sold.
Therefore, Alliance Group must be confident about selling
much larger quantities.
Decision makers also have to consider the impact that
technology will have on the quality of the product. For
example, historically, mass produced products were often
seen as lower quality than those that were handmade. Also,
some customers are actually happy to pay higher prices for
handmade products. This might be the case in the clothing
industry, for example. Another issue is the flexibility of new
technology. When production processes are automated, it
often means that a business can only produce standardised
products. This reduces the choice for customers.
However, many would argue that most technology is so
sophisticated today that quality and flexibility are not
compromised. For example, production lines in the motor
industry can deliver flexibility. This is because it is possible
to produce cars to many dierent specifications on the
same line.
To conclude, investing in new technology is risky and
businesses have to evaluate the costs, productivity gains,
the impact on quality and the loss of flexibility (if any) before
going ahead. In this case, it appears that Alliance Group
is happy to take the risk and be an early adopter in the
purchase of this technology.
CHAPTER 44
CASE STUDY: BANANA FARMING IN UGANDA
1
▶ Describe three possible resources used by Robert
Oloya on his banana farm.
Resources used on Robert Oloya’s banana farm are likely
to include land, tools and labour. Land would include the
soil and water that banana plants need to grow. Tools might
join. Consequently, the job has always been done
manually. However, in 2015, an inventor called Jonathan
Zornow developed a technique that allowed a robot to
sew eectively. It involved using a water-based plastic to
coat the fabric, which made it sti rather like cardboard.
Following the application of this coating robots were able
to handle the cloth more easily. Once the ‘Sewbo’ has
completed a sewing task, the coated material is immersed
in water and the cloth returns to its normal state.
3
▶ Discuss the possible disadvantages of introducing
Sewbo into the textiles industry.
Like most new technology, robots have their disadvantages
when they are introduced into factories. One of the main
disadvantages is that workers often have to be laid o.
This is usually because robots can do the work of people;
consequently, fewer workers are needed. This is likely to
result in redundancies and possible hardship for those laid
o. In this case, if the technology becomes established,
the textiles industry could see some great changes. A large
proportion of garment manufacturing takes place in places
like China, Bangladesh and Thailand. In much of the industry,
workers are treated poorly and receive relatively low wages.
Eliminating the exploitation of these of these workers would
be a positive move. However, the many thousands of people
working in the industry might struggle to find alternative
employment once the technology is introduced.
MULTIPLE-CHOICE QUESTIONS
1B, 2D, 3A, 4B
CASE STUDY: ALLIANCE GROUP
1
▶ Describe one disadvantage to Alliance Group of
introducing the new robotic technology into its plants.
Unfortunately, the introduction of new technology is not
without problems. One of the main ones is the high initial
cost of buying and installation. In this case, Alliance Group
is investing NZ$ 16 million in new technology. This is a lot
of money and may create a financial burden for the group.
For example, if Alliance Group have to borrow money it will
have to meet interest charges. This will reduce the profits
made by the business while the loan is being repaid. It may
also cause cash flow problems if the business is short of
liquid resources. However, in this case there is no financial
information to analyse so the financial impact of the NZ$16
million is not known.
2
▶ What are the benefits to Alliance Group of introducing
new technology in its plants. Give at least two benefits
in your analysis.
The introduction of new technology has a number of
benefits. Generally it raises productivity, reduces unit costs
and reduces waste in production. In this case, Alliance
Group aims to improve operational eciency as a result of
the investment. The two fully automated robots in the first
plant will operate safely in the same space as workers in the
plant. They take on the dicult and potentially dangerous
roles in meat processing and contribute to improvements
in quality and hygiene. The new robotic cutting machine for
sheep meat will reduce waste in the process and improve
hygiene. This is because the machine has circular blades
rather than band saws. This machine also improves health
72 ANSWERS
2 ▶ Discuss how specialisation might benefit Moon
Brothers Construction Company.
Moon Brothers Construction Company will benefit from
employing specialists. When people specialise, their
productivity is higher. This is because the quality of work is
likely to be better. They focus on the same limited range of
tasks or skills and become very skilled. Specialist workers
are usually better trained and more experienced in the
specific tasks they take on. This means the company can
operate more eciently and oer customers a higher level
of workmanship.
MULTIPLE-CHOICE QUESTIONS
1D, 2A, 3A, 4B
CHAPTER REVIEW
CASE STUDY: TOOTING TOYS
1
▶ What is meant by the term capital-intensive production?
Capital-intensive production involves using larger amounts
of machinery relative to labour in the production process.
Yang Chen is considering switching to more capital-
intensive methods in this case.
2
▶ Suggest two examples of land used in production at
Tooting Toys.
Tooting Toys has a factory that is located on a plot of land.
However, materials such as plastic, which is an oil-based
material, is a main input. Other components used when
producing pedal tractors might be made of metal.
NB. Any two of these are acceptable – there may also be
many others.
Yang Chen is an entrepreneur.
3
▶ Discuss his role at Tooting Toys.
Without entrepreneurs, businesses like Tooting Toys would
not exist. In this case study, Yang Chen came up with the
business idea to produce small plastic toy tractors using a
simple shaping machine. Entrepreneurs are the business
owners. Here, Yang Chen is the sole owner of Tooting Toys.
He is in complete control of the business and is responsible
for its direction. Entrepreneurs are also risk-takers: they risk
their own money in a venture. In this case study, Yang Chen
risked CNY 70 000 of his own money. When he first set up
the business there was a chance that Tooting Toys would
not succeed. In this case, Yang Chen could have lost some,
or all, of his money. Finally, entrepreneurs are responsible
for organising resources. Yang Chen will have to buy and
hire resources such as raw materials, tools, equipment
and labour. He will also need to use skills such as decision
making, people management, time management and
financial judgment to organise resources eectively.
4
▶ Assess whether Yang Chen should switch to more
capital intensive production methods. Make a clear
judgement in your evaluation.
In 2016, Yang Chen planned to introduce a new product.
It is a large plastic pedal sports car. He has had a great
deal of interest from large retailers and one has placed
an initial order for 100 000. However, to produce such
large quantities he would need to consider automating a
include digging tools for preparing the land for crops and
a machete (large knife) to cut the bananas from the plants
when they are harvested. Labour would include the people
who are employed to help out on the farm.
2
▶ How might the use of machinery (to prepare the land,
for example) impact on Robert’s banana farm?
If Robert used machinery on the farm, some of the tasks
might become easier. For example, if tractors or other
machines were used to prepare the land for crops, this
taskwould become easier and could be done more
quickly.However, there may be less need for labour so
some of Robert’s farm workers might lose their jobs. The
purchase of machinery might also put a financial strain
on the business, especially if money is borrowed to buy
machinery.
ACTIVITY 1
CASE STUDY: ANGELA’S BAKERY
1
▶ Suggest two examples of capital that Angela will use.
Capital is often said to be an artificial resource because
it is made by labour. Examples of capital used by Angela
that are mentioned in the case include the property that
was purchased where the bakery was built. Angela will
also have used ovens, cooking implements such as cake
tins and baking trays, a food mixer, a mobile phone, some
kitchen furniture and a computer.
NB. Any two of these are acceptable – there may be
others.
Angela Collier is an entrepreneur.
2
▶ What evidence is there in this case study to support
thisview?
Entrepreneurs are responsible for setting up and running
small businesses. Angela has set up a bakery to supply
local shops, cafés and hotels with cakes. This was her
idea and she owns the business. This is a feature of
entrepreneurship. Angela has also taken some risk: she has
invested €40 000 of her own money. If the business is not
successful she may lose some, or all, of this money. Angela
also organises other production factors. She has purchased
some capital and hired people to help her out once the
business was established.
ACTIVITY 2
CASE STUDY: MOON BROTHERS CONSTRUCTION
COMPANY
1
▶ What is meant by the division of labour? Use examples
from the case study in your explanation.
Workers are likely to specialise in certain tasks and skills.
This is called the division of labour and allows people to
concentrate on a limited range of tasks. The three workers
for Moon Brothers Company are all specialists. They all
focus on one particular job for the company: Brendan is
a bricklayer, Mary is an electrician and Ahab is a plumber.
Each of them has specialist skills that are needed to do
their jobs; these have taken time to develop.
ANSWERS 73
commitment can be found throughout. For example,
the hotel’s accommodation is luxurious and has been
renovated with respect for the charm and history of the old
highland house. Also, much of the food used in the kitchen
is high quality locally sourced produce. For example, white
fish and shellfish are caught and landed in Ullapool and
Lochinver or dived for by friends. Local farmers produce
organic vegetables and free-range eggs, a free-range farm
in Morayshire supplies beef and lamb, and game, other
than barn-reared fowl, is wild and seasonal. Their desire to
oer top-quality accommodation and high quality locally
sourced food is evidence of how important quality is to their
operation.
2
▶ What evidence is there in the case to suggest that The
Albannach provides a quality experience for guests and
diners?
The Albannach Hotel was awarded a Michelin star for the
quality of its food in 2009 – seven years later it still has that
award. A Michelin star is a worldwide recognition of quality
restaurant food. This provides ‘hard evidence’ of the quality
they provide. The Albannach is also in the Good Hotel
Guide.
ACTIVITY 1
CASE STUDY: SAMSUNG
1
▶ What is meant by a product recall?
If a business has an unresolved problem with a product, it
may be forced to ask all customers to return the product.
This is called a product recall. One example is when
Samsung launched its Galaxy Note 7 smartphone in
August 2016. It hoped to challenge Apple in the market for
smartphones. Unfortunately, Samsung had to recall all sets
and halt production due to a problem with the batteries.
This followed a number of serious incidents. For example,
on 4 October 2016, a US customer suered lung damage
when a Galaxy Note 7 released smoke in his bedroom.
Also, on 5 October a set caught fire on a Southwest Airlines
flight. There were many more similar incidents. The Galaxy
Note 7 was ocially recalled in the USA by the Consumer
Product Safety Commission in September. It advised
owners of the sets to shut down and cease all usage,
and return them in exchange for a replacement. However,
even replacements had problems. Therefore in October,
Samsung stopped production of the sets. Samsung
instructed customers to return the sets in kits containing
special packaging. The kits consisted of an antistatic bag
(for the phone) and three layers of wrapping, one of which
was made of a fire-proof material.
2
▶ Why is quality so important for products like the one in
this case study?
Product recalls are, at best, embarrassing for a business. At
worst they can do a great deal of damage. With technical
products like smartphones, quality is extremely important.
If quality is insucient and customers are put at risk by a
defective product, this is a serious issue. Because there is
so much to lose from supplying faulty electrical products,
quality is of the highest importance for the safety of
customers.
significant proportion of production. Investment in new
technology would cost CNY 14 million. The business
would have to borrow over CNY 7 million to help fund the
automation. Before making the switch, Yang Chen would
have to consider whether the advantages of more capital-
intensive production were greater than the costs.
One of the main advantages to the business would be lower
unit cost. Provided Tooting Toys can sell large quantities
of its products, investment in technology is usually more
cost eective. Also, when machinery is employed in
production, the quality of output is usually more precise
and consistent. This will reduce defects and cut the waste
in production. Another benefit of machinery is that it can be
used for long periods of time without breaks and holidays.
Machines do not get tired and they can be put to work for
24/7 if necessary. Finally, Yang Chen is likely to find that
managing machinery is a lot easier than managing people
in production. Machines do not react to instructions,
they have no emotions and will not cause conflict in the
workplace.
However, Yang Chen needs to be aware that employing
more machinery does have disadvantages. For example,
there is the huge cost of purchasing and installing new
machinery. The cost of the investment to Tooting Toys is
said to be CNY 2 million. The business will have to borrow
about CNY 7 million, which will place a financial burden
on the business. It is also possible that production will
be disrupted while the installation takes place. Installing
new machinery takes time and workers may need to be
retrained. Another disadvantage is that the new machinery
may be inflexible. It may be suitable for making the new
pedal sports cars but nothing else. Having inflexible
machinery can be limiting – particularly if the sports cars
do not sell in sucient quantities. Problems can also occur
if machinery breaks down. There may be long delays in
production if breakdowns cannot be resolved quickly. This
might mean that customers are let down – particularly if
joint-in-time methods are being used. Finally, workers may
feel threatened by the new machinery. For example, they
may feel that their jobs are under threat if machinery is
more ecient and cost eective. This could impact on the
morale of the whole workforce.
To conclude, there is a lot for Yang Chen to think about
before committing to more capital-intensive production. He
must be confident that sales will be high enough to justify
the investment. He must also manage the introduction of
the new technology carefully to minimise the impact on the
workforce. He must be confident that the financial burden
of the loan will not cause cash flow problems and be sure
that the machinery is not too inflexible. Since Dragon Toys
already has a large order for the new product, Yang Chen
may be full of confidence and go ahead with the switch to
more capital-intensive methods.
CHAPTER 45
CASE STUDY: QUALITY AT THE ALBANNACH HOTEL
1
▶ Discuss the importance of quality to The Albannach?
Lesley and Colin are passionate about their business.
They are totally committed to quality. Evidence of this
74 ANSWERS
MULTIPLE-CHOICE QUESTIONS
1A, 2C, 3B, 4B
CHAPTER REVIEW
CASE STUDY: ASHWIN DATA SYSTEMS (ADS)
1
▶ How does ADS ensure quality in its business?
Many businesses follow codes of practice. These show
that a production process has been carried out to a certain
standard. Once a business has been assessed and has
achieved a certain standard, it is regularly checked by
the awarding organisation to make sure standards are
maintained. In this case, ADS has been granted ISO 9001
certification, the internationally recognised standard for the
quality management of businesses.
2
▶ Why does quality matter so much to a business like ADS?
The importance of quality has grown in recent years.
Consumers are more aware, they get information through
specialist consumer magazines, social media and the
Internet and as a result they have higher expectations than
ever before. Increased competition has also forced firms to
improve the quality of their products. Government legislation
designed to protect consumers has forced firms to improve
quality. Faulty products are costly for a business. For
example, if faulty products find their way onto the market,
they may have to be recalled which is expensive and
embarrassing for a business. If ADS supplied faulty software
to clients, it could disrupt their operations and result in lost
customers. Consequently ADS may face compensation
claims. Quality matters to a business because, generally,
they will enjoy more sales if they can deliver quality
products. Poor quality is likely to result in lost customers.
ADS have been awarded the ISO 9001 certificate.
3
▶ Discuss two benefits from winning this award.
One benefit that ADS should enjoy as a result of ISO
9001 certification is that the award can help a business to
examine and improve systems, methods and procedures.
This will lower costs, motivate sta and encourage them
to get things right first time. It can also highlight product or
design problems and develop improvements, record and
investigate all quality failure and customer complaints and
make sure that they do not recur.
The ISO 9001 award also gives a clear signal to customers
that ADS are taking measures to improve quality. This
should help to generate more sales and lead to higher
profitability. Also, if ADS develops a reputation for quality,
they may gain a competitive edge in the market and be able
to charge a higher price. Customers are often prepared to
pay more if quality can be guaranteed.
ADS are considering the introduction of TQM.
4
▶ Will this benefit the company? Make a clear judgement
in your evaluation.
TQM is an approach to quality control designed to prevent
errors, such as poor quality products, from ever happening.
The business is organised so that the production process
is investigated at every stage. ADS may enjoy a number of
benefits if they introduce TQM into their organisation. TQM
3
▶ Discuss how Samsung may be aected by this
productrecall.
The impact of the product recall at Samsung could be
huge. It could have a long-term eect. Immediately after
the first announcement, around US$14 000 million was
lost from the value of the company as its share price fell
dramatically. Also, hundreds of Koreans have threatened to
sue Samsung for compensation. They wanted to recover
the costs of visiting shops to exchange their phones, for
the time they spent transferring data and for psychological
harm from handling a hazardous product. However,
Samsung is a powerful and resourceful company. It may
have the money and strategies needed to recover and
progress in the future. The share price had recovered all
losses since October 2016 by the end of the year and gone
up further. The Samsung Galaxy Note 7 is just one of many,
many products for the business. If one fails like this, they
have many others to fall back on.
ACTIVITY 2
CASE STUDY: SANTA CRUZ GUITAR COMPANY
1
▶ Describe two features of total quality management that
are used by the Santa Cruz Guitar company.
One important feature of TQM is quality chains. Every
worker in a business is like a link in a chain and every worker
is both a customer and a supplier. This is because a worker
on a production line will only receive (as a customer) and
pass on (as a supplier) semi-finished work if it has reached
specified quality standards. This avoids faulty products
ever being made. The Santa Cruz Guitar Company aims to
avoid errors in production at all costs. It employs a number
of highly skilled craftsmen called luthiers and organises
employees around six dierent workstations. After work
on a guitar is completed at one workstation, the job is then
passed on to the next. However, each workstation is under
the supervision of a senior luthier and no guitar passes on
to the next stage without a thorough quality check – usually
by two luthiers. Although production is organised like an
assembly line, each workstation operates like a link in a
chain. They are both customers and suppliers.
Another feature of TQM evident at the Santa Cruz Guitar
Company is a focus on the customer. Firms using TQM are
committed to their customers. They respond to changes in
people’s needs and expectations. In this case, each guitar is
made to precise customer specifications and the company
has a website where guitar owners can communicate
directly with the manufacturer. The success of the company
is reflected by its long list of customer orders.
2
▶ Explain one advantage to the Santa Cruz Guitar
company of using TQM principles.
One key advantage of using a TQM approach to ensure
quality is that waste and ineciencies are removed. At the
Santa Cruz Guitar Company, the thorough checks that are
made before each guitar is passed to the next workstation
help to minimise the possibility of mistakes. This also helps to
keep rework and waste to an absolute minimum. No finished
product should have a defect by the time production has
been completed. This will help to keep costs down and allow
the firm to produce high quality products for customers, thus
ensuring the company’s reputation is maintained.
ANSWERS 75
people will tend to borrow less because borrowing becomes
more expensive; therefore they might cut down the amount
of purchases made by credit card for example. This might hit
Ismail’s business because consumers may use credit cards
to buy goods like jewellery. Also, jewellery is a non-essential
product, therefore it will be relatively easy for consumers to
cut back on the amount of jewellery they buy if it becomes
more expensive.
In 2017, Ismail was informed that his rent in the shopping
mall would double. As a result of the news, Ismail was
considering two options:
Option 1: Move his shop to a Bahraini side street where
rent is very cheap.
Option 2: Cease trading from a shop and set up an online
business selling jewellery.
f Justify which one of these two options Ismail should
choose. (9)
It might be argued that the current location of Ismail’s
jewellery shop is a good one. This is because shopping malls
are modern and attract a large number of shoppers in a
concentrated area. However, when an important cost like rent
doubles, this might be too much of a financial burden for the
business to bear. This is presumably why Ismail is considering
two options for changing his business.
Moving his shop to a Bahraini side street will reduce costs
because rent will be lower. Ismail might also get more retail
space for his money. This might mean that profit margins are
higher and he may be able to display more stock, which will
give shoppers more choice. However, the side street may
not attract as many shoppers as the mall and his business
may become isolated. To compensate, he may have to spend
more money on advertising, which will raise costs.
Setting up an online jewellery business may be a realistic
option. The set-up costs would be low and Ismail would avoid
all the expenses, such as rent, fixtures and fittings, associated
with selling from a shop. He would also be able to locate his
operation anywhere he chooses as long as he has a reliable
Internet connection. Another benefit is that he may draw
customers from all over the world since online selling allows
businesses to reach global markets.
To conclude, Ismail needs to choose an option that suits his
own personal preference. If operating a store from a mall is
too expensive and a new location in a side street is perhaps
regarded as a step backwards, the online option may be the
right choice. If Ismail can design an attractive website and meet
customer needs with an extensive range of jewellery, online
selling might be the way forward. The prospect of selling to a
global market is very attractive indeed to any entrepreneur.
EXAM PRACTICE: 2 PEOPLE IN BUSINESS
a Define the term ‘fringe benefit’. (1)
One example of a motivational theory is Maslow’s Hierarchy
of Needs.
Some employees receive fringe benefits in addition to their
normal pay. They are often described as the ‘perks’ of the job.
Examples might include free or subsidised meals, a company
car, discounts on company products and free private health
insurance.
helps a business to become more market orientated. This
is because it improves customer focus by encouraging sta
to focus on customer needs. Since TQM is adopted through
the whole organisation, it helps improve quality in all aspects
of the business. TQM also removes waste and ineciencies,
which will save ADS money. TQM will also help ADS to
develop ways of measuring performance in its operations
and improve communication and problem solving.
However, ADS must also appreciate that TQM is very
expensive to introduce. There are high training and
implementation costs. TQM can also be bureaucratic and
will only work if everyone in the business is committed.
This means that all personnel must be involved when TQM
is introduced, including senior managers and shop floor
workers. Without total commitment from everyone, TQM is
unlikely to be successful.
Generally, most people would agree that if TQM is introduced
eectively with the commitment of all sta and adequate
training for everyone, quality will improve and the business
will benefit financially in the long term. ADS is a business that
values quality and appears to be developing a reputation in
the market for quality. If it can achieve this, it may enjoy a
competitive edge and begin to dominate the market.
EXAM PRACTICE: 1 BUSINESS ACTIVITY AND
INFLUENCES ON BUSINESS
a State one non-financial aim of a business. (1)
One non-financial aim of a business is to gain personal
satisfaction.
b State one way of measuring the success of a business. (1)
One way of measuring the success of a business is to look at
the amount of profit made in a financial year.
c Explain one way in which a fall in the exchange rate might
aect a business. (3)
Ismail buys jewellery from overseas. Consequently, when he
makes a payment he will have to pay in a foreign currency.
Unfortunately, when the exchange rate falls the price of imports
will rise. This means that Ismail will have to pay more for his
stock. This will reduce the profit made by Ismail’s business
unless he is able to charge his customers a higher price.
d Explain one disadvantage of operating as a sole trader. (3)
One of the main disadvantages of operating as a sole trader
is that they have unlimited liability. This means that if the
business fails a sole trader can lose more money than was
originally invested. This is because a sole trader can be forced
to use personal wealth to pay o business debts. This could
have serious financial implications for sole traders and their
families. They stand to lose more of their own money if the
business fails.
Ismail read in a newspaper that interest rates in Bahrain
were likely to rise in 2017.
e Explain one possible eect on Ismail’s business of an
increase in interest rates. (3)
Most businesses would consider an increase in interest
rates as negative. This is because higher interest rates might
dampen demand for some products. When interest rates rise
76 ANSWERS
while the job is being done. A number of dierent approaches
might be used by a business. One common approach
involves a new recruit watching and copying the actions of an
experienced and competent employee. This method can work
well if the existing member of sta is a good and committed
teacher. If not, the quality of training might be poor. The main
advantage of on-the-job training is that it is relevant because
workers are learning by actually doing the job. Trainees are
also producing output, which can generate revenue. On-the-
job training is also relatively cheap and easy to organise.
However, on-the-job training may be stressful for the trainee,
particularly if working with others. Trainees might also make
mistakes and produce output that is unfit to sell. Also, if the
trainers are not committed, training quality is likely to be poor.
Some employees receive training away from the normal work
area. This is called o-the-job training. For example, it might
involve workers going to college once a week. Alternatively,
it might involve a small group of managers travelling
overseas to learn about new management techniques. The
main advantages of o-the-job training are that output is
not aected if mistakes are made and trainees cannot be
distracted by work. Also, training could take place outside of
work hours if necessary and customers and others are not
put at risk. However, there are disadvantages. Trainees do not
produce any output and some o-the-job training is expensive
if provided by specialists. Also, some aspects of work cannot
be taught o-the-job and it may take time to organise.
Many companies prefer on-the-job training because it is
cheap and relevant. However, where there might be a danger
to others if workers are being trained on the job, o-the-
job training is likely to be used. In this case, Skyscanner
organises much of its own training. For example, Skyscanner
oers a range of 200 courses to help promote the transfer of
knowledge in its organisation. The CEO delivers a five-week
programme for high-potential employees, educating them
on how to think like an entrepreneur. To conclude, small
businesses are likely to use on-the-job training to minimise
costs. But as firms grow, like Skyscanner, o-the-job training
may be more cost eective.
EXAM PRACTICE: 3 BUSINESS FINANCE
a Define the term cost of sales. (1)
The cost of sales is the direct expenses incurred by a
business in the course of production. Examples might be raw
materials and the wages of factory workers.
b Calculate the gross profit margin for West Point in 2016. (2)
Gross profit margin =
Gross profit
___________
Turnover
× 100
Gross profit margin =
gross profit
___________
revenue
× 100
= US$5 200 000 × 100
US$14 200 000
= 36.6 per cent
c Outline one reason why West Point might produce a
statement of comprehensive income. (2)
The statement of comprehensive income shows business
owners and managers the amount of profit made by a
business in a financial year. However, the information
b Outline one reason why motivation in the workplace is
important. (2)
Well-motivated employees will work harder. They are likely
to take more pride in their work, complete tasks quickly and
feel that their jobs are important. As a result, they will produce
higher levels of output. Businesses also need workers to
co-operate. For example, more and more businesses organise
their sta into teams. Therefore, if workers do not co-operate
with each other, teamwork will be disrupted.
c Outline one legal control over employment that might
aect Skyscanner. (2)
Generally, owners are free to set levels of pay in their
businesses. However, in some countries governments have
introduced a legal minimum wage. This involves passing
legislation that means no employer is allowed to pay their
workers an hourly rate below the limit set. Employers face
a penalty if they pay wages that are lower than the national
minimum wage.
Skyscanner advertises jobs online.
d Analyse the benefits to Skyscanner of advertising jobs
online. (6)
The use of specialist online sites for advertising jobs is
now common. Many jobseekers are familiar with specialist
sites that advertise jobs. Some sites are general but others
advertise jobs in specific fields such as accountancy or
teaching. It is also common for businesses like Skyscanner
to advertise jobs online. There may be a link from a general
business website which guides jobseekers to a vacancies
page, for example. Advertising jobs online is fairly cheap since
there is no need to pay a media outlet for advertising space. It
is also possible to give a great deal of detail online and modify
job adverts easily so that they are always up-to-date.
Another important benefit is that online adverts can be used
to attract applicants from all over the world if necessary. This
is because online job adverts can be accessed anywhere
across the globe. This means that a business like Skyscanner
will have a bigger choice when recruiting people and is more
likely to be able to recruit high-quality candidates.
Skyscanner is committed to equipping their sta with
new skills. To help with sta training, Skyscanner oers
a range of 200 courses to help promote the transfer of
knowledge in its organisation. The CEO delivers a five-
week programme for high-potential employees, educating
them on how to think like an entrepreneur.
Many businesses face two key options when training
their sta:
Option 1: On-the-job training
Option 2: O-the-job training
e Justify which of these two options Skyscanner should
choose. (9)
Most businesses have to train their workers. This means they
have to be taught how to do their jobs. If workers are well
trained, they will be more productive and better motivated.
However, there are dierent ways in which workers can be
trained. One of the most common methods is on-the-job
training. This means that workers are trained in the workplace
ANSWERS 77
In this case, West Point may be better o arranging a bank
overdraft. If the business has been struggling financially, it may
need an injection of cash very quickly; a bank overdraft will
provide such an injection. It is also a flexible source of finance
and will only be used when necessary. However, West Point
will need to get permission from the bank before an overdraft is
granted. If the bank refuses to provide an overdraft, then West
Point might be forced to use trade payables. Initially, though, a
bank overdraft is probably the better of the two funding options.
EXAM PRACTICE: 4 MARKETING
a Calculate the amount of money Sony spent on advertising
as a percentage of its revenue in 2014. (2)
The amount of money spent on advertising as a percentage of
revenue is given by:
US$2350 million × 100 = 3.4 per cent
US$69 050 million
For some of its products, such as its gaming console,
Sony uses a skimming pricing strategy.
b Analyse the benefits to Sony of using a skimming pricing
strategy. (6)
Some businesses may launch a product into a market
charging a high price for a limited time period. This is called
skimming or creaming and is used for some of Sony’s
products. The main objective is to generate high levels of
revenue with a new product before competitors bring out a
rival product. In the market for some goods, there is a group of
consumers called ‘early adopters’. Early adopters are prepared
to pay higher prices because they like to be the first to buy
the product. It has been suggested that early adopters are
younger, have a higher social status with a better education
than late adopters. They may also have higher levels of income
and be more socially forward. It is reckoned that about 13 per
cent of consumers are early adopters in such markets.
Skimming allows businesses like Sony to recover the cost of
research and product development. The relatively high levels
of revenue that are generated from sales to early adopters
contribute to these high R&D costs. The high levels of revenue
also act as an incentive to firms like Sony to carry on investing
in R&D.
c Evaluate the importance of market research to a company
like Sony. (12)
Market research involves gathering, presenting and analysing
information regarding the marketing and consumption of
goods and services. Market research can be expensive but
businesses are prepared to meet the cost because of the
benefits it brings.
Market research is important because it helps to identify
and understand customer needs. A business will be more
successful if it can supply products that meet customers’
needs. This means that a business has to gather information
to identify these needs. For example, when developing a new
gaming console, Sony will need to find out which product
features are important to potential customers. These might
include model design and style, graphics quality, durability,
portability and flexibility. Once this data has been gathered, a
business can design a product that meets the specific needs
of customers.
contained in the statement might be used to help make some
important decisions. For example, it will show a business
what has happened to costs during the year. It might show,
for example, that the cost of sales has increased sharply.
As a result, a business can identify reasons for this and take
measures to bring costs under control.
d Analyse the importance of cash to a business like West
Point Ltd. (6)
Cash is the most liquid of all business assets. Without cash
a business cannot trade. It is reckoned that poor cash flow is
the reason why many businesses eventually fail. Even when
trading conditions are good, businesses can fail. A business
always needs cash to pay important bills. Suppliers have to
be paid for the materials and components that have been
purchased. If a business fails to pay a supplier on time, it may
mean that the supplier will refuse to trade with that business
in the future. Businesses also need cash to pay for overheads
such as rent, electricity, insurance and telephone charges.
Businesses will often get bills for the services that they have
used. Again, if these bills are not paid, there is a risk that such
services will be terminated. Finally, employees have to be
paid every week or every month. If a business cannot pay its
employees, it would not be very long before they walked out.
If a business runs out of cash, it may become insolvent – this
means that the business cannot pay its debts. This would
usually result in the business closing down; this is the worst
that can happen. Unfortunately, unless a business can raise
cash immediately to pay the most pressing debt, the business
will collapse. Therefore, it is important that a business
continually monitors and controls its cash flow.
West Point has experienced financial diculties in recent
months and wants to improve its cash flow. Two options
have been identified.
Option 1: Take out a bank overdraft
Option 2: Make more use of trade payables
Justify which one of these two options West Point Ltd
shouldchoose. (9)
When a business runs short of cash, it is important to act quickly.
Without sucient cash, a business cannot trade. One way West
Point can raise cash quickly is to get an overdraft from a bank.
This is a common source of finance for most businesses. A bank
overdraft means a business can spend more money than it has
in its account. In other words, they go overdrawn. The bank
will set an overdraft limit and interest is only charged when the
account is overdrawn. Bank overdrafts are simple and flexible.
However, the bank has the right to ask for the money owed to be
paid back at any time. It may do this if it thinks the business is
struggling. A business may use bank overdrafts as a short-term
source of finance.
The other funding option being considered by West Point is
using trade payables. This is where a business buys resources,
such as raw materials and components, and pays for them at
a later date – perhaps 30, 60 or even 90 days later. This is a
common way of doing business in many countries. It is a cheap
source of finance because there is no interest to pay. However,
many suppliers encourage early payment by oering discounts
and the cost of goods is often higher if firms buy on credit. Also,
if West Point Ltd delayed payments for too long, suppliers might
get upset and refuse to deliver goods in the future.
78 ANSWERS
b State one example of an internal economy of scale. (1)
One example of an internal economy of scale is financial
economies.
c Explain one limit to the growth of a business. (3)
One of the main limits to growth is a lack of finance needed to
expand. Growth usually requires investment in new resources
such as property extensions, new machinery, equipment and
more labour. Unfortunately, some businesses are not able to
convince moneylenders that if the company grows it will be
more successful and the finance will be repaid. Many small
businesses that want to grow are still seen as too risky.
d Explain one disadvantage to a business of using labour-
intensive production. (3)
Abdul Engineering uses labour-intensive production, which
means that they use relatively more labour than capital. One
of the main disadvantages of labour intensive production is
that labour is more dicult to manage than capital. People
have feelings and can react in an unpredictable way. For
example, a worker might not follow the instructions given by
a manager. This might result in delays, mistakes or conflict.
This can be disruptive to production. Sometimes, if there
is a serious disagreement between workers and managers,
industrial action such as a strike might result. This could not
happen with machinery.
e Explain one reason why it is important to use resources
eectively. (3)
If resources are used more eectively, eciency will improve.
For example, if fewer raw materials are used in production,
costs will fall. If costs are lowered, then businesses will
make more profit. This will increase returns for the owners
and provide cheap funds for investment in the future. The
business will also be more competitive in the market, which
will help to generate more sales.
Abdul Engineering has started to receive multiple orders
for one of its products.
As a result of the multiple orders, Abdul is reviewing the
production method used at the factory. Two options are
being considered for the future.
Option 1: Continue using job production.
Option 2: Switch to batch production.
f Justify which one of these two options Abdul Engineering
should choose. (9)
Abdul Engineering is currently using job production to
manufacture metal frames. This is where a business produces
one product from start to finish before moving on to the
next. Each item produced is likely to be dierent such as a
dierent frame design for each greenhouse. Job production
is used when orders are small, such as ‘one-os’. The
quality of output from job production is usually very good.
This is because skilled craft workers often carry out work.
Workers are likely to be motivated because the work is varied.
Also, each worker is likely to be involved in completing the
whole job from start to finish. One key advantage to Abdul
Engineering of using job production is that products can be
custom made. This means that dierent farmers can order
dierent sized greenhouses with dierent designs. However,
If possible, businesses need to anticipate customer needs.
This means they try to predict what customers want in
advance and respond to changes very quickly. Businesses
like Sony operate in a rapidly changing environment and have
to keep up with the latest trends, fashion, technology and
design.
Market research is also important because it helps to identify
gaps in the market. If Sony can spot a gap in the market, it is
likely to gain a competitive edge. It may be able to generate
higher levels of revenue and profit before a competitor, like
Microsoft, arrives. Finding untapped markets is not easy but
gathering information from people might help.
Businesses can also use market research to reduce the
risk in business. Setting up a business or launching a new
product is risky. As markets get larger, and as competition
gets fiercer, launching new products gets even riskier. The
likelihood of failure is high but investment in eective market
research can help reduce the risk of failure. There are many
examples of costly product failures that may have resulted
from misreadingthe market or failing to carry out eective
market research.
Finally, market research information can help a business
like Sony to make important decisions. Businesses have
to make countless decisions and generally the quality of
decision making can be improved if managers have access to
meaningful information. Market research can provide a wide
range of information that could be used to improve decision
making – particularly when making marketing decisions.
Although there are some considerable benefits from carrying
out market research, a business needs to ensure that the
data gathered is reliable. If market research data is inaccurate
or out of date, any decisions based on the data are likely
to be unsound. The reliability of market research data often
depends on the number of people questioned and whether
they represent the views of everyone. Ideally, information
could be gathered from every single person in a market.
However, this would take too long and cost too much money.
To overcome this problem, businesses use a sample of
people. A sample is a much smaller group; however, the
behaviour and views of the sample must be representative of
all the people in the market, otherwise the data will be biased
and unreliable.
A business should also appreciate that human behaviour is
unpredictable. Although people may indicate their intentions
in a questionnaire, what they do in reality might be quite
dierent. People might change their minds or misunderstand
the question. They might also give answers that they think the
interviewers wanted to hear.
To conclude, these issues must be addressed to ensure the
reliability of data. Companies like Sony will understand these
issues and take them into account. Market research is vital
for companies like Sony where competition is so intense.
If they are not able to meet or exceed customer needs and
expectations, they will lose out to rivals.
EXAM PRACTICE: 5 BUSINESS OPERATIONS
a Define the term ‘labour productivity’. (1)
Labour productivity is the output per worker in a given time
period.
ANSWERS 79
although production might be easier to organise when
using job production, production may be slower and lead
times longer. This is because craft workers take longer than
machines to carry out their tasks. Job production is also likely
to be more expensive than other methods. This is because
the wages of craft workers will be higher and specialist tools
might be needed.
When demand grows and orders for multiple units are placed,
a business might switch to batch production. This is where
a business makes a number (a batch) of products to the
same design or specification and then changes production
to another product with dierent specifications. When
products are made in batches, production is usually divided
into a number of operations or processes. An operation
or process is applied to the entire batch before it moves
onto the next. Unit costs are likely to be lower when batch
production is adopted. This is because output is higher,
workers can be more specialised and more use is made of
machinery. Production can also be flexible because orders
with dierent measurements, styles or specifications can still
be met. However, planning and co-ordination may be more
dicult. For example, if a particular operation takes longer
than all others in the production process, it is important that
resources employed on other operations are not kept waiting.
Also, if batches are small then unit costs may still be quite
high.
In this case, Abdul Engineering might need to switch to
batch production. It has started to receive multiple orders
for some of its products and production is likely to be more
ecient using batch production. If the business wants to
grow, it needs to capitalise on this new opportunity. Abdul
may be able to invest in more machinery and rely less on his
workforce. This should help to improve eciency and raise
profits. Provided the multiple orders continue into the future, a
switch to batch production would be justified.
ANSWERS 483
PREPARING FOR YOUR
PEARSON EDEXCEL
INTERNATIONAL GCSE
BUSINESS EXAMINATION
(PAPER 1)
SAMPLE ANSWERS WITH COMMENTS
Paper 1
1 ▶ (a) (i) B (ii) C (iii) C
Sample answers to (iv) (v) and (vi) are not given so you try these
yourself, for exam practice.
Comment, 1 (a) (i), (ii) and (iii)
Multiple-choice questions are designed to test your knowledge.
Therefore marks are awarded for satisfying AO1. When answering
multiple-choice questions it is important to read all of the answers
before making your selection. You must avoid picking the first
answer that you think might be right – this is because there might
be a more accurate answer further down the list.
The answer to (a) (i) is B. Packaging is a variable cost because
as output is increased more materials are needed to package the
extra output. The wrong answers, rent, interest payments and
insurance premiums are all examples of fixed costs. They do not
vary when output changes.
The answer to (a) (ii) is C. A job description is a document that
outlines the tasks, duties and responsibilities associated with
a job. It is used when recruiting sta. For example, it shows
applicants exactly what they will have to do if they get the job.
A job specification is a personal profile of the type of person
needed to do a particular job. A job application form is a standard
document used to collect information from a job applicant. A
curriculum vitae is a document used by a job seeker that lists
personal details, qualifications, work experience, referees and
other details. These are all wrong answers.
The answer to (a) (iii) is C. Skimming is a pricing strategy that
involves charging a high price when a product is first launched.
This strategy is often used by businesses selling technological
products such as smartphones and computer games.
Penetration pricing involves selling a product at a low price when
it is first launched. Cost plus pricing involves adding a mark-up
(a certain percentage) to the cost of a product to set the price.
Psychological pricing involves setting the price slightly below a
round figure – charging US$99.99 instead of US$100 perhaps.
These are all wrong answers.
STUDENT ANSWERS
(b) Average cost is the unit cost of production. It is the cost
of producing a single unit and can be found by dividing
total cost by output (in units).
(c) There is no sample answer for this question so you can
try it yourself, for exam practice.
(d) An example of a stakeholder is an employee.
(e) There is no sample answer for this question so you can
try it yourself, for exam practice.
(f) One advantage of customer loyalty to a business is that
marketing costs will be lower. The cost of attracting
new customers is considerably higher than the cost
of retaining existing customers. With lower costs, a
business should enjoy higher profits and therefore
greater returns on the money invested in the business.
(g) A sole trader is the simplest form of business organisation
and has just one owner – in this case Edison Johar. One
main advantage to Edison of operating as a sole trader is
that he gets to keep all the profit made by the business. He
does not have to share the profit with any other stakeholders.
This means that he may be more motivated. For example,
he might work harder to please his customers. He can
also choose whether to keep the profit or reinvest it in the
business. To improve eciency, for example.
Another advantage is that Edison has complete independence as
a sole trader. He does not have to consult any other stakeholder
before making a business decision. He can run his business in
any way that he wants. He can choose his hours of work and take
holidays whenever he wants. He is not answerable to anyone. This
is often one of the main reasons why people set up a business.
They like the idea of being in charge. The possibility of conflict is
also reduced since one person (i.e. Edison) has all the power.
COMMENT
(b) Definitions will normally be awarded just one mark for
AO1. No more than one or two sentences are required
to define a term. In this case, average cost is the cost of
producing a single unit. It is calculated by dividing total
cost by output.
(d) Giving a business example is another way of
demonstrating knowledge. Therefore 1 mark for AO1
is awarded for a correct example. There are several
other examples of business stakeholders in addition
to the one given in the student answer – employee.
Other possible answers include customers, suppliers,
shareholders/owners, managers, the local community or
the government.
(f) This question is again focused on testing knowledge.
However there are three marks awarded for AO1 in this
question. One mark might be awarded for identifying an
advantage and another two for explaining the advantage
to a business. One advantage of customer loyalty is that
marketing costs will be lower (1). The student answer
explains that the cost of attracting new customers is
higher than that of retaining existing ones (1). The answer
also goes on to explain that with lower costs, profits and
returns to the owners will be higher (1).
(g) This question is about the business in the case and has
six marks available. Therefore three might be awarded
for AO2 and three for AO3. For AO2 the student answer
identifies two advantages to Edison of being a sole
trader. Independence, which is explained, and the right to
keep all the profit made by the business. To get all three
AO2 marks, it is important to answer the question in the
context of the business. For AO3 there must be some
analysis. Here the student has explained the advantages
484 ANSWERS
his car-washing/valeting business, surely this would suggest
that the business is successful and will continue trading.
However, personal satisfaction might be dicult to measure
accurately. It is not quantifiable. Also, dierent owners might
perceive personal satisfaction in dierent ways. It is for
this reason that Edison might be advised to use profit as a
measure of success for his business.
Comment
(a) One mark only is awarded here. However, it might be one
mark for AO2. This might be because the business in the
case is referred to directly in the question. Therefore the
answer must be given in the context of Edison’s business
to demonstrate application. The student answer here
states that the source of finance is suitable for a small
business like Edison’s. This answer therefore recognises
that Edison is running a small business and as a result
has selected a suitable source of finance.
(c) Three marks are awarded for this question. Edison’s
business is referred to in the question so one mark might
be awarded for AO1 and two for AO2. In the student
answer, the cheapness of the source is given as the
advantage (1). The benefits to Edison’s business are
then explained. A cheap source, such as retained profit,
is suitable for a small business. This will keep costs low
and future profits higher. (2)
(e)
Three marks are available here. They may be awarded for
knowledge since there is no reference to the business in
the case study to suggest that application is needed. In
the student answer profit has been identified as a financial
aim (1). Profit is defined and its role in business explained
(1). Possible uses of profit are also explained (1).
(f) Answers to this question, which oers 9 marks, are likely
to require application, analysis and evaluation. So three
marks each for AO2, AO3 and AO4 might be awarded.
The student answer clearly explains why profit might be
a good measure of success. For example, profitability
means that the business idea is sound and that the
running of the business is eective. This demonstrates
analysis. The answer is also set in the context of Edison’s
business which demonstrates application. Evaluation
is demonstrated when the answer also recognises
that using profit to measure success may also have
drawbacks. For example, if there is no competition in the
market, it is easier to make a profit.
The student answer also explains eectively how owner
satisfaction can be used to measure the success of a
business. For example, if the owners are happy, and are
content to carry on running the business, this suggests
that the business is successful. If they weren’t happy they
would probably close or sell the business and pursue other
interests. The answer is also set in the context of Edison’s
business which demonstrates application. Evaluation is
used when the student recognises the problems of using
the owner’s satisfaction as a measure; this is not easy
to quantify. There is further evaluation when the student
makes a final judgement by saying that profit is probably
the best measure in this case. The judgement is also
justified. Remember that it is always important to justify any
judgement you make in an answer.
of being a sole trader and developed the implications
of the advantages for the business. For example, it is
explained that Edison has the right to keep all the profit
and then decide how to use it. He might keep it for
himself or reinvest it in the business, which might help
improve eciency.
Question 2
Student answers
2 ▶ (a) A short-term bank loan might be used to raise the
Rs50,000 to pay for some new equipment. This would be
easy for a small business like Edison’s to arrange.
(b) There is no sample answer for this question so you can
try it yourself, for exam practice.
(c) Retained profit is a cheap source of finance. There is
no interest to pay and no administration costs to meet.
This source would benefit Edison’s business because
costs will be lower. This means that profits will be higher.
Edison’s business would also avoid the additional cost of
a loan, which is often important for a small business.
(d) There is no sample answer for this question so you can
try it yourself, for exam practice.
(e) A business can pursue a number of financial aims. One
common financial aim is for the business to make as
much profit as possible. Profit is revenue less all business
costs. It is the driving force behind most businesses.
If the business makes high levels of profit, owners can
withdraw it from the business for their own use or retain it
in the business for investment in the future. For example,
it could be used to help fund the purchase of new
equipment.
(f) Most people would agree that if a business is making a
profit then it is successful. Also, if profits are consistently
rising then the business is becoming more successful.
Rising profits would show that Edison Johar is running
his business eectively. It would show that he was able
to attract customers, provide them with a quality car
washing service and charge a high enough price to more
than cover the costs. It shows that the business idea
and its implementation are robust. Also, a profitable
business is more able to survive going forward. However,
profit may not always reflect success. For example, it is
possible to make high profits if there is no competition
in the market. Therefore, profits made by a monopoly
are not as impressive as profits made in a competitive
market. In this case, we do not know how much
competition Edison has in the market, however, it is very
unlikely that Edison has a monopoly in a market which is
relatively easy to enter.
It could be argued that a business is successful if the
owners are satisfied. If the owners are happy, and are
content to carry on running the business, this suggests
that the business is successful. If they weren’t happy, they
would probably close or sell the business and pursue other
interests. Success to Edison Johar might mean survival in the
market, rising profits/returns or business growth. He might
also believe that the business is successful if it continues to
provide financial security for him and his family. If Edison said
he was satisfied with the performance and future outlook for
ANSWERS 485
Quickwash because they are happy with the car washing
service they get. The analysis also considers the main
disadvantage of using penetration pricing, i.e. the cost
in terms of lost margins. Again this is set in context to
ensure that AO2 marks are maximised.
4 ▶ (a) The return on capital employed is given by:
ROCE =
Operating profit
________________
captal employed
× 100
ROCE =
Rs2,200,000
_____________
Rs18,000,000
× 100
ROCE = 12.2 per cent
(b) There is no sample answer for this question so you can
try it yourself, for exam practice.
(c) Expanding a business by developing a franchise
means that the owners (the franchisors) allow other
entrepreneurs (the franchisees) to trade under their name.
In this case, Edison and Nalaka would allow others to set
up Quickwash centres in other parts of Colombo, or even
in other towns and cities in Sri Lanka. Edison and Nalaka
would provide the franchisees with a licence to trade
under the brand name of Quickwash. They may also
oer a start-up package including help, advice, essential
equipment and training on how to run a carwash
centre and operate the systems used by the franchise.
Franchisees might also get materials, equipment and
support services that are needed to run a Quickwash
centre. In return for these services, the franchisees will
pay Edison and Nalaka certain fees. These might include
a start-up fee – a lump sum – an ongoing fee (usually
based on sales) and possibly a contribution to marketing
costs. Franchisors sometimes make a profit on some of
the materials, equipment and merchandise supplied to
franchisees.
The main advantage of setting up a franchise is that
Quickwash is likely to grow much faster as a business
because the brand can be established in many dierent
locations all over Sri Lanka at the same time. This
is possible because dierent franchisees can set up
Quickwash centres all at the same time with no extra
cost to Edison and Nalaka, and because they have
already established that there is a demand for this kind
of service. A business can usually grow faster using a
franchise operation than it could growing on its own.
Another benefit is that Edison and Nalaka will reduce
their risk in the business venture. This is because other
entrepreneurs, the franchisees, are putting up their own
money to set up a Quickwash centre in another location.
They are funding the growth of the business. If the
centres fail, Edison and Nalaka do not have any of their
own money at risk.
There is also the attractive benefit that Edison and
Nalaka will receive regular payments from franchisees if
the operation is successful – plus the original lump sums.
Very little extra eort will be needed from Edison and
Nalaka to get this money.
However, there are one or two disadvantages with
franchising. The total profit potential of a national
car washing business is being shared out with other
3 ▶ (a) Labour intensive means that more labour is used in
production relative to capital.
(b) There is no sample answer for this question so you can
try it yourself, for exam practice.
(c) In a cash flow forecast the closing balance is given by:
= opening balance + cash inflows − cash outflows
= Rs1,000,000 + Rs3,600,000 − Rs4,900,000
= −Rs300,000 (ie a negative closing cash balance)
(d) Sometimes a business will introduce a new product and
charge a low price for a limited period. This is called
penetration pricing. The aim of this strategy is to get the
product established in the market. Once this objective
has been achieved, the price slowly increases to higher
levels. In this case, Edison and Nalaka are planning to
use penetration pricing when they open Quickwash, their
new car washing centre in Mount Lavinia. There are two
main reasons why penetration pricing might be favoured.
First, Edison and Nalaka will hope that drivers get into
the habit of using Quickwash when the price is low. Then,
when they start to increase the price, drivers will carry
on using Quickwash because they are happy with the
car washing service they get. Second, this strategy is
also popular if there is a lot of competition in the market.
The car washing market is not too dicult to enter so
competition might be intense, therefore a low starting
price seems a sensible strategy.
However, the cost of penetration pricing can be high
since profit margins will be reduced. There is also the
danger of a negative response from drivers when prices
start to increase after the introductory oer. Edison and
Nalaka will have to be ready for a negative reaction
should it happen.
(e) There is no sample answer for this question so you can
try it yourself, for exam practice.
Comment
(a) Since this requires a definition, one mark is likely to be
awarded for AO1. No more than one or two sentences
are required to define a term. Here labour intensive
production methods involve making more use of labour
in production relative to capital. There is no real point in
explaining this further since only one mark is available.
(c) This question requires a calculation using numerical
information from the case. Therefore the two marks are
likely to be awarded for AO2. You need to remember how
to calculate the closing balance in a cash flow forecast.
No formula for this will be given in the exam booklet
since it is not a financial ratio. Write down every step in
the calculation as the student answer shows here.
(d) This question requires application and analysis so three
marks might be awarded each for AO2 and AO3. The
student answer clearly explains how penetration pricing
is used by Edison and Nalaka. They want to attract
customers to their new carwash venture. One way of
doing this is to oer a low price. Two advantages of this
are explained clearly and in context. For example, Edison
and Nalaka will hope that drivers get into the habit of
using Quickwash when the price is low. Then, when they
start to increase the price, drivers will carry on using
486 ANSWERS
PREPARING FOR YOUR
PEARSON EDEXCEL
INTERNATIONAL GCSE
BUSINESS EXAMINATION
(PAPER 2)
SAMPLE ANSWERS WITH COMMENTS
Paper 2 Investigating large businesses
1 ▶ (a) (i) D (ii) C (iii) D
Sample answers to (iv) (v) and (vi) are not given so you can try
these yourself, for exam practice.
(b) Branding involves giving the product a feature that allows
consumers to recognise the product.
(c) There is no sample answer for this question so you can
try it yourself, for exam practice.
(d) A trade payable might be an example of a current liability
for Coca-Cola. For example, it might owe money to a
supplier of sugar.
(e) There is no sample answer for this question so you can
try it yourself, for exam practice.
(f) Internal recruitment involves filling a job vacancy by
appointing someone who already works for the business.
One advantage of this is that the cost of recruitment will
be lower. The costs of placing a job advert, processing
numerous job applications, shortlisting and interviewing a
number of dierent candidates are all avoided. Therefore
lower recruitment costs will help to boost profit.
(g) Sponsorship is an example of below-the-line promotion
and involves paying a fee for the right to have the name
of the business associated with a particular event. In this
case, Coca-Cola has been a sponsor of the Olympic
Games since 1928. This is a long association. One main
advantage to Coca-Cola of sponsoring the Olympic
Games is that the name of the brand gets displayed
globally on the television without paying broadcasters.
The Coca-Cola logo, and some of its adverts, will
be seen all over the world when Olympic events are
broadcast. The reach is huge – possibly billions of
people. Coca-Cola will be allowed to place its logos
around the stadiums at events. For example, its adverts
might be seen on the trackside electronic advertising
screens. The Coca-Cola logo will also feature on a board
(along with other sponsors) – which can be seen during
televised interviews with athletes.
The cost of sponsorship is also likely to be considerably
less than TV adverts. Therefore Coca-Cola will be saving
some money in its advertising budget. Sponsorship is
clearly an important element of Coca-Cola’s marketing
strategy. It must be since the company has sponsored
the Olympic Games for nearly 100 years. Sponsorship is
a cost eective way to get global television coverage.
entrepreneurs. This means that Edison and Nalaka could
probably make a lot more money in the long run if the
business is grown without the help of franchisees. There
is also the danger that one or two ‘poor’ franchisees could
damage the brand; this might happen if a small number
of Quickwash centres delivered a very poor service. The
reputation of the whole operation could be damaged if
customers’ complaints spread – as they can do with social
media. To conclude, Edison and Nalaka would need to be
happy to share the profits from their business idea and
be prepared to deal with bad publicity if an incompetent
franchisee threatened the brand. If they can do this, then
a franchising operation might an appropriate strategy
for them.
Comment
(a)
This question requires a calculation using numerical
information from the case. Therefore the two marks are
likely to be awarded for AO2. The formula for ROCE will
be given on the formula sheet at the beginning of the
exam paper. You need to show all your working in case
you make a mistake getting to the final answer. Write
down every step in the calculation as the student answer
shows here.
(c)
For this 12-mark question, three marks each are likely to
be awarded for AO1, AO2, O3 and AO4. In this answer,
AO1 marks are likely to be awarded for demonstrating a
clear understanding of franchising and identifying some
advantages and disadvantages of franchising to the
franchisor as a method of growth. AO2 marks will be
awarded for keeping the answer in context throughout.
Throughout the whole of this answer, the advantages and
disadvantages of growing a business using franchising
is applied to Quickwash. Marks for analysis might be
awarded for the clear explanations given relating to the
advantages and disadvantages of using franchising as
way to grow a business. For example, the student answer
explains that one advantage is that Edison and Nalaka will
reduce their risk in the business venture. This is because
other entrepreneurs, the franchisees, are putting up their
own money to set up a Quickwash centre in another
location. They are funding the growth of the business. If
the centres fail, Edison and Nalaka do not have any of
their own money at risk. There are several examples of
clear analysis in the student answer. Finally, AO4 marks
are awarded for making arguments with evidence and
drawing a clear conclusion. In this case, the student
concludes that Edison and Nalaka would need to be
happy to share the profits from their business idea and
be prepared to deal with bad publicity if an incompetent
franchisee threatened the brand. If they can do this then
a franchising operation might an appropriate strategy
for them.
ANSWERS 487
two advantages of sponsorship to Coca-Cola in detail.
For example, it is explained that Coca-Cola will benefit
from the huge reach of sponsoring a global event, such
as the Olympic Games. Finally, the student also explains
why sponsorship is so important to Coca-Cola.
2 ▶ (a) Coca-Cola are likely to recruit full-time workers since
they will be needed as operatives in the factory for long
periods of time.
(b) There is no sample answer for this question so you can
try it yourself, for exam practice.
(c) The exchange rate is the rate at which one country’s
currency is exchanged against the currency of another.
Changes in the exchange rate have an impact of the
price of exports and imports. For example, if a country’s
exchange rate strengthens, imports become cheaper and
exports become more expensive. Therefore, a business
that imports goods will benefit from a rising exchange
rate. In contrast, if the exchange rate is falling, it is
exporters that benefit. This is because falling exchange
rates make exports cheaper. This should result in higher
demand and therefore exporters should enjoy higher
sales, more revenue and higher profits.
(d) There is no sample answer for this question so you can
try it yourself, for exam practice.
(e) There is no sample answer for this question so you can
try it yourself, for exam practice.
(f) When Coca-Cola build a new factory, they have to
choose a suitable combination of materials, tools,
equipment, machinery and labour for production. Some
businesses use labour-intensive production. This means
that they use relatively more labour than capital. Labour-
intensive production is common in Far Eastern countries,
such as China and Vietnam, where labour is cheap.
In contrast, some businesses use capital-intensive
production methods. This means that production relies
more on the use of plant and machinery. Generally, Coca-
Cola probably uses more capital-intensive methods but
it may depend on where the factory is located. Before
making the decision Coca-Cola would have to consider
whether capital-intensive production or labour-intensive
production would be most suitable.
One of the main advantages to Coca-Cola of capital-
intensive production would be lower unit costs. Provided
Coca-Cola can sell large quantities of its products,
investment in technology is usually more cost eective.
Also, when machinery is employed in production the
quality of output is usually more precise and consistent.
This will reduce defects and cut the waste in production.
Another benefit of machinery is that it can be used
for long periods of time without breaks and holidays.
Machines do not get tired and they can be put to work
for 24/7 if necessary. Finally, Coca-Cola is likely to
find that in production managing machinery is a lot
easier than managing people. Machines do not react to
instructions, they have no emotions and will not cause
conflict in the workplace.
However, Coca-Cola will need to be aware that
employing more machinery does have disadvantages.
For example, there is the huge cost of purchasing and
installing new machinery. The cost to Coca-Cola of the
Comment, 1 (a) (i), (ii) and (iii)
As in Paper 1, marks for multiple-choice questions are awarded
for satisfying AO1. Once again, remember to read all of the
answers before making your selection. Avoid picking the first
answer that you see that you think might be right because there
might be a more accurate answer further down the list.
The answer to (a) (i) is D. Cash is the most liquid asset of all and
is therefore a current asset. Trade payables and a bank overdraft
in A and C are both current liabilities. Property in B is a non-
current asset.
The answer to (a) (ii) is C. Owners are said to have limited liability
when they can only lose the original amount of money invested in
a business if it fails. In A, a certificate of incorporation is awarded
to a limited company, which permits it to trade as such. In B
unlimited liability means that business owners can lose more than
the original amount invested in a business if it collapses. In D, a
patent is a licence that can be obtained by a business to prevent
rivals from copying an idea or invention.
The answer to (a) (iii) is D. Social enterprises are set up to achieve
a social or environmental aim, not to make a profit. In A, B and C,
multinational companies, private limited companies and public
limited companies are all likely to be driven by profit, although
some might have other objectives in addition.
(b) Definitions will normally be awarded one mark for
AO1. No more than one or two sentences are required
to define a term. In this case, branding also involved
dierentiation from competitors. The definition is not
detailed as it may have been but will likely be awarded
1 mark.
(d) Giving a business example is another way of
demonstrating knowledge. In this case, the example is
specific to Coca-Cola so a mark for AO2 might awarded
for a correct example. The student answer states that a
trade payable might be an example of a current liability
for Coca-Cola. For example, it might owe money to a
supplier of sugar. This is a relevant example and applied
to Coca-Cola. Other examples could have been used
such as a bank overdraft or any tax owed by Coca-Cola.
(f) There are three marks awarded for this question which
again is focused on testing knowledge (AO1). One mark
might be awarded for identifying one advantage and
another two for explaining the advantage to a business.
One advantage of internal recruitment is that recruiting
costs will be lower (1). The student answer explains
that costs like placing a job advert, processing job
applications, shortlisting and interviewing a number
of dierent candidates are all avoided (1). The answer
also goes on to explain that with lower costs profits will
be higher (1).
(g) This question is about the business in the case and has
six marks available. Therefore three might be awarded
for AO2 and three for AO3. For AO2, the student answer
identifies two advantages to Coca-Cola of sponsorship:
lower cost relative to TV advertising and a huge reach.
To get all three AO2 marks, it is important to answer the
question in the context of the business. This answer
makes clear reference to Coca-Cola’s long-term
sponsorship of the Olympic games. For AO3, there must
be some analysis. Here the student has explained the
488 ANSWERS
3 ▶ (a) The amount spent on raw materials and direct labour is
referred to as the cost of sales.
(b) There is no sample answer for this question so you can
try it yourself, for exam practice.
(c) The operating profit margin is given by:
=
Operating profit
______________
Revenue
× 100
=
US$8,728
__________
US$44,294
× 100
= 19.7 per cent
(d) Financial ratios can be used to evaluate the performance
of a business. For example, profitability ratios, such as
the operating profit margin and the return on capital
employed (ROCE), can assess the profitability of a
business like Coca-Cola. The operating profit for Coca-
Cola was 19.7 per cent in 2015 (see c). This can be
compared with the operating ratios of other businesses
in the soft drinks industry. If it is significantly higher, then
it might be concluded that Coca-Cola had performed
better. The ROCE looks at the profit made by a business
in relation to the amount of money invested in it. This is a
common measure of profitability and it can also be used
to make comparisons.
Ratio analysis can also be used to assess the liquidity of
a business. For example, the current ratio and the acid
test ratio are both measures of liquidity. They use current
assets and current liabilities to assess whether levels
of working capital are sucient. If the current ratio is
significantly less than 1.5 for Coca-Cola then this might
suggest that it needs to obtain some short-term finance.
Although financial ratios are very useful it is important
to appreciate that their usefulness can be limited. For
example, ratio analysis only uses historic data and does
not take into account qualitative data such as the quality
of the workforce.
(e) There is no sample answer for this question so you can
try it yourself, for exam practice.
Comment
(a) One mark for AO1 may be awarded here. The student
answer states that the amount spent on raw materials
and direct labour is referred to as the cost of sales. Since
there is no mention of Coca-Cola in the question, there is
no need for application in this answer.
(c) This calculation question is likely to be awarded two
marks for AO2. The formula for the operating profit
margin will be given at the front of the answer booklet.
Remember to show all your working and set it out neatly
like the student answer.
(d) Since Coca-Cola is mentioned in the question, three
marks might be awarded for AO2 and three for AO3. To
get all three analysis marks, a student may be expected
to explain both the benefits and the disadvantages to
Coca-Cola of ratio analysis. For example, profitability
ratios, such as the operating profit margin and the return
on capital employed (ROCE), can assess the profitability
of a business like Coca-Cola. The student answer is
in context because it states clearly that the operating
Gaza Strip factory is around US$20 million – this is a
significant amount of money. Problems can also occur
if machinery breaks down. There may be long delays in
production if breakdowns cannot be repaired quickly and
this might mean that customers are let down.
Labour-intensive methods are often cheaper. They are
also more flexible. Labour may be very cheap in the Gaza
Strip where unemployment is high. Therefore employing
labour-intensive methods in Palestine may be a good
production strategy.
To conclude, it is likely that Coca-Cola would prefer to
use capital-intensive production. This is because their
products are standardised and they produce very large
quantities which would allow the company to recover the
cost of their investment. However, with workers being
so cheap in the Gaza Strip, and possibly willing to work
hard once given an opportunity for employment, labour-
intensive methods would have to be considered seriously.
COMMENT
(a) One mark might be awarded for AO2 since Coca-Cola
is mentioned in the question. Therefore the answer must
be given in the context to demonstrate application. The
student answer here states that full-time employees
might be recruited since Coca-Cola will need workers in
its factory for a long time, that is, permanently.
(c) Three marks are awarded for this question. There is no
mention of a specific business in the question so three
marks for AO1 might be awarded. In the student answer,
the meaning of exchange rates is explained clearly (1). It
is also explained that changing exchange rates have an
impact on import and export prices (1). The impact of a
falling exchange rate on a business is then explained (1)
(f) Answers to this question, which oers 9 marks, are likely
to require application, analysis and evaluation. So, three
marks each for AO2, AO3 and AO4 might be awarded.
The student answer clearly explains the dierence
between labour- and capital-intensive production.
Analysis and application marks might be awarded for
explaining the advantages of capital-intensive production
with specific reference to Coca-Cola. For example,
one of the main advantages to Coca-Cola would be
lower unit costs. Provided Coca-Cola can sell large
quantities of its products, investment in technology is
usually more cost eective. Also, when machinery is
employed in production, the quality of output is usually
more precise and consistent. This will reduce defects
and cut the waste in production. The disadvantages are
also explained. For example, there is the huge cost of
purchasing and installing new machinery. The cost to
Coca-Cola of the Gaza Strip factory is around US$20
million. This is a significant amount of money. Analysis
and application marks might also be awarded for
explaining the advantages and disadvantages of labour-
intensive production. Finally, evaluation is demonstrated
when a judgement is made and justified. For example,
the student answer states that it is likely that Coca-Cola
would prefer to use capital-intensive production. This
is because their products are standardised and they
produce very large quantities, which would allow the
company to recover the cost of their investment.
ANSWERS 489
relating to a marketing message, but they also can send
images such as photographs and video clips. In a recent
marketing event, Coca-Cola positioned what they called
Happiness Machines around the world. These are classic
Coke vending machines that dish out treats including
drinks, pizza, flowers and sandwiches. Some video clips
of customers enjoying the free gifts that came from the
machines went viral which helped to promote Coca-Cola.
Finally, links can be used by businesses to draw trac into
company websites. This should help to increase sales.
There are some minor disadvantages of using social
media. One of the main ones is that Coca-Cola cannot
control all the comments and other posts which appear
on social media. Therefore, it will have to accept that
sometimes there may be some negative information
about the company and its products on view. Since
Coca-Cola came top in a survey as ‘one of the brands
doing social media particularly well’, this does suggest
that social media is very important to the company.
Comment
(a) This is a calculation question so there may be two AO2
marks awarded for the correct answer. According to
the student answer, savings of around 29 per cent will
be made in material costs since the new cans are 29
per cent smaller. This suggests that the contents will
be reduced by 29 per cent. However, it might be worth
pointing out that some of Coca-Cola’s costs will be fixed
so the actual savings may not amount to 29 per cent.
(c) Three marks each may be awarded for AO1, AO2, AO3
and AO4 in this question. In this answer AO1 marks are
likely to be awarded for demonstrating an understanding
of how social media might be used in marketing and
identifying some advantages and disadvantages. AO2
marks will be awarded for keeping the answer in context.
Throughout the whole of this answer the advantages
and disadvantages of using social media in marketing
are applied to Coca-Cola; marks for analysis might be
awarded for the clear explanations. For example, a key
benefit is that adverts can be targeted. This means that
Coca-Cola can direct their promotions, oers and other
marketing information only to those people who are likely
to be interested. As a result, there is much less waste
in advertising. There are several examples of analysis
in the student answer. Finally, AO4 marks are awarded
for making reasoned judgements and drawing a clear
conclusion. In this case, the student concludes that since
Coca-Cola came top in a survey as ‘one of the brands
doing social media particularly well’, this does suggest
that social media is very important to the company. Also,
both the advantages and disadvantages are weighed up.
profit for Coca-Cola was 19.7 per cent in 2015 which
can be compared with the operating profit ratios of other
businesses in the soft drinks industry. If it is significantly
higher, then it might be concluded that Coca-Cola had
performed better. The ROCE looks at the profit made by
a business in relation to the amount of money invested
in it. This is a common measure of profitability and it
can also be used to make comparisons. At the end of
the answer the weaknesses of ratio analysis are
explained briefly.
4 ▶ (a) The new cans of coke will be smaller so the cost of filling
the cans will be lower. As a percentage the potential
costs savings might be:
= 355 −
250
____
355
× 100
=
105
____
355
× 100
= 29.6 per cent
The new cans are 29.6 per cent smaller so the potential
cost savings might be 29.6 per cent.
(b) There is no sample answer for this question so you can
try it yourself, for exam practice.
(c) The use of social media platforms such as Facebook,
Twitter, Instagram and Tumblr, in advertising is growing at
a rapid rate. In 2015, the internet had 3170 million users.
There are 2300 million active social media users and 91
per cent of retail brands use two or more social media
channels. Social networks gather lots of information
about users which allows businesses to target their
adverts more eectively. When people use the Internet
every click, every view and every sign-up is recorded
somewhere. This behaviour is monitored, processed and
eventually ends up with businesses.
One of the main advantages to Coca-Cola of using social
media in marketing is cost. Using social media is easy
and inexpensive relative to other methods of advertising.
For example, television advertising, which Coca-Cola also
uses, is a very expensive method of advertising.
Another key benefit is that adverts can be targeted. This
means that Coca-Cola can direct their promotions, oers
and other marketing information only to those people
who are likely to be interested. As a result, there is much
less waste in advertising. For example, if Coca-Cola bring
out a product that is directed mainly at children, they can
adapt their content on social media so that it is suitable
for this target. Coca-Cola can also respond immediately
to developments in the industry and the quality of
customer service can be improved because it is possible
to communicate instantly with customers. Another big
benefit is the ability to reach huge audiences – hundreds
of millions or even billions. One way this can be achieved
is through viral advertising. This involves any strategy
that encourages people to pass on messages to others
about a product or a business electronically. It creates
the potential for exponential growth in the exposure of
a message. Like a virus, these strategies exploit the
process of rapid multiplication that results from people
sending messages to family, friends and colleagues, who
then send them on again. Not only can people send text
