CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.

Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.

Chapter 3
Business in context
Learners’ discussion might include:
• The benefits and costs to governments and the economy of supporting small businesses. It is possible
that the finance could be used more effectively supporting larger and more established businesses.
• Business size can be compared in several different ways. Learners should suggest and start to explain
some of the more obvious ones, such as the number of employees and the level of sales or revenue.

Activities
Activity 3.1
1 Largest businesses by: number of employees – Z; capital employed – Y; revenue – X; selling space – Y;
number of outlets – Z.
2 There is no single measure of business size and the measures can give different rank orders of business size.
It is important to select the measure of size most appropriate to the use that the data is going to be put.
3 There is no definitive answer. Learners should aim to achieve a justification when choosing between
different measures.
a The government might focus on sales turnover in assessing monopoly power. Competition
legislation usually defines monopoly in terms of market share; this is best measured by revenue.
b Capital employed gives an indication of the capital of a business. Capital employed measures the
total value of all the long-term finance invested in the business. It is the sum of shareholder capital
and non-current liabilities.
c Selling space will be particularly relevant in determining sales potential, as this determines the
amount of stock that can be displayed for customers to purchase and the number of different
product lines that can be sold.

Activity 3.2
Learners’ own answers.

Activity 3.3
1 Learners’ answers might include:
• As a result of rising incomes in China, the demand for meat is increasing. Therefore, Shuanghui
must secure supplies of meat to process in its factories in China. Taking over Smithfield will enable
Shuanghui to control supplies of meat to other meat processors.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

• Smithfield is a large meat producer in the USA. The takeover will increase Shuanghui’s potential
revenue and profits.
• Chinese businesses are now sufficiently profitable that they can expand externally. Shuanghui has
the capital available to take over Smithfield rather than just forming a strategic alliance. This gives
Shuanghui more control.
2 Learners’ answers might include:
Employees
• Protection of jobs. Shuanghui’s resources will provide greater financial stability for Smithfield and
therefore protect jobs. However, in the long run, Shuanghui may decide to close the US factories
and move production abroad.
• Pay levels are currently protected. However, pay levels cannot be guaranteed in the future.
• Shuanghui provides demand for Smithfield as a meat producer. This will benefit employees
working on farms producing the meat. However, Shuanghui may change working conditions to
reduce costs in the future.
Smithfield shareholders
• It is likely that the US$34 Shuanghui paid per share is well above the market price. Therefore,
shareholders will receive a capital gain from selling shares. However, once shares have been sold,
there will be no future dividends.
Government in USA
• Closer trading relationship will benefit the US government as there will be an increase in exports
to China. This will benefit the US trade balance.
• Injection of foreign direct investment into the USA will boost economic activity. Shuanghui may expand
operations in the USA, increasing employment and output. However, profits will flow back to China.

Activity 3.4
1 Starbucks operates cafés around the world whereas Nestlé is one of the world’s largest food and
beverage companies. Starbucks will benefit from Nestlé’s established distribution network and global
reach. This will reduce costs to Starbucks of selling its products in the booming drink-at-home coffee
market. Nestlé will benefit from an increase in sales, strengthening its position in the coffee market.
The alliance will also capitalise on the experience and capabilities of both companies. This could
increase innovation and enhance the products offered to customers.
These benefits will deliver long-term value for shareholders.
2 Learners’ answers might include:
• To take advantage of economies of scale, which will reduce unit costs and therefore potentially
increase profit margins.
• China has a rapidly growing middle class, with high-income consumers set to double within
four years. Therefore, Starbucks may benefit from increasing sales and profit.
• Rapid growth will enable Starbucks to gain first-mover advantage in the Chinese market and prevent
competitors from developing brand loyalty. Therefore, Starbucks can capture a high market share.
• To gain market leadership through achieving high market share.
• The cost of opening new cafés in China may increase significantly in the future due to rapid
economic growth. Slower expansion may allow other firms the opportunity to dominate the
Chinese market.
3 Organic growth is internal growth rather than growth through merger or takeover of a chain of
Chinese cafés.
Advantages
• Control over quality to protect the brand image of Starbucks.
• Chinese consumers are demanding Western products and culture so will be attracted to the
Starbucks brand. Integration with a chain of Chinese cafés could dilute the brand and result in
lower sales and profit.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

• Difficulty of integrating Chinese cafés into the Starbucks group. A culture clash could prevent
change being introduced successfully.
Disadvantages
• Increased capital cost of expansion. Investment costs are high.
• Slower growth of sales for Starbucks.
• Difficulty of controlling the expansion. For example, the ‘time-saving policy of designing stores
uniformly’ has been criticised. In the long term, this may affect Starbucks’ brand image negatively
as store designs may not meet local needs. There has also been a problem with product quality;
Consumer Reports magazine has ranked McDonald’s coffee ahead of Starbucks.
Evaluation: An overall assessment may consider the availability and cost of finance for expansion to
be a critical factor. Ten thousand new cafés represents nearly seven cafés being opened every day for
the next four years.

Activity 3.5
1 Learners’ answers might include:
• Raw material prices have also risen. This will reduce the gross profit margin of the company.
• Retail mergers have increased the bargaining power of TC’s customers. Therefore, retailers can
force TC to accept lower prices.
2 Learners’ answers might include an evaluation of at least two of the following methods of expansion:
• Takeover of suppliers is backward vertical integration: absorb profit margins of cloth
manufacturers; control price paid for cloth and therefore perhaps reduce price to customers;
greater control of the quality of cloth and therefore the clothes produced.
• As TC is a manufacturer, it has production experience that could transfer to the production
of cloth.
• Takeover of retailers is forward vertical integration: absorb profit margin of retailers; greater
control over marketing of the finished product to ensure meeting customer needs; choose which
clothes of other manufacturers to stock or not, which could reduce distribution for competitors.
• TC does not have retailing experience so may lack understanding of the market and operations.
There has been consolidation in the retail market with mergers between clothes retailers. This
suggests that the market is competitive and TC would need to be sure that any retailer it wishes to
take over is able to survive in the market.
• TC would need to consider the cost of a takeover; availability of finance; suitability of any
takeover target.
• A hostile takeover may require TC to pay a premium well above the market capitalisation of the
business it takes over.
• A final recommendation for this business is required based on the learner’s analysis of the methods
of expansion.

Exam-style questions
Short answer questions
1 Learners’ answers will vary, e.g. shareholders might want to compare business size if they only want to
buy shares in large companies, believing that they might be better investments.
2 Some businesses have many employees with low levels of capital equipment, so they are large
businesses by the employee measure but small businesses by the capital employed measure. Other
businesses have a few highly skilled employees using capital equipment costing millions of dollars.
It is difficult to compare the size of these businesses using capital employed.
3 The problem with using number of employees is that some firms are capital intensive whilst others are
labour intensive. For example, a firm with a highly automated production line will have relatively few
employees.

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4 This is the total value of a company’s issued shares. In a stock market crash, market capitalisation will
decrease. For example, as a result of COVID-19, Apple’s market capitalisation declined by more than
$142bn during one week in 2020.
5 Employees: a merger or takeover of two businesses in the same industry at same stage of production
might lead to job losses due to rationalisation as there will be no need for duplication of job roles.
6 Shareholders: a merger with or takeover of a business operating closer to the market and consumer
(e.g. a shop) means that a business can absorb the profit margin of the shop so as to increase
profitability. Therefore, dividends to shareholders may increase.
7 Strength: continuity of policy and decision-making if the children have worked in the business
previously, as it is likely that they will be more committed to the long-term success of the business.
8 Increase in economic activity and employment resulting in higher living standards, particularly as
many small firms do not use very much capital to produce output but depend on more employees per
unit of capital than larger businesses.
9 Problem: lack of economies of scale, which are the cost benefits of being a large business. Relatively
high costs might lead to a small business being uncompetitive within its industry, especially if it is
dominated by large businesses.
10 Organic growth is internal growth so would involve increasing the size of the existing factory or
building a new factory. External growth is through merger or takeover. For example, one computer
manufacturer might merge with another.
11 Advantage: no interest repayments on borrowed money as would be necessary if the expansion was
financed with loans.

Essay questions
1 a Learners’ answers might include two of the following:
Number of employees. This very simple measure is easy to understand and use to make
comparisons. The problem with using number of employees is that some firms are capital intensive
whilst others are labour intensive. Explain one business example to illustrate this.
Revenue or sales turnover. This is the total value of sales made by a business over a given
time period. It is a common measure of size when comparing businesses in the same industry.
A potential weakness is that some firms may have high turnover but add relatively little value to
the production process.
Market capitalisation. This is the total value of a company’s issued shares: market capitalisation
= current share price × total number of shares issued. It is only relevant for businesses quoted on
a stock exchange where shares can be traded. Share prices can be very volatile and thus the market
capitalisation of a business may change rapidly despite no significant change within the business.
b Advantages of internal growth
• It avoids overtrading, which would place a strain on finances.
• It maintains control over the quality of production.
• It avoids the problems of culture clashes which often occur with external growth. Culture clashes
can be very damaging and result in mergers and takeovers failing to achieve corporate objectives.
Disadvantages of internal growth
• Market share may grow more slowly.
• External growth can bring new ideas and innovation into the business. It gains access to
patents to improve products.
• There may be synergy from external growth between two companies, where the whole is
greater than the sum of the parts. Synergy will not result from internal growth.

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2 a Servicing the needs of larger businesses such as providing specialist engineering services or
machine maintenance to a large car manufacturing business. This helps the larger business to keep
control over costs as it does not have to employ its own specialist engineers.
Providing business functions that the car manufacturer does not want to retain itself because the
functions are not required all the time, e.g. recruitment and selection of production line workers in
a car manufacturing factory.
b Strengths: commitment of family members; strong culture and identity; continuity of policies.
Weaknesses: the business may be too large for one family to manage, especially if it has no
professional managers or if family members have not been promoted on merit.
Evaluation: for example, the most crucial factor could be that customers prefer dealing with the
same family members over a period of years.
3 a Learners’ answers will vary, e.g. shareholders – opportunity for greater profit by reducing costs;
employees – opportunity for careers in different sectors of the industry; customers – this type
of integration can lead to higher prices (by the business controlling supplies of materials or
components to competitors) or lower prices (by reducing costs).
b Organic: slower and more manageable; able to keep the culture of the business the same (a culture
of creativity might be important for this type of business); more likely to be able to finance growth
without increasing loans.
External: Reduces competition and this is a very competitive industry; acquires highly skilled
employees who may be in short supply; acquires an established customer base.
Evaluation needs to focus on the context of a web design business.

Data response questions

1 Chai Wei’s restaurant
a i Sales level.
ii Integration with a business in the same industry and at the same stage of production.
b Learners’ answers might include:
• Greater flexibility. The restaurants are more likely to be responsive to customer needs. Chai
Wei can take decisions quickly as the market changes. For example, he was able to change the
menu within two days. This will result in customer satisfaction and repeat sales.
• Personal service can be provided to customers. This improves customer loyalty and sales.
c Learners’ answers will vary, developing and applying one advantage and one disadvantage to Chai
Wei’s business, e.g.:
Advantages: commitment, motivation and reliability; pride and family reputation; knowledge
continuity.
Disadvantages: continuity problems; promoted to management too early; informality, lack of
procedures and policies; traditional, failure to adapt to change.
d Chai Wei and family (owners)
• External growth will result in increased sales and potentially greater profit which goes to the
family. However, there is risk of expansion causing cash flow problems and failure.
• Time and effort to ensure that the restaurants meet the standards set by Chai Wei. If they do not,
there is a danger that the reputation of all the restaurants is damaged, decreasing sales.
Employees
• Adapting to possible change in management style.
• Possible rationalisation of the enlarged business resulting in job losses. If Chai Wei gives
management roles to his family, other managers’ jobs may be at risk.
Suppliers
• Increase in demand for the local specialist suppliers. However, the existing suppliers of the
restaurants taken over may lose sales.

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Customers
• Reduced contact with the restaurant owner resulting in less responsiveness to customer
demands.
• Chai Wei charges low prices so this will benefit customers of the taken-over restaurants.
• Economies of scale are possible. This could enable even lower prices for meals. However, cost
savings may not be passed on to customers.
Evaluation could be shown by assessing which stakeholder groups are likely to be most positively
or negatively affected.
2 Machine Elec (ME)
a i Takeover.
ii Business expansion by merging with or taking over another business.
b Diseconomies of scale with higher unit costs and therefore lower profit margins. This will reduce
ME’s competitiveness in the market.
More employees and more locations are more difficult to manage. Growing businesses can have
problems in coordinating the activities of employees and branches.
c Small businesses provide supplies to the industry. As they specialise, they may be able to produce
more efficiently than the washing machine manufacturers. This will reduce the cost of components.
ME provides this benefit and has used its expertise to produce better-quality components with the
potential to give greater satisfaction to customers.
Washing machine manufacturers can focus on their core activities to meet customer expectations
more effectively.
d Customers
• Greater innovation from ME and therefore better components for the manufacturers of
washing machines. This will improve the quality of output and therefore increase sales
to consumers.
Employees
• Job security for existing employees as ME will produce improved components and demand
may increase.
• New jobs for electrical engineers.
• As the owner of the other business is planning on retiring, this could have resulted in job
losses without ME’s decision to merge.
Local community
• Merger will provide new jobs.
Evaluation might focus on which stakeholder group is most affected or on identifying the factors
that could influence the impact on each stakeholder group.

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