The Association of Business Executives Certificate

1.1IB
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Introduction to Business
morning 4 June 2008

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

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ABE 2008

F/500/3659

Answer any FOUR questions Q1 (a) What do you understand by the following terms: (i) the public sector (ii) the private sector (iii) the primary sector (iv) the tertiary sector

(12 marks)

(b)

A successful sole trader wishes to expand and is considering forming a partnership with a life-long friend. Outline the advantages and disadvantages for a sole trader in forming a partnership. (13 marks) (Total 25 marks)

Q2

(a)

Describe how the following might affect a UK business that is planning to expand its factory capacity to satisfy growing foreign demand: (i) an increase in domestic interest rates (ii) an increase in the exchange rate (iii) an increase in corporation tax (iv) an increase in domestic economic growth (12 marks) Consumers are becoming more concerned about the impact that businesses have on the natural environment. Outline the positive and negative effects to a business of this changing public awareness. (13 marks) (Total 25 marks)

(b)

Q3

In order to improve quality in a manufacturing business the management are proposing some new initiatives. (a) (b) Explain what is meant by quality in this context. (5 marks)

Explain the following terms and show how they might contribute to improve quality: (i) quality circles (ii) kaizen (iii) TQM (iv) benchmarking (20 marks) (Total 25 marks)

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Q4

(a)

Using examples, explain the following financial terms: (i) fixed costs (ii) variable costs (iii) net profit (iv) debtors (trade receivables) and creditors (trade payables)

(12 marks)

(b)

A public limited company is expanding its production. For each of the following activities, identify two suitable sources of finance, stating the advantages and disadvantages of each source. (i) the building of a new factory costing 80 million (ii) the acquisition of five new machines costing 10,000 each (13 marks) (Total 25 marks)

Q5

(a)

Explain the following marketing terms: (i) extension strategy (ii) demand-based pricing (iii) unique selling point (USP) (iv) niche market

(12 marks)

(b)

With reference to the marketing mix, show how a vehicle manufacturer can develop an extension strategy to prevent the decline in one of its range of cars. (13 marks) (Total 25 marks)

Q6

(a)

A firm is planning to recruit a significant number of new employees. Explain what the firm must do to ensure a successful recruitment process. (10 marks) The new workforce requires substantial training. Outline the costs and benefits of introducing a comprehensive training programme. (15 marks) (Total 25 marks)

(b)

Q7

(a)

Explain the difference between: (i) corporate objective and corporate strategy (ii) stakeholder and shareholder (iii) break-even and profit maximisation

(12 marks)

(b)

A large multinational company is planning to take over a large UK publicly quoted company. What might be the objectives, concerns, and/or worries of the following interested parties? (i) the employees of the UK company (ii) the Board of Directors of the multinational company (iii) the shareholders of the UK company (13 marks) (Total 25 marks)

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Q8

(a)

An office furniture firm, which successfully produces a range of products made from high quality materials, is planning to boost exports. To do this it must introduce flow production in its factory. Explain the advantages and disadvantages of flow production. (13 marks) As a business expands, it can take advantage of economies of scale. Identify and explain four economies of scale that might be available to an expanding business. (12 marks) (Total 25 marks)

(b)

End of Question Paper

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Certificate Introduction to Business Examiners Suggested Answers

Q1

(a)

(i)

The public sector of an economy is that part owned and directed by the government on behalf of the people. The public sectors main role is to provide public services such as health care, law and order, defence and education. The private sector is that part of the economy concerned with transactions made by private individuals, businesses and institutions. The businesses are owned and managed on behalf of the owners and shareholders where the principal task is to make profit. The primary sector is concerned with the extraction or creation of raw materials. Examples include all forms of mining (such as gold, copper and coal), agriculture, oil extraction, fishing and forestry. The tertiary sector is that part of the economy comprising of businesses that supply services, such as insurance, transport and banking.

(ii)

(iii)

(iv)

(b)

Forming a partnership is one method of expanding a business. The main advantages of a partnership are: There can be division of labour between the partners so that each can specialise and benefit from each others expertise. More capital can be introduced into the business by adding new partners Decision-making can be shared Partners can develop interchangeability so that one partner can substitute for another in times of illness or holiday In this specific case the sole trader is forming a partnership with a lifelong friend who should therefore be trustworthy and easy to work with. The main disadvantages are: General partners have unlimited liability and therefore are responsible for all debts The withdrawal or death of a partner may dissolve the firm Decision-making may be slow as all partners must agree. Shared control means the possibility of disagreements and delays.

Q2

(a)

All companies are affected by changes in the external environment over which they have no control. Good businesses are able to adapt and take advantage of changes or at least to minimise the damage of unfavourable changes. For a UK firm the decision to expand its factory capacity is an important one as it involves a great deal of capital and a permanent change in its operational size. The following impacts are possible: (i) An increase in domestic interest rates will push up the cost of borrowing to fund the expansion. This will reduce the estimated profits unless the extra costs can be passed on in the form of higher prices in the foreign markets. This will very much depend on the amount of competition that the business is facing. Overall the higher cost of borrowing will increase the risk involved in expanding production.

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(ii)

If the UK exchange rate increases it means the pound sterling is stronger and other currencies are weaker. This will mean any imported raw material will be cheaper but any exports will appear dearer in foreign markets. As the extra demand is coming from other countries, the firm will have a difficult decision to make. Keeping its sterling price the same will make the product appear dearer abroad and possibly lead to a fall in sales. The alternative is to reduce its prices and accept a lower profit margin. It will all depend on whether the company believes the increase in the exchange rate is temporary or long term.

(iii)

An increase in corporation tax will reduce net profit after tax and leave the company with fewer funds with which to fund the expansion. This could mean more borrowing. It will also mean that future profits from the proposed expansion will not now seem as attractive as the government will take a larger slice in taxation. An increase in domestic growth should result in higher demand for its products and less need to target foreign markets. However, growing demand may also affect the price of raw materials and labour resulting in higher costs. Usually a growing economy is a favourable feature for the majority of firms.

(iv)

(b)

A company must acknowledge the opinions of its customers or risk losing their support. The public is now better informed about the wider issues involved in manufacturing and business. This is largely the result of the work of pressure groups such as Greenpeace and Friends of the Earth. A firm can respond in a variety of ways some of which are defensive and some of which are opportunistic. Firstly a business must ensure that its practices are not contrary to current public opinion. This can be achieved through a written environmental policy to address issues involving the firm. For example a paper manufacturer might advertise its tree planting programme or its use of recycled paper in its products. Other firms such as cosmetic manufacturers could advertise the fact that they have stopped certain practices such as experiments involving animals or the use of toxic chemicals. All of these measures are defensive in that they are aimed at reassuring present consumers about current products. On the other hand a firm could use its environmentally friendly approach to win new customers by advertising the positive points. In this case a firm would highlight the lack of damage to the planet in its production process, its products and in its exploitation of resources. Furniture manufacturers might stress the use of entirely renewable resources in its range of products. A pharmaceutical company could boast about not conducting experiments on animals. A business producing in a developing country might emphasise its contribution to the local economy, its training of the work force or the building of social infrastructure such as schools and hospitals. Rather than damage limitation this is a positive approach to convince the market about the firms attitude to the environment. Finally the firm could seize the opportunity to create new environmentally friendly products for the market. Companies such as the Body Shop have created a whole new market in products that are produced with the minimum of damage to the earth. They stress the use of re-cycled materials even encouraging customers to bring back empty containers for refills. In this way a business can seize a new opportunity and gain a share of a new growing market niche.

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Q3

(a)

Quality is the ability of a product to satisfy customer requirements. In the context of manufacturing, quality is concerned with product design, the supplies of materials and components, monitoring and control of the production process, delivery and after-sales service. The business aims to have a system of quality assurance that ensures the whole process from raw materials to dealing with customers is right first time. (i) Quality circles are discussion groups that meet regularly to identify quality problems, to consider solutions and to make recommendations to management. They are composed largely of factory floor workers as they are the people who know the operation best. The group allows workers to participate in the decision making process and to display their ability to solve problems. The success of the original scheme at Toyota in the 1950s has resulted in its spread throughout the world. Its application to a manufacturing business could lead to greater motivation as the work force are given the chance to show their knowledge of the process and to suggest improvements that will directly benefit the quality of production. These could involve better design, the use of better materials or less wasteful processes. Kaizen is a Japanese term meaning continuous improvement. It is a means of improving performance by involving all employees in the suggestion and implementation of small changes. The cumulative effect of these changes, often the idea of shop floor workers, is a steady rise in productivity, a fall in the reject rate and the raising of quality. Products will be made right first time and to the correct specification thus assuring the customer of the quality of the product. TQM stands for Total Quality Management. TQM is a quality initiative that attempts to establish a culture of quality that affects the attitudes and actions of every employee. The emphasis on quality should permeate the whole organisation. This will ensure that the raw material inputs are of the correct standard, that the manufacturing process is fault free and the after sales service is accurate and helpful. Benchmarking is the practice whereby a firm studies the best production and marketing process used by immediate competitors and firms from similar industries. Benchmarking involves identifying processes that need improvement; studying how other firms perform these processes particularly well; adapting and implementing those processes and monitoring the impact of the change. This ensures that a firm constantly and consistently drives up quality in line with the best in the industry.

(b)

(ii)

(iii)

(iv)

Q4

(a)

(i)

Fixed costs are costs that do not vary in the short-term when a firm alters its level of output. Examples of fixed costs include rent, rates, insurance and depreciation and must be paid irrespective of the level of output. Variable costs are those expenses that change directly with the volume of output. Examples might include fuel with miles driven or raw materials and components with production output. These costs will depend on the level of production and sales. Net profit is the difference between a firms sales revenue and all costs. These costs include the direct operating costs such as materials and labour as well as indirect costs such as insurance, rent and advertising. It is the net profit that is taxed by government.

(ii)

(iii)

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(iv)

A debtor is a firm or individual that owes money because they have bought goods or services but have not yet paid for them e.g. a customer buying goods by installments. A creditor, however, is a firm or individual to whom money is owed for goods or services already provided e.g. raw material suppliers who only invoice firms on a monthly basis.

(b)

Long-term projects such as a new factory and the purchase of machinery should be financed through a long-term source of finance. (i) A factory 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 (ii) 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 assets 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 in to 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

Q5

(a)

(i)

An extension strategy is a plan to lengthen the life cycle of a product as it approaches and enters the maturity stage. This type of strategy can range from redesigning the product, adding an extra feature, changing the packaging, reducing the price and image to completely repositioning the product in another market. A good example is the repositioning of Baby Oil and Baby Powder to become part of the skin care market for women as well as a product for the baby care sector. Demand-based pricing is a pricing method based on the intensity of demand rather than the costs of production and distribution. It relies on being able to segment the market and apply price discrimination. An example might be rail or air travel where consumers are differentiated by class of seat or time of travel. USP stands for Unique Selling Point which is a feature of a product that can be focused on in order to differentiate it from all competition. The USP should be based on a real product characteristic that consumers can easily verify, for

(ii)

(iii)

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example a sports car boasting that it has the fastest acceleration. Stronger USPs are those based on a patented technical advantage for example Dyson vacuum cleaners that boasted the only dual cyclone suction method. (iv) A niche market is a relatively small and identifiable segment of a larger market. This type of market appeals to small firms as they are often overlooked by large scale producers and are therefore less competitive. This allows small firms to charge higher prices as the consumers are willing to pay a premium for what they perceive to be a more unique product or service. It is quite common in the luxury goods market. For example a made to measure tailor can charge much more for a suit than a large clothing firm offering ready-made suits.

(b)

The aim of an extension strategy is to halt the decline in the sales of a product. In the case of a car this can be achieved by changing elements of the marketing mix: New promotional techniques such as endorsements by well known personalities such as movie stars, TV celebrities or famous sportsmen. A new, refreshing advertising campaign could highlight the cars new features. New pricing strategies. The cars could be offered at lower prices or with attractive credit terms such as interest free loans. Developing the product by introducing new features such as electric windows, a re-styled body, air-conditioning as standard features instead of extras. By targeting new segments of the market. If previously the car was targeted at the individual consumer market the manufacturer could try to penetrate the company car market by offering significant discounts for bulk orders. Alternatively they could try foreign markets

Q6

(a)

In order to have a successful recruitment campaign a firm needs to follow a logical sequence to ensure that a suitable number of employees with the appropriate skills are employed in order to meet the manpower requirements of the business. The process needs to include details about: the job analysis procedure gathering all the facts relating to the tasks, responsibilities and context of the job the job description outlining the content of the job the person specification the qualities and qualifications required by the candidates for the job the procedure for advertising the vacancy both internally and externally the selection procedure the initial screening of applications, interviewing and testing. This sequence of events should ensure that the applicants fit the job on offer and that the successful candidate has the necessary skills to do the task.

(b)

The cost of training new employees is not just the direct charge for a course. While the employee is being trained the firm is losing the production that the worker would have contributed. Where training is provided internally there is also the overhead cost of the training area as well as the running costs of the training department including salaries and training materials. In cases leading to external qualifications there might be also examination and resource material costs. The benefits of training, however, often outweigh the financial costs. Training should mean that the work force is more skilled, more flexible and can adjust faster to changes

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required by customers. This in itself should provide a firm with a competitive advantage. Training also has a motivational impact. A well-trained labour force often has a lower turnover, which reduces recruitment and induction costs. Productivity is also affected as better trained personnel can achieve higher outputs per period thus reducing overall unit costs. For new employees the investment in significant training will be a motivating factor as it demonstrates the firms commitment to its workforce.

Q7

(a)

(i)

Corporate objectives are the medium and long term targets of a business that give a sense of direction to the managers, departments and the organisation as a whole. They should be measurable and have a specific timeframe for example to increase sales by 5% by June 2009. To be effective they must be realistic and attainable. However, a corporate strategy is the detailed plan for achieving the corporate objective. The plan would include details of not only what is to be done but also the financial, production and personnel resources required.

(ii)

A stakeholder is any individual or group that has an effect on or is affected by a business or organisation. This might include groups such as employees, owners, trade unions, customers, pressure groups and competitors. A shareholder, however, is a part owner of a business who has invested funds in the purchase of firms shares. Shareholders have a right to vote and to attend the annual general meeting. Break-even is the output level at which a firms revenue just matches its fixed and variable costs, earning neither a profit nor a loss. For newly established firms this is one of its first goals so that it can survive. Profit maximisation is often taken to be the main reason why firms exist and to be their primary corporate objective. It means only taking actions that will drive up profits. In reality most firms have a hierarchy of objectives where profit is only one of them. As long as a sufficient level of profit is earned a firm might be more interested in long term objectives of expansion or diversification.

(iii)

(b)

Whenever there is a takeover of one business by another there will always be concerns among the affected parties. It will involve change which can be both a threat but also an opportunity. In the case of a large multinational business taking over a UK firm the objectives and concerns will vary. (i) The objective of the majority of the UK employees will first and foremost be to secure their employment. For a few high flyers they will see the takeover as an opportunity for promotion and to progress upwards in a much larger organisation. The main concern, however, will be about redundancies. One of the prime reasons for takeovers is to merge operations and squeeze out inefficiencies by reducing staff numbers. The objectives of the Board of Directors of the multinational will be to expand their operations in the UK. A takeover provides a quick way of gaining market share without having to undertake the more lengthy business of building brand recognition. Another objective will be to achieve economies of scale and to reduce unit costs. Some operations will be duplicated particularly in the management and head office areas. These can be slimmed down to provide savings on overheads.

(ii)

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(iii)

The UK shareholders prime objective will be to achieve a premium price for their shares. To persuade investors to sell the multinational will have to offer a price above the normal market level. For UK shareholders who wish to remain shareholders in the joint business the main concern will be the ability of the multinational to secure cost savings and higher profits for the new venture.

Q8

(a)

A flow production process can deliver the following benefits to a manufacturing business: The increased output level can create economies of scale such as purchasing economies. Raw materials such as the wood, plastic and steel can be bought in bulk at much reduced cost thus reducing the unit cost of the finished product. The increased output can be achieved at a lower cost which will allow the firm to be more competitive in the new markets. Flow production should enable the firm to achieve higher quality and fewer rejects. This will further reduce costs and also enhance the reputation of the business in the furniture market. Flow production also has disadvantages associated with it such as: The high cost of purchasing, installing and maintaining a capital-intensive production line. The demand for the furniture must be high and long-term in order to justify the commitment of large amounts of capital. The work can be repetitive and boring for the work force. This might lead to lower worker morale and de-motivated employees. This in turn could result in a higher labour turnover with the associated recruitment costs. Each part of the production process is interdependent. Any breakdown will result in the entire production line being affected. The level of maintenance must be much higher in order to guarantee continuous operations.

(b)

Economies of scale are the cost reductions gained through expanding the level of output. A business expanding could take advantage of any of the following economies: Purchasing economies larger output provides more scope for bulk buying and obtaining better discounts and more favourable credit terms. Marketing economies a wider range of promotion and advertising is possible since these costs can now be spread over a larger output. Specialist advertising agencies can be used to design more effective, better-targeted campaigns. Financial economies financial institutions often regard larger firms as less of a risk and are therefore willing to offer loan capital at more favourable rates of interest. Technical economies a larger-scale plant costs proportionately less to build than a smaller one. Larger firms can also afford to apply the idea of division of labour more effectively with the employment of specialist staff. Managerial economies the division of labour, when applied to management, allows the employment of specialists in the functional areas of marketing, finance, production, purchasing and human resources. Risk-bearing economies diversification can lead to greater security by not being reliant on one product, market, consumer or supplier. A range of products can be marketed internationally so that recession in one area will not adversely affect the whole organisation. Any four of the above economies would be acceptable.

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