THE ASSOCIATION OF BUSINESS EXECUTIVES

CERTIFICATE
IM

Introduction to Business

morning 7 December 2005

1 Time allowed: 3 hours.

2 Answer any FOUR questions.

3 All questions carry 25 marks. Marks for subdivisions of questions are

shown in brackets.

4 No books, dictionaries, notes or any other written materials are

allowed in this examination.

5 Calculators are allowed providing they are not programmable and

cannot store or recall information. Electronic dictionaries and
personal organisers are NOT allowed.

6 Candidates who break ABE regulations, or commit any misconduct,

will be disqualified from the examinations.

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

 Answer any FOUR questions

Q1 (a) What do you understand by the terms:

(i) Command economy

(ii) Market economy
(iii) Public goods
(iv) Merit goods (16 marks)

(b) Explain three advantages associated with the

privatisation of state-run industries. (9 marks)
(25 marks)

Q2 (a) What are three advantages and three disadvantages

of being a sole trader? (13 marks)

(b) A sole trader wishes to expand his business by

entering into a partnership. Explain three advantages
and three disadvantages of forming a partnership to
achieve this. (12 marks)
(25 marks)

Q3 (a) What do you understand by the term ‘PEST analysis’? (5 marks)

(b) Explain how a change in technology might affect a

business. (10 marks)

(c) A manufacturing business imports 90% of its raw

materials and exports half of its finished products.
Explain how a fall in the exchange rate will affect the
business and what the business could do to remedy
the situation. (10 marks)
(25 marks)
Q4 (a) Explain the main features of the following means of
remunerating employees:

(i) time-based wages

(ii) output-based wages
(iii) salary (9 marks)

(b) A retail business is experiencing high levels of

absenteeism and turnover in front line staff. This is
resulting in high recruitment and training costs and
poor service to customers. The company is
considering a number of different methods for
improving the situation. Comment critically on the
following methods to improve motivation in staff:

(i) job enlargement

(ii) job enrichment
(iii) quality circles
(iv) employee share-ownership scheme (16 marks)
(25 marks)

Q5 (a) Explain the difference between primary market

research and secondary market research. (5 marks)

(b) With the aid of a diagram explain what is meant by

Product Life Cycle. (10 marks)

(c) Using a product of your own choice discuss two ways

in which the marketing mix may have to change at
different stages of the product life cycle. (10 marks)
(25 marks)
Q6 (a) Explain the usefulness of the following to a business:

(i) a factoring company

(ii) a venture capitalist
(iii) a leasing company (12 marks)

(b) A firm wants to expand its business by building a new

factory and equipping it with the latest machinery.
Identify two suitable sources of finance the firm could
use, stating the advantages and disadvantages of
each. (13 marks)
(25 marks)

Q7 (a) What factors would influence the choice of location for

a large retail outlet such as a supermarket, a
department store or a garden centre? (15 marks)

(b) For such a retailer, identify and explain five costs

associated with holding large quantities of stock. (10 marks)
(25 marks)

Q8 (a) Define the term ‘stakeholder’. (4 marks)

(b) What are the main objectives of the following external

stakeholders:

(i) the government

(ii) the customers
(iii) the local community? (9 marks)

(c) Explain how the objectives of a new business might

change as it grows in size. (12 marks)
(25 marks)
 Certificate

Introduction to Business

Examiner’s Suggested Answers

Question 1

(a) (i) A command economy is one where the means of production are
controlled by the state and the allocation of resources (land, labour
and capital) is managed centrally.

(ii) A market economy is one where individuals and firms own the means
of production. Economic decision-making is highly decentralised with
resources being allocated through a large number of markets by the
forces of supply and demand.

(iii) Public goods are those goods and services that are socially desirable
but often privately unprofitable. This is because once public goods are
provided it is not possible to exclude other people from using them e.g.
pavements, street lighting, police, flood controls etc.

(iv) Merit goods are those goods that the government feels that people will
underconsume if left to the free market. The government, therefore,
either subsidises the goods and services or provides them free at the
point of use e.g. healthcare, education, inoculations etc.

(b) Privatisation is the transfer of activities and assets from the public sector to
the private sector. Three advantages associated with this are:

• Commercial freedom – privatised firms can pursue commercial and

financial objectives free of any political control and interference. This
allows businesses to search for the best financial deals, invest in more
productive and efficient systems and to expand into foreign markets.
• Reduction in government borrowing – the government no longer has to
finance the privatised industries therefore it reduces the need for
increased taxes. Where the assets have been sold to the general public
the government gains a one-off windfall from the sale that can be used
to reduce the national debt or to fund public services or reduce tax
rates.
• More efficient management – exposure to market forces and the drive
for increased profits will ensure that bureaucratic forms of
management are replaced by more modern, efficient methods with the
recruitment of skilled entrepreneurs from the private sector. Workers
can also benefit with the introduction of share ownership and bonus
schemes.

In the UK successful privatisations have included British Airways, British

Telecom and British Gas.
Question 2

(a) The main advantages of being a sole trader concern decision-making, profit
sharing and customer relations. The sole trader is the ‘boss’ and as such
makes the decisions on a daily basis with no waste of time in consultation.
This allows the sole trader to be quick in responding to market changes.
Each good decision should be reflected in a cost saving, an increase in
revenue or the enhancement of the business’ reputation. The reward for
being successful is profit that the sole trader does not have to share with
any other partner. This can provide the owner with a great deal of
satisfaction and motivation as well as an income. The third advantage is
the opportunity to build good customer relations. The sole trader is able to
have direct contact with customers and to provide a more personal service
that often helps to build a loyal group of repeat clients thus ensuring future
sales.

The disadvantages concern risk and liability, hours of work and expansion.
The sole trader has unlimited liability. This means the owner is fully
responsible for all the debts of the business. The owner is not only risking
the capital invested in the business but also their own personal assets such
as a house. The typical sole trader will work much longer hours than any
salaried employees will. It is also difficult to find cover for the taking of
holidays or for illness especially where the business requires personal
service such as with a plumber, a hair stylist or a photographer. Expansion
is also a problem as a sole trader will invariably have only a small capital
base. To enlarge the business may require the owner to take on more risk
by arranging a bank loan or share the profits by taking on a partner. Either
way the fundamental basis of the original operation has to change.

(b) The main advantages of a sole trader becoming a partnership are:

(i) There can be division of labour between the partners so that each can
specialise and benefit from each other’s expertise.
(ii) More capital can be introduced in to the business by adding new
partners
(iii) Decision-making can be shared
(iv) Partners can develop interchangeability so that one partner can
substitute for another in times of illness or holiday

The main disadvantages are:

(i) General partners have unlimited liability therefore they are liable for
each other’s mistakes and all of the debts of the business.
(ii) The withdrawal or death of a partner may dissolve the firm
(iii) Decision-making may be slow as all partners must agree. Shared
control means the possibility of disagreements and delays.

Question 3

(a) PEST analysis is a method that can be used to look at the environment
within which all firms operate. The initials stand for Political, Economic,
Social and Technological. Each of these areas has an effect on a business
in one way or another. A business must recognise this and adapt its
 strategy accordingly. For example increasing social concern over pollution
has forced many manufacturers to stop using certain raw materials and to
adopt cleaner production systems. Firms that ignore external factors will
lose sales to competitors that recognise them.

(b) A change in technology can have serious positive or negative effects on a

business. On the positive side, technological change has led to the
development of new raw materials that can result in easier manufacturing
processes and lower costs. The rapid development of moulded plastics has
allowed electrical and automotive products to be made not only cheaper but
also in more stylish designs. Technology can also lead to changes in
processes. The advent of computers has led to high-speed, fully automated
flow production systems being developed. This in turn has led to lower unit
costs and lower consumer prices. New technologies have created entirely
new markets such as the mobile phone industry and digital broadcasting.

On the negative side technology has replaced the need for a lot of unskilled
and semi-skilled labour. Those affected have suffered long-term
unemployment unless they were fortunate to retrain. Advances in science
can cause some products to be made redundant. For example the
development of computers for office work has replaced the need for
typewriters. Employees can expect to retrain several times in a career.

(c) A fall in the exchange rate will mean that all imported goods including raw
materials will be more expensive for the domestic manufacturer. This will
increase manufacturing costs and lower profit margins. On the positive
side, not only will imported raw materials be dearer, so will imported
competitor goods. The domestic producer is faced with two alternatives –
leave prices unchanged and enjoy lower profit margins while facing less
competition from imported goods or increase its prices in line with imported
goods. The final outcome will depend on how price sensitive the domestic
market is.

In a similar manner the relative price of its exports will now be lower on the
world market. As it is already a significant exporter, this will boost its sales
in foreign markets. The business has the option of increasing its prices and
profit margins or enjoying a more competitive position in the market and
increasing its foreign sales.

Question 4

(a) (i) Time-based wages is one method of rewarding employees for their
labour. It is payment for the length of time spent working rather than
the quantity of output achieved. It is a simple method to administer as
it requires only a record of attendance. This system is often adopted
where remuneration is difficult to relate to output for example with
nurses, teachers or maintenance workers. The main disadvantage for
the employer is that it relies on trust. The employee is expected to give
‘a fair day’s work’ for the agreed remuneration. Some firms prefer to
ensure they get a satisfactory output by employing supervisors to
oversee the work of time-based operatives.
 (ii) In contrast, output-based wages are directly related to the output
each individual or group of workers produces. Such schemes normally
establish an output norm for the average worker for which a basic
wage is paid. Output achieved in excess of this is rewarded by bonus
payments. This should provide an incentive for workers to be
productive and needs less supervision. It may, however, lead to rushed
work, lower quality production and an increase in rejects.

(iii) A salary is a fixed regular payment made by an employer, often

monthly, for professional or office work. It differs from time-based
wages in that it is not strictly related to the actual number of hours
worked and any extra hours worked do not normally attract any
overtime payment.

(b) In retailing the work can be notoriously repetitive which may result in
workers becoming bored and disenchanted with their employment, for
example stacking shelves or operating the check-out. In extreme cases this
could result in a regular exodus from the work force as employees seek
more interesting or demanding work.

(i) Job enlargement is considered to be one of the ways in which staff can
be motivated. It consists of increasing the number of tasks and
possibly responsibilities involved in a job. This may succeed but it
depends largely on how different the tasks are and the amount of
responsibility given. It could result in ‘more of the same’ type of work
in which case it will soon become as repetitive and boring as the
original single task.

(ii) Job enrichment, however, takes this a stage further and is largely
based on the work of Herzberg. He suggested that an enriched job
should ideally contain several tasks at different ability levels, some of
which were beyond the worker’s experience to date. This would
provide some progression. This may be a better method of motivating
workers in retailing especially if the scheme involved a team of
workers e.g. discussions on shop layout or display.

(iii) Quality circles are discussion groups that meet regularly to identify
quality problems, to consider solutions and to make recommendations
to management. They are composed largely of front line workers as
they are the people who know the operation best. The group allows
workers to participate in the decision making process and to display
their ability to solve problems. The success of the original scheme at
Toyota in the 1950s has resulted in its spread throughout the world.
Its application to retailing could lead to greater motivation as the work
force are given the chance to show their working knowledge and to
suggest improvements that will directly benefit their working
environment.

(iv) Employee share ownership is a means of obtaining a greater

commitment of staff to the welfare of the company by offering a
financial incentive in the form of shares. As the value of the shares is
directly related to the success of the company and its profit level, it
serves as an incentive for workers to not only work hard but to reduce
costs and to suggest improvements. The main drawback is that the
 worker must be committed to the company for a substantial period of
time in order to achieve significant benefits from the share scheme.
The financial incentive may not be enough to overcome the boredom of
the job.

In conclusion, a combination of job enrichment and quality circles may

provide a means of reducing staff turnover in areas where the task is
repetitive.

Question 5

(a) Primary research is the gathering of first hand data that is specifically
relevant to a firm’s products, consumers or markets. This is carried out by
fieldwork and is often done by external specialists. Secondary research,
however, is information gathered from second hand sources such as
reference books, government statistics and market intelligence reports.
Such data is often available free of charge but has not been collected for the
specific needs of any individual business. Although primary research is
more specific for the business, it is also more expensive than secondary
research.

(b) The product life cycle is a concept that all products have a life cycle of
birth, growth, maturity and decline as shown in the diagram below.

Product Life Cycle Diagram

Product Sales

Introduction Growth Maturity Decline

TIME

In the birth or development stage the product is new to the market, sales
are often slow and there is a high failure rate. Cash flow will be negative as
money is spent on research and development, market research, product
launch and setting up the initial production line. The majority of ideas for
new products never reach the launch position and of those that do many
are withdrawn when initial sales are low.
 For those goods that survive, the growth stage brings rising sales as
consumers become aware of the product. This results in an improved cash
flow especially as economies of scale are enjoyed with the higher output
level. Competitors may launch similar rival products thus curtailing the
rate of growth as the market becomes segmented by the different brands.

The maturity stage is characterised by a levelling off in sales and a more

stable market share. The product is now well established and provides a
steady cash flow for the business.

Eventually the product will enter the decline phase of the life cycle where
sales fall usually caused by changing consumer tastes, new technology or
the introduction of new products.

Although most products will follow this simple pattern there will be a great
difference in the length of each stage and the total duration of the life cycle.
Some products such as Coca-Cola are still going strong over 100 years after
their birth whereas others such as fashion clothing last less than one year.

(c) The marketing mix is the combination of factors through which a firm
carries out its marketing strategy in order to encourage sales at each stage
of the product’s life. There are four aspects to the marketing mix: product,
price, promotion and place. A different combination or emphasis is needed
for each of these four factors at different stages of its life cycle.

For example at the birth stage of a new chocolate bar the accent will be on
product development as market research identifies any changes needed.
Promotion will concentrate on developing product awareness among the
identified target market. Pricing strategy will be either ‘skim’ pricing if the
product is seen as innovative or luxurious or ‘penetration’ pricing in order
to gain rapid market share. Initially the product will be ‘placed’ in a limited
geographical area or among a limited number of retail outlets in order to
gain essential market feedback.

Once the chocolate bar reaches the growth stage the marketing mix will
change. It will concentrate on developing widespread coverage with an
expanded promotional campaign concentrating on the brand image and the
use of a wider distribution network. Price may have to fall in the face of
emerging competition as rival firms develop similar chocolate products or
react by cutting the price of their existing products.

Similarly at the mature stage the mix will change again as it seeks to
encourage repeat sales from its loyal customers. Price discounts and
special promotions may be used to hold on to market share and its existing
distributors.

In the decline stage the firm can attempt to prolong the chocolate bar’s life
through a series of ‘extension strategies’. These may include developing a
wider product range (e.g. mini bars), entering new markets or changing the
packaging. Once it is no longer profitable to continue production
advertising will cease and prices will be reduced to clear remaining stocks.
 The marketing mix is important, therefore, as it helps to support the
product and to extend its sales at each stage of its life.

Question 6

(a) (i) A factoring company provides finance to bridge the gap between the
issue of invoices by a company and the receipt of payment i.e. the
period of credit. Usually the factoring company will extend 80% of the
invoice value as soon as the invoice is issued to the customer. At the
end of the credit period the factor will collect the total due from the
customer and it will send the balance of 20% minus its own charges.
The business benefits by receiving the bulk of its money at the time of
sale which it can use to fund further trade. The customer still retains
the same credit period and the factor earns a percentage of the invoice
total.

(ii) Some businesses find it difficult to raise finance through conventional

channels such as banks. Venture capitalists are specialist lenders who
undertake high risk investments hoping to make high returns. They
lend money in exchange for part ownership of the business in the
hope that the business will flourish and grow and eventually float on
the stock market. At this point the venture capitalists can sell their
shares at a profit.

(iii) A leasing company can provide a business with new assets such as
machinery and vehicles without having to buy them outright. The
leasing company ‘rents’ the assets to the business for an agreed
monthly payment. At the end of the leasing period the assets are
returned to the leasing company and can be replaced with more
modern versions. This allows a business to modernise without having
to find large amounts of capital.

(b) Long-term projects such as buildings and the purchase of machinery

should be financed through a long-term source of finance. Buildings can be
financed through a mortgage or a long-term bank loan. The advantages of
these forms of finance for the firm are:
the cost of the buildings is spread over many years
the interest charges can be off-set against tax
the loan is secured against the value of the buildings

The disadvantages are:

The rate of interest might increase over the period
Failure to pay the interest and capital repayments might result in the
buildings being repossessed and the business closing down

New machinery can be financed also through a bank loan with the same
advantages and disadvantages. Alternatively the machinery could be
financed using leasing. A leasing company will purchase the machinery for
the firm and leases it at an agreed rental for an agreed time period. The
advantages of this form of finance for the firm are:
No need for a large capital outlay as payments are spread over the life
of the lease
No need to provide security
 Rental is paid for from income generated by the asset’s use
Rental is fixed and can therefore be budgeted for
At the end of the lease the firm has the option to buy the asset or to
enter into another lease for more modern machinery

The disadvantages are:

The firm does not own the machinery
The rental charges will be higher than the interest on a bank loan

Question 7

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

(b) There are a number of disadvantages with holding large amounts of stock
each of which will add to the costs of the business. The most common are:
• Interest charges – all stock represents funds tied up in the business.
Stock financed by borrowing obviously incurs interest charges.
However, so does stock financed by the business’ own funds because
if they were not tied up in stock they could be earning interest in the
bank.
• Rent – stocks have to be stored and will occupy floor space that incurs
rent charges.
• Staffing – all stocks need to be looked after and secured. The business
will have to employ warehouse staff, security staff and stock clerks to
control the stock.
• Equipment – storage may need shelving, containers, fork lift trucks
and even refrigerated premises depending on the type of stock being
held. Large supermarkets will have vast quantities of frozen and fresh
foods that will need special attention.
• Theft, damage and deterioration – even when security is tight pilfering
can occur and mishandling can result in damaged goods. Poor storage
conditions can also result in the condition of the stock deteriorating.
Question 8

(a) A stakeholder is any individual or group that has an effect on or is affected

by a business or organisation. This might include groups such as
employees, owners, trade unions, customers, pressure groups and
competitors. Some management theorists believe that it is beneficial in the
long run for firms to recognise the views of these groups and to include
their objectives in the decision making process.

(b) (i) The government is concerned about businesses for three main
reasons. The first is because businesses provide employment for the
public and a means for individuals to finance their own lifestyle
without the assistance of the state. The second reason is for income as
the government receives part of the profits through taxation. The final
reason is that the health of businesses is a reflection of the success or
failure of the government to manage the economy.

(ii) A customer wants value for money. Any product or service must
satisfy the needs of the customer at a reasonable price. A customer
will also expect good service both during the purchase stage and the
after sales stage. Expert and impartial advice is also expected.

(iii) The local community may well have diverse objectives with regard to
the creation of new businesses in their area. Although it will create
jobs for local people it might also cause problems such as road safety
for children and the reduction of ‘greenbelt’ land. They may also be
concerned about the impact of businesses on the local environment.

(c) As a new business grows its objectives will change. At first the principal
objective is survival that is to reach a sustainable sales level that allows the
firm to break-even. Unless a business can achieve this objective it will close
as soon as initial capital is exhausted. Once a firm has reached a
sustainable level of sales it might change its objective to one of profit
maximisation. At this stage the business is attempting to maximise the
difference between total revenue and total cost. A sustained period at this
stage allows a business to develop capital reserves that can be used for the
next stage of expansion.

Successful firms can follow a policy of growth both in terms of market

share in existing products and markets and in new products and markets.
This leads to a greater diversification in their operations, which in turn
should reduce the risk of failure.