STUDENT GUIDE NEW EDITION

With
exam-style
questions
and model
answers

AQA A-LEVEL

Business
Topics 1-6

Nel Jame dy Hopoen

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 New Student Textbook

mee) Business
Malcolm Surridge and Andrew Gillespie

Boost your confidence for AQA A-level Business with one revised
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Andrew Gillespie. This textbook covers the topics on the AQA
A-level business specification, ensuring you are fully prepared.

_ NEW | PRINT ||DIGITAL

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Textbook:
Includes up-to-date and relevant case
studies of real companies
AQA
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quantitative and analytical skills ) A-level

Includes practice questions

throughout to prepare you for
|Business
assessment
= ; Malcolm Surridge
Supports your revision with new Andrew Gillespie
end-of-unit recap sections OYNAM ¢ HODDER

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 A-LEVEL
STUDENT GUIDE

AQA

Business
Topics 1-6
m What is business?
_m Managers, leadership and decision making
m Decision making to improve marketing performance
mg Decision making to improve operational performance
m Decision making to improve financial performance
m Decision making to improve human resource performance

Neil James

( HODDER
) EDUCATION
AN HACHETTE UK COMPANY
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Contents
ering Wie Most TOminis, DOOK . 5's. <daieNEMOS
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ERG Hele
a) ee 85.9215 RAT a GRIPE See eee S

Content Guidance
Ree STOISIIOSS fucis Py lw evict ae EAA Bindi wl ead oie 6
Managers, leadership and decision making ...............++0: 13
Decision making to improve marketing performance............. 21
Decision making to improve operational performance............ 37
Decision making to improve financial performance .............. 49
Decision making to improve human resource performance........ 61

Questions & Answers

oe
Leep Skeet geared abba ethiopia elllbbe « ehinT a |a | SP 75
Paper 1 Multiple-choice questions .............0.0c
cece eens 77
Baer’ snOr-aAnswer GUGSHONS< «56 iis ese 5 woes hoy kn ee ele 81
ae At Soe Ns cle iyGee dei Sur aaron Oe ala me eg a 87
Pare 2 Data-Tesponse GUGSTIONS: 26a Ih VW eva a ad 89
aN eS SAER RSV es. ne ae oie ee eet PE Stik ees ees a,eet 98

LTO CHIE NOISIER SVMS lig hs cdr relied Gea Tele nah Me ahh eh ale is! Rinadn> 106
BiGetting the most from this book

Knowledge check
Advice on key points in the text to help
you learn and recall content, avoid Rapid-fire questions throughout the
pitfalls, and polish your exam technique Content Guidance section to check
in order to boast your grade. your understanding.

Summaries
Knowledge check answers
w Each core topic is rounded
1 Turn to the back of the book for
off by a bullet-list summary
the Knowledge check answers.
for quick-check reference of
what you need to know.

Questions
§Answors:
eS
() Explain why SallAway might have decided to outsource the running ofits website. (7marks)

Exam-style questions Pe
The commsad words hero, explain why, maan tha! analysis
=requived, which should
ofcourse baundertaken inthecontext ofSaitAway.

(@ Analyse the importance of product design and low wastage to the success of
‘SallAway, (8marks}
Use ofthe command word analyse requires youtoGevelop anIn-depth argument as
tothe importance ofproduct design and low wastage specifically inthe context of

Commentary on the
7
Se =
(@ To what extent do you believe digital sales through its website rather than

questions Sse
Jookattbothsidesanddraw conclusions using context tosupport youranswer,
Tips on what you need to do
to gain full marks.
Ww
2018 pe «100 = 16.10%
Commentary on sample
student answers
73
1.875
2019 = 100 = 20.83%
‘SallAway has only achieved Its objective in 2019 aa.in 2018 the profit
margin was only 18.10%. This isprobably
for 2019 In order toachieve the 20%.
why it incruased Its prices
ae)
Correctly
o/5 Read the comments showing
how many marks each answer
Sample student answers revenue
it
= 100 would be awarded in the
LETS.100= 20.89% exam and exactly where
Practise the questions, then
Onty theprofit margin for2019.
has beencalcutated.
fes, ithas achieved |tsobjective of n 20% profit margin. 3/5 marks awarded

look at the student answers marks are gained or lost.

th tf I] papier ccbae ieaa ages iit
a oulow. this case SailAway has outgourcad the management ofrunning
ts website, There are a number of reasons why the company
might have done this. One ofthe most important reasons is

4 = AQA A-level Business

4 AQA A-level Business

About this book
This Student Guide has been written to provide you with the ideal resource for your
revision of AQA A-level Business (7132). In your study of the subject you will look
at business in a variety of contexts, small and large, national and global, service and
manufacturing.
The overall focus of Student Guide 1 is decision making in the various functional
areas, the influences on those decisions and the impact they may have on
stakeholders. Central to the AQA specification are the following themes:
= how developments in technology are affecting decisions in the functional areas
m the influence of ethical and environmental issues on decisions in the functional
areas
m how decision making in the various functional areas improves competitiveness
® the interrelationship between decision making in the various functional areas
The focus of Student Guide 1 is the following:
m what a business is, its nature and purpose, its different forms and the external
environment in which it operates
= management, leadership and decision making, together with the role of
stakeholders
decision making to improve marketing performance
decision making to improve operational performance
decision making to improve financial performance
decision making to improve human resource performance

Content Guidance
The Content Guidance section offers concise coverage of the specification providing
an overview of key terms and concepts as well as exam tips where appropriate.

Questions & Answers

The Questions & Answers section provides examples of the various types of question
you are likely to face, together with sample answers and examiner comments.
Overall this guide, used well, should provide you with the necessary knowledge, exam
practice and examiner guidance to be able to succeed in your A-level exam.

Topics 1-6
Content Guidance
8 What is business?
Understanding the nature and purpose of business
Public services
Why businesses exist
Services provided by
A business is any organisation set up to service or satisfy the wants and needs of the government or local
people. There are a number of reasons for setting up a business, including to provide: authority, for example
B goods and services (including public services) the NHS, police force,
m money for owners (profit) fire service and rubbish
m help and support for others (charitable organisations) collection. (See pp. 7-8
for more information on
The relationship between mission and objectives the public sector.)

An organisation's mission statement gives the big picture of the business and
represents its vision, core purpose and values. It is sometimes seen as the Knowledge check 1
philosophy that guides how a business operates. For example, Tesco’s mission Write down three reasons
statement is: ‘We make what matters better, together’, whereas Sainsbury’s is: why businesses exist.
‘Our mission is to be the consumer's first choice for food, delivering products of
outstanding quality and great service at a competitive cost through working faster, Knowledge check 2
simpler and together’.
Briefly outline the
A business's objectives are more specific. They are targets or goals that will enable an difference between the
organisation to achieve its overall mission. In other words, the mission statement gives mission statement and
a direction or focus for the objectives that have been set and, by having objectives, a objectives.
business can work towards achieving its mission.
As well as overall business objectives, each functional area of a business has its Knowledge check 3
own set of objectives enabling it to contribute to the overall business objectives and What is meant when
mission. All objectives must be SMART: we say that all business
Specific objectives should be
Measurable SMART?
Achievable
Realistic
Time-based The relative importance
of business objectives
For example, increasing sales revenue by 5% in the next year is a SMART objective,
changes over time and
whereas simply having an objective to increase sales is not.
depends on the individual
The relative importance of different objectives is likely to vary over time depending business and the
on circumstances. In difficult economic times, survival is likely to be more important circumstances in which it
than profit or environmental targets. However, in a booming economy, profit, growth is operating.
and social issues will take on far more important roles.

6 AQA A-level Business

 What is business?
—_ rrUHCHUTHHT VHT _5B LL

Common business objectives

The overall business objectives are targets that have been set for the whole business
and are often referred to as corporate objectives. These might include:
= profit — vital for the long-term health and security of a business
m= growth — in terms of market share or sales turnover
m survival — important for many businesses in times of economic uncertainty and
for all businesses when first starting out
m cash flow — for many smaller businesses, cash flow may be more important than
profit
m customer service — to gain loyal customers in a competitive marketplace
In addition, corporate social responsibility (CSR) has become an increasingly Corporate social
important objective. This relates to how a business treats its workers and suppliers responsibility (CSR)
and the environment, including the use of sweatshops, fair trade and pollution. A company’s sense of
responsibility towards
Why businesses set objectives the community and the

Having objectives is important for the business and each functional area for a number environment in which it

of reasons: operates.

m Objectives give meaning to planning and enable the business to remain focused.
m The business can measure and review performance. As a result, its objectives may
be revised or corrective action may be taken, depending on the circumstances. Business is examined

m Objectives provide a motivation for those responsible for implementing plans. largely through case
studies, so your
answers should be
The measurement and importance of profit
linked specifically to the
Profit is the reward the owners of a business receive for taking the risk involved
business in the case
in setting up in business. Without profit as an incentive, there would be a general
study. This is the skill of
reluctance to set up in business. Profit is calculated as: application.
profit = revenue — total costs
Revenue (also known as turnover, sales or sales turnover) is the money received by a Profit The reward the
owners of a business
business from the sales of its products or services. It is calculated as:
receive for taking on the
revenue = price per unit x number of units sold (output) risk of starting a business.
Total costs are the value of all business costs and may be split into fixed and variable
costs:
m fixed costs are those that do not change with output: rent, rates, insurance
premiums, etc.
m variable costs are those that vary directly with output: raw materials, direct
labour, etc.

‘Understanding different business forms

Private sector and public sector
In the UK there are a number of different forms of business, but before we look at
these it is necessary to distinguish between the private sector and the public sector.

Topics 1-6 7
Content Guidance
8aasasasasasawawawswswsws ss sss =

The private sector is that part of the economy where a business is owned and
controlled by an individual or a group of individuals. There are a number of different
types of business in the private sector, such as sole traders, partnerships, private
limited companies, public limited companies, charities and mutuals.
The public sector is that part of the economy that is owned and controlled by the Privatisation The
government or local authorities. In the UK this means a number of the public services process of transferring
such as the police force, fire service, the BBC and the NHS, as well as local council- ownership of government-
run services such as refuse collection. The public sector used to include a number of owned and controlled
key nationalised industries and utilities such as coal, steel, water and telephone, but industries or businesses
these have largely been sold off to the private sector through privatisation. to the private sector.

Sole traders and partnerships

These are unincorporated businesses, meaning there is no distinction in Unincorporated
law between the owner and the business itself. Typical examples include small businesses Those
shopkeepers, plumbers, joiners and electricians. where there is no
distinction in law between
Advantages the individual owner and
m They are easy to set up with few legal formalities. the business itself.
m The owner takes all the profit.
mw They have financial privacy as their financial affairs do not have to be published.
mw They have greater independence than other legal structures and as a result may be
more responsive to changes in circumstance.

Disadvantages
w They have unlimited liability so the owner’s personal assets may be used in the
event of failure.
Knowledge check 4
m They have limited capital and access to capital (loans) for expansion.
Identify three advantages
m Their business skills may be limited.
of being a sole trader.
m Problems may arise if the owner is ill or wishes to take a holiday.

Private limited companies (Ltd) Incorporated

Private limited companies have at least two owners (shareholders) and are incorporated businesses Those
businesses under the Companies Act. Generally, private limited companies are small that have a legal identity
to medium-sized businesses that are family owned. Some well-known larger examples separate from the
include Clarks (shoes), Baxters (soups and preserves) and Walkers Shortbread (biscuits). individual owners. This
means that the owners
Advantages
have limited liability
m The owners have limited liability.
and are not responsible
m They have access to a greater amount of capital than unincorporated businesses. personally for the debts of
m They have greater privacy than public limited companies. the business.
m They have less pressure from outside investors and greater flexibility.
Disadvantages Knowledge check 5
uw They are more difficult to set up than unincorporated businesses. What is the difference
m Although they have access to a greater amount of capital than unincorporated between an incorporated
businesses, they have access to less capital than public limited companies. business and an
m Financial information is accessible to outsiders. unincorporated business?

8 AQA A-level Business

 What is business?

Public limited companies (plc)

Public limited companies are owned by shareholders who buy and sell shares through When discussing limited
the stock market. Although there are some large and well-known private limited liability in answers, always
companies, public limited companies tend to be the largest, e.g. BP, Shell, Marks & relate it to the business
Spencer, and Next. in question. Why would
that business benefit from
Advantages
limited liability?
m The shareholders have limited liability.
m They have access to greater amounts of capital.
m They have greater power over suppliers regarding credit terms.

Disadvantages
m They have to publish greater amounts of financial detail leading to more scrutiny of
their affairs.
m The original owners are likely to lose control of the business.
m Pressure from investors may result in greater emphasis on short-term profit rather
than long-term performance.

Non-profit organisations
Other types of organisation in the private sector are non-profit organisations such as
charities and mutuals. Charities may be large fundraising organisations such as
Cancer Research, Winston’s Wish or the Red Cross, or they may be smaller charitable
trusts designed to manage assets such as money, investments or land. Mutuals are
interesting as they are generally private businesses whose ownership base is made up Knowledge check 6
of its clients and policy holders, for example insurance companies and some building
What do you understand
societies. Although both these examples have traditionally been organised in this way,
by the term ‘mutual’?
many big insurance companies and building societies have tended to become public
limited companies.

Reasons for choosing different forms of business

Business owners have to choose the structure that will best meet their needs. The
choice of business structure depends on a number of factors:
m the potential risks and liabilities of a business — the greater the risk and liabilities,
the greater the need for incorporation and limited liability
m the product or service being offered — the more risky the product or service, the
greater the need for incorporation
m the formalities and expenses of setting up — sole traders are easy to set up with
few formalities and costs, so unless a business is particularly risky or requires
access to large amounts of capital, an unincorporated business would probably be
appropriate

_ Reasons for changing business form

m A change in circumstances, such as the growth of a business, may mean that the
owner wishes to incorporate their business in order to benefit from limited liability.
m The owner may find it easier to raise capital by becoming incorporated or, in the
case of a private limited company, by changing it to a public limited company.

Topics 1-6 9
Content Guidance

m Acquisition or takeover may cause a change of structure, for example a private Knowledge check 7
limited company may be taken over by a public limited company.
List three things that
m Sometimes a business may move from being public limited to private limited in
might influence the choice
order to distance itself from the constant scrutiny of the City.
of legal structure fora
business.
The role of shareholders and why they invest
Individuals can invest in public limited companies to become shareholders and part
owners of the business. As shareholders they have certain rights and a role to play in
the running of the business.
Major decisions that will have an impact on shareholders are required to be approved When deciding on
by them at a general meeting called by the directors. Their main role therefore is to the most appropriate

attend this meeting and discuss whatever is on the agenda, ensuring the directors do legal structure for a
not go beyond their powers. There are also certain things that can be done only by business, base any
shareholders such as the removal of directors or changing the name of a company. In recommendation on
practice, for individual shareholders this means very little as they normally own only the circumstances of
a small proportion of the issued shares. The biggest shareholders in public limited the individual business,

companies are usually financial institutions, pension funds, insurance companies, etc. its size, the product
or service and the risk
People invest in shares primarily for two reasons: involved.
m Income. Shareholders are entitled to a share of company profits known as a
dividend.
u Capital growth. Shareholders hope that the value of their shares will increase
Dividend A share of
over time.
the after-tax profit of a
company distributed to its
Influences on share price and the significance of share price changes shareholders according
The share price of any company can fluctuate both positively and negatively. Reasons to the number of shares
include: held.
m performance — better or worse than expected profits
m expectation — of better or worse profit performance
mw changes — within the market or competitive environment Knowledge check 8
m world uncertainty — such as conflict in the Middle East Identify three factors that
Market capitalisation is calculated as: might cause a company’s
share price to fall.
market capitalisation = share price x number of shares issued
It gives a valuation of the company — its net worth. Changes in the share price
therefore affect the valuation of the business. A falling share price might provide an
Market capitalisation
opportunity for investment or takeover, or it might be an indication of a business in
This is equal to the share
decline.
price multiplied by the
number of shares issued.
The effects of ownership on mission, objectives, decisions and
performance
Public limited companies are owned by shareholders who are driven by profit, which Knowledge check 9
can lead to a short-term approach to business. Decision making may be made more Outline briefly what
on the basis of achieving profit and the philosophy outlined in the mission statement _ is meant by ‘market
may take a ‘back seat’. This emphasis on profit was demonstrated by Tesco in autumn capitalisation’.
2014 when it was shown to have made mistakes in reporting profits higher than they
10 AQA A-level Business
 What is business?

actually were. These failings led to a big fall in Tesco’s share price. Sole traders and
private limited companies are less affected by this need to achieve profits and may be
Don’t assume that the
able to keep a closer focus on their mission statement and objectives.
influence of the external
environment will always
Businesses operate in an external environment be negative: it can also
A business does not operate in a vacuum. It is subject to influences from the external be positive. Examine the
environment which will have an impact on demand, costs and the way it operates in circumstances of the
general. business in any stimulus
material in order to decide
How the external environment can affect costs and demand whether the influence is
External influences on a business can affect its ability to achieve its strategic goals positive or negative.
and objectives. By external it means they are beyond the control of the business and
include competition, market conditions, economic and demographic factors and
environmental issues. Such factors can affect both demand for a product or service
and the costs of operating a business. Some of these influences are unpredictable,
whereas some influences change regularly, but whatever the case a business is likely
to have to take action to cope.

Competition
As monopolies are illegal in the UK, all businesses face competition from others
offering a similar or the same product. If an individual business differentiates its
product from that of its competitors with a unique selling point (USP), it might Unique selling point A
be able to increase demand. Alternatively, if its competitor releases a new, more real or perceived benefit
technologically advanced product or additional facilities, demand could fall. If the of a good or service that
products are relatively the same, such as in the grocery market, there will be pressure differentiates it from
to reduce price and lower costs in order to maintain profitability. competing brands and
gives its buyer a logical
Market conditions reason to prefer it over
Market conditions are the characteristics of a market into which a business is entering other brands.
or into which a new product is being introduced. Such characteristics might be the
number of competitors, the intensity of competitiveness and the market’s growth rate.
A market with high growth and a low intensity of competitiveness is likely to present
greater opportunities for higher demand than one where the opposite conditions
prevail.
Economic factors
These might include the stage of the economic cycle, interest rates, inflation and
exchange rates. Looking specifically at interest rates, any change can have a big
impact on business.
Interest rates have a direct impact on the cost of borrowed money: it is cheaper to
borrow at times of low interest rates. The level of rates and their expected level is
likely to be a key influence on decisions to invest.
The level of interest rates can affect demand: rising interest rates could mean lower
demand as consumers who have borrowed money are likely to face higher interest
payments and have less disposable income as a result. Other consumers might also
be encouraged to save more because of rising interest rates. Falling interest rates are
likely to have the opposite effect.

Topics 1-6 11
Content Guidance

If a business has large cash reserves it could benefit from rising interest rates because Knowledge check 10
of the higher interest received.
Briefly outline how a
Demographic factors business might benefit
Demographic factors refer to the socio-economic characteristics of the population positively from a fall in
such as age, sex, income and occupation by which a business might segment the interest rates.

market, as well as birth and death rates, the level of public health and immigration.
All of these factors may have an influence on the level of demand for a business and
the type of products and services on offer.
Environmental issues and fair trade
Environmental issues cover a broad area and can have a big impact on the way a
business operates and its costs of production, as well as potentially influencing
consumer demand.
No longer can a business carry out production without regard for its local
environment. Any hint of pollution in the UK can be quickly brought to public
attention through social media, for example, and pressure groups can have a
significant impact on the business(es) responsible.
The concern for the environment is, to some extent, being driven by factors such
as climate change and sustainable development. There is concern that carbon Sustainable
emissions are a contributing factor to global warming and that businesses and development Where a
governments should be doing more to cut carbon emissions. There is also a worry that business aims to meet
certain resources are running out and so we should try to conserve and sustain them. the needs of the present
For example, the fishing industry is subject to quotas and some paper manufacturers without compromising
now say they plant one new tree for every one they cut down. the ability of future
generations to meet their
Fair trade is about better prices, decent working conditions and fair terms of trade
needs.
for farmers and workers in developing countries. This is likely to mean higher costs
for a business, but it could lead to greater demand and a better reputation, as well as
acting as a unique selling point.
Knowledge check 11
These external factors can have a significant impact on the demand for products and
Why might a business
services provided, the costs incurred and any profit made. Some changes such as
adopt a fair-trade
demographic ones can be identified, and others such as interest rates changes can be
approach?
anticipated, allowing any negative impact on cost and demand to be minimised and
any positive impact maximised.

Summary
In this section you need to know about:
w The reasons businesses exist
Mission statements and objectives
Profit, revenue and costs
Private and public sector businesses
Shareholders and market capitalisation
The external environment

12 AQAA-level Business
 Managers, leadership and decision making

B Managers, leadership and

decision making
Understanding management, leadership and
decision making
What managers do
In 1916, the French engineer Henri Fayol created the first principles of the classical
management theory. According to him, the five key functions of managers are to:
= draw up a plan of action
m organise work
= command people under them by giving instruction
= coordinate the resources for which they are responsible (for example, money,
people or time)
= control activities and people by measuring and correcting them to enable
Knowledge check 12
performance to fit plans
Outline briefly the role of a
The role of a manager therefore includes setting objectives, analysing, making fame
decisions, reviewing and leading.

Types of management and leadership styles

In 1939 the psychologist Kurt Lewin suggested three styles of leadership:
= Autocratic, where leaders make decisions without consultation. This style is good
when quick decisions are needed and there is no need for team input, but it can be
demotivating and lead to absenteeism and a high turnover of labour.
= Democratic, where leaders make the final decision but include team members in
the process. This style can lead to greater job satisfaction and productivity, but it
can be slow and a hindrance if quick decisions are needed.
= Laissez faire, where team members are given freedom in how they work and the
setting of deadlines. Support is given, but otherwise leaders do not get involved.
This style can be creative and give great job satisfaction, but it can also be
damaging if team members lack the necessary skills and fail to work effectively.
In addition to the three main styles outlined above, leaders are also considered to
belong to one of the following leadership groups:
= Bureaucratic, which tends to follow rules and procedures rigorously. This style
is useful for work where safety is a key concern, but it is likely to lack flexibility,
creativity and innovation.
= Charismatic, which revolves around a leader who is likely to inspire and motivate
team members. However, sometimes such leaders believe they are invincible and
Knowledge check 13
can do no wrong, which can be damaging to an organisation.
. List three styles of
Two further studies on leadership styles involved the Tannenbaum Schmidt idiiabie
continuum and the Blake Mouton grid.

Topics 1-6 13
Content Guidance
OO
8S...
———————Ola ee rS=

The Tannenbaum Schmidt continuum

This model shows where a manager's approach lies on a continuum, ranging from
exerting rigid authority at one end (‘Tells’) through to the team having full freedom to
act independently at the other end (‘Delegates’), as shown in Figure 1.
Autocratic leader Democratic leader

Use of authority by leader

Tells Sells Suggests Consults Shares Delegates

Manager Manager ‘sells’ Manager Manager Manager Manager
makes decisions decisions presents ideas _—_presents defines limits permits
and announces and invites tentative and asks the subordinates
suggestions decision group to make to function
subject to a decision within the
change limits defined
by superior
Figure 1 The Tannenbaum Schmidt continuum

This shows the relationship between the level of freedom in decision making a
manager gives to a team of workers and the level of authority retained by the manager.
As workers’ freedom increases, so the manager’s authority decreases.
The Blake Mouton grid
Developed in the 1960s by Robert Blake and Jane Mouton, this model portrays
leadership through a grid depicting concern for people on the y-axis and concern for
production on the x-axis, with each dimension ranging from | to 9, as shown in Figure 2.
The Blake Mouton grid results in five leadership styles:
= Country club management — low task and high people orientation, in the belief
that this will increase motivation. However, lack of focus on tasks can hamper
production.
= Team management — leaders focus on both people and task; there is an
emphasis on empowerment, trust and team-working.
um Middle-of-the-road management — leaders try to maintain balance between
company goals and needs of people; likely to lead to average performance.
su Impoverished management — little concern for task or people; leaders are
ineffective and organisation becomes disorganised. uiline Orisily the
Tannenbaum Schmidt
= Task management — leaders have more concern for production than people,
continuum and the Blake
which may increase output in the short run but is likely to lead to high labour
Mouton grid.
turnover.

14 AQA A-level Business

 Managers, leadership and decision making

igs ; oe)
2 “Team management _
5 Work accomplishment isfrom. committed
people; interdependence through.
a ‘common stake’ in organisation purpose
8 leads to relationships of trust and respect
o 7§
a
°
BY 6
o
©3 35
5 4
e)
3

Pd

1
g
1 2 3 4 5 6 Y 9
Low High
Concern for production
Figure 2 The Blake Mouton grid

The grid is useful in that it provides a framework to assess leadership styles,

_ but it does not take into consideration individual business circumstances. Team
management might appear from the grid to be the best style, but there may be
circumstances when a different approach could be preferable.

The influences on and effectiveness of different styles of management

and leadership
There are a number of influences on the style of leadership adopted:
m The personality traits of the individual will have a bearing — some people feel they Business culture The
must always be in control and they will therefore be more autocratic in nature; others shared values, attitudes,
are more prepared to discuss things and lean towards a more democratic style. standards and beliefs
m The type of business may have a bearing on the style adopted — the technology within a business.
industry, which requires a high degree of creativity and innovation, may adopt a
more laissez-faire style; the oil industry, where safety is paramount, may have a
more bureaucratic style.
The style of leadership
m The circumstances in which the business finds itself may determine the style
adopted is likely
adopted — when faced by difficult conditions, a more autocratic style may be
to depend on the
adopted; in good times a more democratic style may be possible.
characteristics of the
The effectiveness of different styles of leadership may be summed up in Table 1. It leader and the individual
should also be noted that leadership style can be linked to and have a bearing on the circumstances facing a
business culture. particular business.

Topics 1-6 15
Content Guidance

Table 1 The advantages and disadvantages of different styles of leadership

Style Advantages Disadvantages
Autocratic Gives the leader control over decisions May lose effectiveness over time
More effective when tasks are simple and repetitive |May lead to high levels of labour turnover and
Important when a business is facing problems absenteeism :
Does not develop future leaders
Democratic |Can result in high worker morale and motivation The leader is not in total control of decision making
The leader has to abide by the views of others
Laissez faire |Results in high morale and motivation If workers are insufficiently qualified, the whole
May develop future leaders business might suffer

Understanding management decision making

The value of decision making based on data (scientific decision making)
and on intuition
One key function of a leader is to make decisions, but decisions involve risk and
uncertainty: get it right and the rewards can be high; get it wrong and it can lead to
disaster. In any business, finance is limited and therefore with any decision there will
be an opportunity cost. This means that by doing one thing the business will be Opportunity cost
unable to do something else. Management wherever possible will wish to reduce any The cost of a foregone
risk in decision making and to help there are various analytical tools that can be used __alternative. Where there is
in a scientific decision-making process. a choice, the opportunity
cost is the decision the
The use and value of decision trees in decision making business did not make.
Decision trees are an example of an analytical tool. They are tree-like diagrams Decision trees
used in determining the optimum course of action in situations where there are a Diagrams used to
number of possible alternatives with uncertain outcomes. The resultant diagram looks _ determine the best course
rather like a cluster of tree branches. of action in situations

Constructing a simple decision tree where inate ata several

possible alternatives with
In rder to
order to construct
co a decision on tree,
tre , itit isi necessary to have the following
ing information
i ion: uncartaltGetemea
m the choice of decisions to be made and their cost
m the probability of success for each decision
m the payoff or financial outcome for each probability
All decision trees start with a square or decision node. The business might have an
objective of increasing sales and be considering either:
@ arevitalised marketing campaign costing £2m, or
™ entering a new overseas market costing £3m
These two options are represented by forks coming from the decision node.
The business can now assess the probabilities of success and failure of each decision
and these can be represented on the diagram as circles or chances nodes. Based on
past experience of marketing campaigns and entering new markets, management can
estimate the chances of success or failure and their likely financial outcomes.
For example, a revitalised marketing campaign may have a relatively high 75% (0.75)
chance of success and therefore a 25% (0.25) chance of failure, leading to an expected

16 AQA A-level Business

 Managers, leadership and decision making

payoff of £15m if successful and only £2.5m in the case of failure. Entering a new
market, on the other hand, has only a 60% (0.6) chance of success and a 40% (0.4)
chance of failure, but the expected payoff is likely to be £30m if successful and only Exam tip|
£2m if a failure. In any decision tree there
is always the option to
It should be noted that the probability of success or failure should add up to 1 in each
do nothing, which will
case (in this case, 0.75 + 0.25 = 1 and 0.6 + 0.4 = 1). All this can be represented in
have no cost or financial
the diagram, together with the financial outcome of each probability, as shown in
outcome.
Figure 3.

fe £15m

Revitalised marketing campaign

Failure 7°
0.6
sii
i whe: SORIA £30m
Success
Enter new overseas market ae >

Failure

Do nothing
Figure 3 A simple decision tree

We are now in a position to calculate the likely outcomes. To do this, multiply the
payoff by the probability of success or failure, add them together and subtract the initial
investment. This results in the overall potential payoff. Using the example above:
Revitalised marketing campaign = (15 x 0.75) + (2.5 x 0.25) — 2
= 11.25 + 0.625 —2

= 11.875 —2

= £9.875m
Enter new overseas market = (30 x 0.6) + (2 x 0.4) - 3

= 16.+0.8 -3

= 18.8-—3

= £15.8m
In this example, entering a new overseas market appears to be the better option.
Decision trees can be a useful analytical tool in making a decision. They can help
reduce risk, but they do have limitations. For example, the probabilities may be
inaccurate as past experience is not necessarily an indicator of future outcomes. Identify three key items
In addition, the probabilities may be influenced by a manager's own bias toward a of information needed
particular outcome. However, they do provide a quantified outcome and when used in order to construct a
with other quantitative information (for example, net present value) and qualitative decision tree.
information (for example, business objectives, external environment), decision trees
can be a useful tool.

Topics 1-6 17
Content Guidance

Sometimes a leader might ignore the scientific analysis when making decisions and Knowledge check 16
use their intuition or ‘gut feeling’. In some cases, particularly with new innovative
What do you understand
products, it is very difficult to forecast consumer reaction and a leader has to be led by
by the term ‘scientific
their gut feeling.
decision making’?

Influences on decision making

Mission and objectives
Scientific decision
To some extent, a business is guided in its decision making by its mission and
making is the systematic
objectives. For example, decision making in The Body Shop is influenced by its policy
approach to collecting
not to sell products tested on animals.
facts and applying
Ethics logical decision-making
Ethics is about making decisions that are morally correct and, in the last few years, it techniques instead
has assumed a much greater importance in decision making. This can be seen in the of generalising, using
growth of fair-trade products. However, when faced with a choice between profit and trial and error methods
ethics, profit will invariably win. This is illustrated by the fact that some businesses or guessing, and this
have been able to prosper and make a profit despite being exposed and criticised for technique can be useful
using sweatshops in developing countries. Such criticism does, however, normally lead when trying to justify one
to a positive effort to correct unethical practices. decision over another. It
never provides a complete
The external environment answer, but it could give
Businesses operate within a dynamic external environment that is constantly weight to a particular
changing. Interest rates, inflation and exchange rates all have an impact on decisions argument when making a
made, as well as technological developments (e.g. online trading), demographic judgement.
changes and changes in taste and fashion.
Competition
Businesses operate within a competitive environment and the intensity of the
competition influences decision making. The supermarket industry involves huge
competition, not just between the ‘big four’ (Tesco, Sainsbury's, Asda and Morrisons)
but also between supermarket discounters Aldi and Lidl.
Resource constraints
When making decisions, a business needs to do so within the limits of its resources.
Does it have the capital to finance a particular decision? Does it employ sufficient
labour? Does it have the capacity to achieve higher production or sales? Has it
recruited the right management talent?

Understanding the role and importance of stakeholders

The need to consider stakeholder needs when making decisions
A stakeholder is an individual or group with an interest in a business. This category
includes consumers, employees, shareholders, suppliers, the local community and national
government. Each stakeholder has different interests and it is important that these
interests are recognised by management when making decisions, as shown in Table 2.

18 AQAA-level Business
 Managers, leadership and decision making
OE

Table 2 Examples of stakeholder interests

Stakeholder Interests
Consumers Quality, value for money
Employees Job security, financial reward

Taxation, employment

Stakeholder needs and the possible overlap and conflict of these needs
As shown in Table 2, different stakeholders have different objectives. This could lead Knowledge check 17
to potential conflicts of interest and it is important that such conflicts are recognised, List six different
balanced and managed by management. stakeholder groups.

Conflict arises when the needs of some stakeholder groups compromise the
expectations of others. A business has to make choices. For example, in order to keep
prices down for consumers it may look for cheaper suppliers, but in doing this should
not compromise its social and ethical standards (for example, by using sweatshops or
child labour).
Decisions made by a business may not bring immediate financial returns and may
require patience on the part of some stakeholders, particularly shareholders. Other
decisions may add to the costs of a business such as efforts made to reduce carbon Looking at a decision in

emissions — pleasing environmentalists but maybe not shareholders. terms of short-term and
long-term consequences
Investing in employees in terms of training and working conditions might be seen by can provide good
some as pandering to the workforce, but a business has to balance the effects of not judgements in answers
investing in training and improving conditions with the costs and likely returns in when fully supported by
terms of motivation and associated improvements in productivity and quality. evidence.
Although there are likely to be conflicts, there are also benefits to a stakeholder
approach in terms of the reputation of a business and perhaps the quality of the
products or service it provides. This may become more apparent in the long term
rather than the short term.
Stakeholder mapping
Stakeholder mapping is a map or visual representation of the various stakeholders of Stakeholder mapping
a business, showing their interest in and importance to the business. A stakeholder map A visual tool used in
can be represented in a number of ways, such as a chart with each stakeholder group strategy and stakeholder
categorised according to the level of interest and power it exerts over the company. analysis to clarify and
categorise various
A stakeholder map can also be shown as a table similar to Table 3. In this example,
stakeholders according
the business is considering the extension of its present production facility by
to the interest and power
expanding into adjacent land that has become available. Stakeholder mapping helps in
they have in a company.
analysing the impact of this decision.
What management is interested in are those stakeholders with the most influence Knowledge check 18
and impact on the business. Mapping allows management to identify potential
How might stakeholder
opportunities and threats to project implementation. As a result, appropriate strategies
mapping help in the
can be developed in order to minimise opposition and increase the likelihood of the
decision-making process?
success of a project.

Topics 1-6 19
Content Guidance

Table 3 Stakeholder mapping in the form of a table

Stakeholder Type Interest Impact
Stakeholder 1 Employees Jobs and job security Likely to favour the decision
Stakeholder 2 Shareholders Cost and long-term May need persuading depending on the
benefits current position of the business
Stakeholder 3 Local community Jobs Likely to be supportive, but those living close
by may be less so
Stakeholder 4 Local council Planning and changes to | Depends on planning guidelines and the
infrastructure extent of changes to infrastructure required
Stakeholder 5 Environmentalists Potential environmental Could have a big impact if there are potential
impact environmental issues

It is also possible to undertake stakeholder mapping in the form of a matrix according

to stakeholder interests and influences and whether they are high or low. As a result,
those with both high interest and high influence have the most impact on a business
and those with low interest and low influence have the least impact.

Influences on and how to manage the relationship with different

stakeholders
There are a number of influences on the relationship with stakeholders, one of which
is illustrated by stakeholder mapping which is the likely impact of a stakeholder group
on a decision. Other influences include:
™ attitude of the board
m financial pressure
® conflict

The key to management is, first, to recognise the importance and influence of the
various stakeholder groups as any underestimation of a particular group and its
impact could lead to serious consequences. Secondly, and crucially, is the need
for communication and consultation throughout the decision-making process. If
stakeholders feel involved in the process, there is a greater chance for success. The
importance of communication should not be underestimated. It will not guarantee
success, but it will make it more likely. If decisions are approached in the right way,
potential conflict can be significantly reduced.

Summary

In this section you need to:

m Understand management, leadership and decision making, including the role of managers, leadership
styles and theories of management.
= Understand management decision making, including risk v. reward, uncertainty and opportunity cost,
the distinction between scientific management and intuition, decision trees, and the influences on
decision making.
m= Understand the role and importance of stakeholders, including stakeholder needs, stakeholder
mapping, the overlap and conflict of stakeholder needs and the influences on management-stakeholder
relations.

20 AQA A-level Business

 Decision making to improve marketing performance

B Decision making to improve

marketing performance
The Chartered Institute of Marketing defines marketing as ‘the process responsible
for identifying, anticipating and satisfying customer requirements profitably’. This
definition summarises the purposes of marketing, which are to:
= anticipate customers’ requirements — through market research
= satisfy those requirements in a way that delights customers — through
the 7 Ps
= meet the needs of the organisation — its aims and objectives

Setting marketing objectives

The value of setting marketing objectives
Each functional area of a business has its own objectives or targets that contribute to
achieving the overall corporate objectives. The marketing function might have one or
more of the following objectives:
increase sales (volume/value)
increase market share
increase the overall market size
introduce a new product or products
increase customer retention and satisfaction (brand loyalty) Brand loyalty When
consumers become
Marketing objectives should be a part of the corporate business objectives and
committed to a particular
sit within the overall business plan and strategy. The value of setting marketing
brand and make repeat
objectives includes:
purchases over time.
m target-setting — the business sets targets to aim for, to ensure that marketing
actions are focused and not used inefficiently
= direction — this gives the business and staff a sense of working towards the same
goals
= motivation — marketing objectives may be motivating, particularly if there are Knowledge check 19
rewards associated with successful completion Fema
Distinguish between sales
= evaluation — marketing objectives provide evidence when it comes to evaluating
value and sales volume.
the success of a particular marketing strategy

External and internal influences on marketing objectives and decisions

There are a number of influences on marketing objectives, both internally (within the
business) and externally (outside the business).

Internal influences on marketing objectives

= Finance available. The marketing department has to operate within the
budget allocated and it is important to remember it will be competing with other
departments when it comes to the allocation of budgets.
= Expertise of personnel. Success in terms of achieving objectives is in part
dependent on the skills and expertise of departmental members.

Topics 1-6 21
Content Guidance

m Production capacity. The objectives must be within the capabilities of a E-commerce The selling
business. For example, an increase of sales by 5% must be possible in terms of of goods and services
spare production capacity available. through electronic means
such as the internet.
External influences on marketing objectives
= Competition. All businesses operate within a competitive environment. Knowledge check 20
w Social attitudes. Social attitudes may change over time, e.g. in the extent of
Using examples,
environmental awareness.
distinguish between
u Economic factors. Changes in interest rates and economic growth.
internal and external
= Legal/political factors. Changes in government or legislation. influences on marketing.
a Technological factors. For example, e-commerce.

Understanding markets and customers

Although external factors

The value of primary and secondary marketing research are out of the control of
the business, it is still
There are a number of key calculations related to the market that you should be able
possible to anticipate
to undertake if you are given certain information. ;
some changes and
mw Given total sales for a market and the sales for an individual firm, it is possible to be prepared for them,
calculate market share: such as a change of
sales (revenue) of individual firm government or an
Market share = x 100
total market sales increase in interest rates.
m Given an individual firm’s sales for two different years, it is possible to calculate
sales growth:
current sales figure — previous sales figure
Sales growth = x 100
previous sales figure
m Given market size for two different years, it is possible to calculate market Knowledge check 21
growth: What do you understand
current market size — previous market size by the term ‘market
Market growth = x 100
previous market size share’?

mw Given the sales of an individual firm and its market share, it is possible to calculate
total market size:
sales (revenue) of individual firm
Total market size = x 100
market share Market research The
Accurate and thorough information is essential to business success and the process of process of gathering,
gathering, analysing and interpreting information about a market, product or service analysing and interpreting
and its customers is known as market research. This takes the form of either information about a
primary or secondary research, and the data gathered may be either qualitative or market, product or service
quantitative. to be offered for sale in
that market, and about
Primary (field) research the past, present and
Primary research is new research collected directly by or for a business in order to potential customers for
answer specific issues or questions. Examples include questionnaires, surveys and that product or service.

22 AQA A-level Business

 Decision making to improve marketing performance
eee

interviews with individuals or groups of people. The big advantage of primary research
is that it can be tailored specifically to the needs of the business, but the downside is
that it can be expensive to collect.
Secondary (desk) research
Secondary research makes use of information that has already been collected.
Examples include published research reports, census information, newspaper reports
and searching the internet. The benefit of secondary research is that it is low cost and
relatively easy to collect, but it suffers from not being tailored to the specific needs of
the business.
Qualitative data
Qualitative data is based on opinion and is gathered by focus groups and face-to-face
interviews to find out not just what people think about your product or service but
also why they think it. It can be categorised but cannot be measured. Qualitative
research can tell you:
m what people, customers and prospective customers think about your product or
service
a how customers choose between different products
mw the type of marketing message that has the most impact
= how price might affect decisions
a opinions about branding, design and packaging

Quantitative data
Quantitative data is collected by asking people specific questions in a structured way Consumer profiles
using surveys and questionnaires so that you can produce hard facts and statistics to Methods of describing
help guide marketing decisions. Quantitative research can provide a business with: consumers so that they
m data that can be represented in easy-to-read charts and graphs can be grouped for
m the means of establishing consumer profiles marketing and advertising
purposes. This might be
m the ability to measure customer awareness
according to age, sex,
w the ability to determine market size
income, education level,
The most important feature of both qualitative and quantitative market research is occupation, etc.
that it helps to reduce risk for a business as it gives an indication about whether a
certain product, service or strategy is likely to be successful and can therefore save
money for the business. Knowledge check 22
Market mapping Distinguish between
qualitative and
Market mapping is a research method that identifies key customer requirements quantitative market
in a market and how existing products are positioned in that market. This can research information.
then be plotted on a map or grid that might enable a business to identify potential
gaps in the market. Figure 4 shows a market map for the supermarket industry
where the supermarkets are placed according to price (low or high) and quality
(low or high). As a result of market mapping, a business might try to reposition
itself in order to achieve greater sales (market share). Are any of the supermarkets
trying to reposition themselves as a result of the growing threat from Lidl and
Aldi?

Topics 1-6 +23

Content Guidance

A
Waitrose
Market mapping does not
only plot geographical
SUE rahe a et gaps in the market. It
| can also be used to spot
Asda | product or service gaps.

| x
2$ Aldi __ Tesco $
a <-—_——— ———— th - ~ oO
j ) =
3 Lidl _ The Co-operative Food a
i)

Iceland

Farmfoods

Y
Low quality
Figure 4 Market mapping: the supermarket industry

The value of sampling

When conducting primary market research, it is impossible to get the views and Briefly explain the
opinions of all your customers or prospective customers, so in order to overcome importance of sampling in
this problem the business interviews a sample of customers. In effect, the business market research.
studies a small group of people who are representative of a larger group. If this is done
correctly, conclusions can be drawn from the sample and applied to the whole group.
The benefit of sampling is that it is a cost-effective method of carrying out market
research. It is, however, important that any sample selected is representative of the
target consumer group and that the sample size is large enough.

The interpretation of marketing data

Positive and negative correlation
After marketing information has been collected, it is then necessary to interpret
the findings and draw conclusions. One method of interpretation is correlation: the
extent to which there is a linear relationship between two variables. A business might
wish to know whether it is worth spending more money on advertising and could
look to see if in the past there has been a positive correlation between increased
spending on advertising and increased sales. If there was a positive link, there could
be a causal relationship. However, it is important to understand that the relationship
may not always be positive; it could, in fact, be negative. Even if there is a positive
relationship, this may not mean that it will always be the case and there will always
be a limit in terms of the amount spent and the positive correlation. Figure 5
illustrates positive correlation, negative correlation and where there is considered to
be no correlation.

24 AQAA-level Business
 Decision making to improve marketing performance

Knowledge check 24

What do you understand

by the term ‘correlation’?
Sales Age
Region

id = o
te
Advertising Internet use Marketing costs

(a) Positive correlation (b) Negative correlation (c) No correlation

Figure 5 Positive correlation, negative correlation and no correlation

Confidence intervals
In market research no estimate can be 100% reliable, so a business might like to know
how confident it can be given a particular estimate. An important tool for dealing
with this problem is that of confidence intervals, which help a business to evaluate
the reliability of an estimate. This is the margin of error that a researcher would
experience if he or she asked a particular question to a sample group and expected to
get the same answer back. For example, if a researcher used a confidence interval of
5 and 65% of respondents gave a particular answer, they could be sure that between
60% and 70% of the whole population would give the same answer.
When a researcher gives a confidence level, it is an expression of how confident that
researcher is in the data collected. The most commonly used confidence level is 95%.
This means that market researchers believe that their prediction will be correct 95%
of the time. Therefore, using the example above, this market researcher would believe
that 95% of the time between 60% and 70% of the population would give a particular
answer.
m Sample size — the larger the sample, the greater the reliability. A wide confidence
interval might indicate a small sample size, although the relationship between the
two is not linear.
m Frequency of response — the greater the number who gave a particular response,
the greater the reliability.

Don’t get confused between confidence level and confidence interval. Market
researchers like to have a certain level of confidence in their result, e.g. 95%. The
confidence interval is simply the margin of error above or below a result, e.g. +/-5%.

Extrapolation
Forecasting is important to businesses because if they can accurately forecast
future sales this will enable them to reduce waste. If the business gets it wrong,
however, it could end up with excess stock or insufficient stock for demand. One
way of forecasting sales is through extrapolation, which uses known data to project
future data, for example known sales figures to project future sales. This is shown in
Figure 6.

Topics 1-6 25
Content Guidance

capacity
Production

2017 2018 2019

Year

Figure 6 Extrapolation

The value of technology in gathering and analysing data for marketing

decision making
Technology offers improved efficiency in marketing tasks and decision-making
processes, because:
a It can manage large volumes of data.
a It can provide better and faster communication with customers.
m It makes forecasting and extrapolation easier.
m It enables specific targeting of sales messages.
a Manufacturing can be linked to point of sale (POS) to respond to changing demand.
Price elasticity
The change to IT-driven direct marketing and a reliance on technology may eclipse of demand The
intuition. However, sometimes a manager's ‘gut feeling’ may be more effective in responsiveness of
making key marketing decisions, particularly when circumstances are changing demand for a good or
rapidly in the external environment. service to a change in its
price.
The interpretation of price and income elasticity of demand
Income elasticity
Elasticity measures the likely change in demand for a product or service in response
of demand The
to a change in a variable such as income or price.
responsiveness of
Price elasticity of demand (PED) measures how a change in the price of a good or demand for a good or
service affects the demand for that good or service. service to a change in
pEp = Percentage change in demand for good A income.

percentage change in price of good A

income elasticity of demand (YED) measures how a change in a consumer's
income affects the demand for a good or service.
VED = Percentage change in demand for a good
When analysing elasticity,
percentage change in real income
you should be interested
If the change in price or income leads to a greater percentage change in the quantity only in whether the result
demanded (ignoring the minus sign), then the calculation yields an answer greater is greater than 1 (elastic)
than 1. This is elastic demand. or less than 1 (inelastic). In
other words, ignore the
If the change in price or income leads to a smaller percentage change in the quantity
minus sign.
demanded, then the calculation yields an answer less than 1. This is inelastic demand.

26 AQA A-level Business

 Decision making to improve marketing performance

A knowledge of elasticity is useful for a business as not all goods and services react
in the same way to a change in price or income. Some such as bread and fuel are
For the exam, it is not
relatively inelastic in that a change in price or income is unlikely to result in any
necessary to know
great change in demand, whereas luxury items are likely to have an elastic demand
how to calculate price
to changes in price or income. Therefore, if the price of an inelastic product or
or income elasticity of
service is increased, demand is not greatly affected but revenue rises. If price is
demand, but you do
reduced, demand again will be minimally affected but revenue declines. With an
need to understand the
elastic product or service, a rise in price leads to a fall in demand and revenue but a
significance of the result.
reduction in price leads to a rise in demand and revenue.
For example, what is the
The same analysis can be made for income elasticity: a rise or fall in income has little significance of a price
impact on the demand and revenue received for inelastic goods but a more significant elasticity of demand of
impact on elastic goods. A rise in income leads to a rise in demand and revenue for —0.3 in comparison to one
income elastic goods and a fall in demand and revenue when income falls. of -2.2?

The value of the concepts of price and income elasticity of demand to

marketing decision makers
The calculation of elasticity can be a useful tool for a business when making
marketing decisions, but it is just one factor in any decision. A pricing decision is not
based on elasticity alone as other factors need to be taken into consideration, such
as the availability of substitutes, likely competitor actions, habits and brand loyalty.
Income elasticity can be used by a business to try to determine likely changes in the
level of demand for its product or service in response to changes in income, but again
this is influenced by competitor actions, habit, necessity, availability of substitutes, etc.

The use of data in marketing decision making and planning Knowledge check 25
The reason businesses collect large amounts of market research data is to help
How does arise in price
managers better understand the environment in which they operate and so improve
affect a business selling
the quality of decision making. Data enables a business to establish consumer profiles
goods or services that are
providing facts, opinions and motivational information about the consumer. This can
elastic in demand?
be the starting point for market planning and decision making and help to reduce risk
and uncertainty.

Making marketing decisions: segmentation, targeting,

positioning
The process and value of segmentation, targeting and positioning
Market segmentation is the process of sub-dividing the market into clearly
identifiable segments with similar wants or demand characteristics. The market can
be segmented in a number of ways: age and sex are probably the most obvious, but
it can also be divided by income, demographics and geographical differences. The
target market is the consumers that a business wishes to sell its products to, and
therefore to whom its marketing efforts are directed.
A clear link can be established between segmentation and targeting: having
segmented a market, the business can more clearly define its target market. This
provides the business with a number of benefits:

Topics 1-6 27
Content Guidance
PE ia Ee

mw Marketing can be aimed specifically at potential customers using media and

promotions relevant to that target group.
w This more focused approach results in a more efficient use of resources,
particularly finance.
However, there are a number of drawbacks:
m A business may ignore a particular group of potential consumers.
@ It may fail to recognise and capitalise on changing tastes and trends among consumers.
Related to segmentation and target markets is the concept of market positioning. Market positioning
This is where the marketing department creates an image for a particular product This defines where a
based on its target audience. This helps to establish a positive identity for the product —_ business’s product or
or service in the eyes of the consumer and potential consumers, encouraging them service stands in relation
to buy this product rather than others on the market. This is created by the overall to other firms offering
marketing strategy using the marketing mix. Market positioning can be illustrated by similar products and
the supermarket industry, with Waitrose positioned at the top end of the market and services, as well as in the
Aldi and Lidl at the lower end. mind of the consumer.

Influences on choosing a target market and positioning

Should the firm aim its product at a particular market segment (niche marketing)
or at the whole market (mass marketing)? Both niche and mass-marketing strategies
can meet most of an organisation’s marketing objectives. On the one hand, attracting
a mass market can increase sales and therefore provide security. On the other hand,
finding the right niche ensures market positioning and innovative products will be
able to reach new segments, as shown in Figure 7.

PS Beae Wits p aca

Figtrs 7 Niche versus mass marketing

28 AQA A-level Business

 Decision making to improve marketing performance

Making marketing decisions: using the marketing mix

Look for ways to integrate
The elements of the marketing mix (7 Ps) the different elements of
The marketing mix is the combination of marketing activities that an organisation the 7 Ps. For the sake of
undertakes in order to best meet the needs of its targeted market. Traditionally, the convenience, the 7 Ps
marketing mix was developed for fast-moving consumer goods and consisted of the 4 are taught as separate
Ps: price, product, place and promotion. As the service sectors have become more aware entities, but the marketing
of marketing, the mix has been developed to include people, process and the physical mix should be integrated.
environment. Figure 8 illustrates the mix and the aspects involved with each of the 7 Ps. Where appropriate,
look closely at the text
When developing a marketing plan, a business should consider all aspects of the
in the exam to see how
marketing mix as they are interlinked. For example, does pricing reflect the quality of
the different Ps need to
the product? Does the choice of promotion reflect the distribution of goods?
work together. The mix is
influenced by factors such
as those given here, the
market segment(s) being
targeted and the actions
of competitors.

4 TARGET MARKET ,

Figure 8 The 7 Ps of marketing

The influences on and effects of changes in the elements of the

marketing mix
The success of the marketing mix depends on ensuring that all the elements come
together and are fully integrated. Many factors influence the elements of the mix.
= Market research results may determine the price a business charges for its
products or services and the places where these are sold.
@ Availability of finance may influence the amount of money spent on promotion
and product development.
_® New technology may influence how often the product needs to be updated or
whether it is made available for sale over the internet.
Topics 1-6 29
Content Guidance
EE ae 8 2 ee Ese ene 6h

= The type of product may also have an influence — a convenience good will be
marketed differently from a luxury product.
Not all marketing involves individual customers. Manufacturers buy raw
materials from other companies. Retailers tend to buy their products directly from
manufacturers. These activities are known as business-to-business (B2B) transactions.
Persuading a business to buy products requires different approaches to those needed
when targeting individual customers. This is known as business-to-business marketing
— the main features of which are as follows:
mw Transactions are much larger.
m Buyers and sellers have more specialist knowledge.
u The buyer's reputation often depends on the quality of the product purchased from
the seller, so there may be more emphasis on this aspect.
m Promotions and advertisements tend to be more informative than persuasive, as
buyers tend to base their decisions on factual information.
m= Customer service is vital because poor service tends to become well known more
quickly than in consumer marketing.

Product decisions
Product portfolio analysis What does the Boston
Matrix show and what can
The aim here is to create a balance of products with widespread appeal. The Boston
Matrix shown in Figure 9 is the usual way of showing this strategy. it be used for?

Market share
High Low

High

growth
Market
Low

Figure 9 The Boston Matrix

Firms aim to produce products with a high market share (‘cash cows’ if market growth is
low; ‘stars’ if the market is growing quickly). They need to think carefully about retaining
products with a low market share (‘dogs’ or ‘problem children’). Dogs, however, should not
always be written off too lightly. Cadbury’s Whole Nut, for example, could be seen as a
dog because it has only a 1% share of a low growth market (confectionery). However, this
still represents almost £40m in sales per year. Market mapping (see p. 23) can be used to
investigate a product range to see if there are any market segments to which the product
does not appeal and new products can be tailored to fit any gap that is discovered.
Product life cycle
The product life cycle describes the various stages a product goes through from when
it was first thought of through to its eventual decline. This concept can be linked
30 AQA A-level Business
 Decision making to improve marketing performance

to the Boston Matrix as a firm should aim to have as many products in growth and
maturity as possible. Such products are the stars and cash cows. To achieve this in
the long term, the firm needs to have a policy of new product development so that it
always has products in the introduction and growth stages, ready to bring to maturity
when required. Figure 10 illustrates this product life cycle.

‘Sales revenue, |
cash flow (£) |

Figure 10 Stages in the product life cycle

In order to keep products in maturity — the most profitable stage of the product life
cycle — extension strategies are used. Examples of extension strategies include:
attracting new market segments
increasing usage among existing customers
modifying the product
changing the image
targeting new markets
introducing new promotions, advertisements and price offers
The business also wants to make its product or service stand out from competitors
as this will give it a competitive advantage. This might be achieved by establishing
a unique selling point (USP). If a firm can improve customer awareness and
goodwill through making its product different from rival products, it can increase
both its sales volume and price. As a result, customers are less likely to stop buying
the firm’s product.
New product development
Product is the central feature of the marketing mix. The key elements are:
= Design of a product. To the consumer this means reliability, safety, convenience of
use and whether it is fashionable, aesthetic and durable. To the organisation, the key |Exam tip |
elements are whether the product satisfies consumer tastes, the financial viability, its
Consider whether the
effect on reputation and whether the company can produce it without difficulty.
product or service offered
= New product development. You need to know the stages involved in introducing
by the organisation in
a new product (from initial screening to the final launch), as well as linking new
the scenario has a USP,
product development to the product life cycle, Boston Matrix, mind showering (also
or whether a USP could
known as ‘brainstorming’), market research and R&D (research and development).
be developed by the
These are the sources of new product ideas. Organisations must be prepared to
organisation, and build
respond to the actions of competitors by developing new products and/or adapting
this into the development
existing products through the use of extension strategies. This ensures that they
of your answer.
retain market share.

Topics 1-6 31
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ee el eee

Factors influencing new product development include:

Technology
m New technology allows the development of new products that are considered
superior to existing products.
w Technology can lead to the development of totally new products.
m Production technology has advanced considerably, enabling organisations to
produce goods and services that are more advanced and cheaper to produce.
m Businesses can more easily produce goods and services that are made to the
individual specifications of the consumer.
m Technology now allows companies to be more aware of consumer tastes.
Competitors’ actions
m The introduction of a new product by a competitor may take away market share,
forcing a business to respond.
= New products from competitors can give a business ideas for its own new products.
Entrepreneurial skills of managers and owners
If an entrepreneur is the first to spot a gap in a market or think of a potentially
successful idea, his or her business can gain first-mover advantage.

Pricing decisions
The factors that influence price are based on the forces of demand and supply.
Demand factors include the nature of the product, consumers’ incomes, competitors’
products, tastes and fashion. Supply factors include costs of inputs (mainly raw
materials and wages), technology, production methods and environmental conditions.
The type of market is crucial too: the number of competitors influences a firm’s
pricing and its power to set prices depends on its market share.
When considering pricing decisions, it is useful to know the difference between
pricing strategies and pricing tactics. There are overlaps between these
classifications, but a simple distinction is outlined below.
Pricing strategies
Pricing strategies are adopted over the medium to long term to achieve marketing
objectives. Such strategies include:
m= skimming pricing — a high price is set to yield a high profit margin
™ penetration pricing — low prices are set to break into a market
w price leaders — large companies that set market prices, which are then followed
by price takers (smaller firms)
price takers — small businesses that tend to follow the prices set by other firms
(price leaders)
Pricing tactics
Pricing tactics are adopted in the short term to suit particular situations. Examples of Knowledge check 27
such tactics are:
With the use of examples,
w loss leaders — very low prices that are used to encourage consumers to buy other,
explain the difference
fully priced, products
between skimming pricing
m psychological pricing — prices that are set to give an impression of value (for
and penetration pricing.
example, £99 rather than £100)
32 AQA A-level Business
 Decision making to improve marketing performance
——$—$—$—$—<—
Oe

Influences on pricing decisions

Firms need to consider their costs. This may lead to the use of a cost-plus pricing
method. This is where the firm calculates its unit costs and then adds on a mark-up.

Elasticity of demand may also be considered when making pricing decisions.

Technology also has an influence on pricing as with e-commerce a business is able
to change prices regularly, e.g. airlines, hotels and many retailers.

Decisions about the promotional mix

Promotion attempts to draw consumers’ attention to a product, brand or company. It
can be above-the-line or below-the-line:
m above-the-line — advertising through media, such as newspapers, television, radio,
cinema and posters
m below-the-line — all other types of promotion, such as public relations, branding,
merchandising, sponsorship, direct marketing, personal selling and competitions
Advertising can be informative or persuasive. In general, advertising aims to raise
awareness, publicise changes and new products and increase brand loyalty. Other
promotions (except public relations and sponsorship) tend to be more targeted, trying
to clinch the final purchase through special offers, persuasive selling or point-of-sale
displays. Companies tend to plan advertising and promotions that support each other.
The promotional mix
This consists of the various methods of promotion used in order to achieve overall
marketing targets. A key element in this is branding — the process of differentiating
a product or service from its competitors through the name, sign, symbol, design or
slogan linked to that product. By establishing a recognisable brand, a business creates
a perception of a product or service that consumers trust and have confidence in.
This gives consumers a reason to choose that particular product or service instead of
a competitor's, and so enables the business to increase sales. As a result, price may be
more inelastic and it could be easier to launch new products under that brand name.
Other elements involved in the promotional mix are:
= Public relations (PR) — this involves gaining favourable publicity through the media.
= Merchandising — attempts to persuade consumers to take action at the point of
sale (POS), also known as the point of purchase (POP), are known as merchandising.
Examples include shop displays, sampling opportunities and special offers.
= Sales promotions — short-term incentives used to persuade consumers to
purchase. Popular methods include competitions, free offers, coupons, three for the
price of two promotions, BOGOF (buy one, get one free) offers, introductory offers,
product placement (featuring a product in a film or television programme), credit
terms and endorsements by famous personalities.
® Direct selling — this takes three main forms:
— direct mail — promotions that are sent directly to the customer/person who has Knowledge check 28
been targeted
What do you understand
— telephone — many companies use telephone contact as it is easier to
by the term ‘promotional
communicate directly with the customer
mix’?
— door-to-door drops — promotions that are delivered directly to houses

Topics 1-6 33
Content Guidance
i SS ss sss ssssss sss ss sss

m Personal selling — particularly important in commercial marketing, where a

company’s sales force contacts other firms that are seen as potential customers.
u Advertising — the main media used are:
— television
— radio
— cinema
— national and regional newspapers
— posters
— magazines
— internet and other electronic media.
When deciding what form of promotion to choose, a business considers the following
factors:
m objectives of the campaign
™ costs and budgets
@ the target market
B legal factors
a customers’ views

Always read questions carefully as identifying the key focus of the question
ensures your answer is fully focused. For example, when answering a question on
the promotional mix, don’t confuse it with the marketing mix.
——

Distribution (place) decisions

This involves getting products to the places where customers can buy them. Shops
do not give space automatically to suppliers: many sales people are employed to
persuade retailers to stock a product rather than trying to persuade customers to buy
it. Customers cannot buy it if retailers do not stock it.
Traditionally, the method of getting a product from producer to customer was:
producer > wholesaler > retailer > consumer
Many companies bypass the wholesaler and it has also become possible to bypass the
retailer. The growth of the internet and e-commerce has had a significant impact on Knowledge check 29
the way consumers do their shopping. What do you

On the other hand, many businesses use multi-channel distribution: their products understand by the term

are available not only through retailers but also directly to the consumer using the ‘e-commerce’?
internet, mail order or telephone.
Factors influencing the method of distribution include:
m type of product
® geography of the market
= complexity of the product

34 AQAA-level Business
 Decision making tc improve marketing performance
——$—$— —$—$—$—————

Decisions relating to other elements of the marketing mix: people,

process and physical environment
People
People are the most important element of any service or experience. First impressions
are important and the person who picks up the telephone to any enquiry or serves the
consumer in a shop or café can in an instant make or break a sale. The reputation of a
business rests with the people involved with it and the customer service it provides so
it is essential they are well trained and motivated.

As the course progresses, try to identify links between these ideas and others such
as ‘finance’, ‘people’ and ‘operations management’, and in the exam try to integrate
these elements to show your depth of understanding.

Process
This involves how the products get to the customers and in the past customer
experience has come under the function of operations. However, as customer
experience can affect the success of marketing decisions, it has now become part of
the marketing mix. Whether the service provided is efficient or not can have a big Knowledge check 30
effect on the level of sales.
Why have the 3 Ps of
Physical environment people, process and
This relates to the actual environment of a shop or restaurant: where it is located and physical environment
how it looks have a big impact on a consumer's decision to use it. It also relates to the become an important
ease of use of a website and how realistic the products look. consideration in the
marketing mix?
The importance of and influences on an integrated marketing mix
The marketing mix refers to all the ingredients of marketing (the 7 Ps) and can be B2B Business to
likened to the ingredients of a recipe. All the ingredients are necessary for the success business. Where a
of the recipe and they must be integrated in the right way, but subtle changes can be business sells to other
made to suit its appeal for different groups. This is the same with the marketing mix: businesses.
all the ingredients are necessary and must be integrated, but it is possible to make B2C Business to
subtle changes in the mix to change the appeal of the product or service or to respond consumer. Where a
to changing circumstances. business sells directly to a
Possible influences on the marketing mix include: consumer.

the position in the product life cycle

the position in the Boston Matrix Knowledge check 31

the type of product Identify two ways in which

the marketing — B2B or B2C the marketing mix might
the marketing objectives change as a product
moves from growth to
the target market
maturity in the product life
competition
cycle.
market conditions and positioning

Topics 1-6 35
Content Guidance
(UU

Understanding the value of digital marketing and e-commerce Digital marketing

Marketing that makes use
Developments in technology have had a significant impact on business marketing
of electronic devices such
function. The power of social media cannot be underestimated and from a business point
as personal computers,
of view it can have both positive and negative impacts. If a business can tap into this with
smartphones, tablets
its digital marketing, it can be a cost-effective way of boosting sales. However, on the
and games consoles to
downside a business's reputation could be damaged quickly via social media.
engage with customers.
In addition, greater contact is established between consumers and business, for
example with the ability of customers to write reviews of products or services
purchased. Other benefits of digital marketing include the ability to gather more
detailed information about consumers and to build relationships with them: for Knowledge check 32
example, Amazon continuously recommends products based on a consumer's past
Outline two benefits of
shopping purchases. Digital marketing also makes it easy for any business to set up
using e-commerce.
and sell almost anywhere in the world.

Digital marketing can have great benefits for a business, but it can also have significant
drawbacks. For example, there is little control over customer reviews, which can seriously
harm a firm’s reputation. Customers are also at the mercy of the internet where viruses and
hackers can cause problems for both business and consumer.

In this section you need to know about:

The purpose of marketing.
Marketing objectives: the value of marketing objectives and the internal and
external influences on them.
Understanding markets and customers, including primary and secondary
research; the calculation of market share size and sales growth; interpretation
of data (correlation and extrapolation); price and income elasticity of demand;
the use of data in decision making; the value of technology.
Making marketing decisions, including the process and value of
segmentation, targeting and positioning; the influences on choosing a target
market and positioning, e.g. niche v. mass marketing.
The marketing mix in decision making, including the 7 Ps and influences
on them; product decisions; the Boston Matrix; product life cycle and new
product development; the promotional mix; pricing, including skimming and
penetration pricing; place, people, process and the physical environment.
The importance of an integrated marketing mix.
The value of digital marketing and e-commerce.

36 AQA A-level Business

 Decision making to improve operational performance

B Decision making to improve Knowledge check 33

What do you understand

operational performance by the term ‘operations

management’?
Operations management is concerned with converting materials and labour into goods
and services in the most efficient manner possible in order to maximise the profit of a
business. In other words, it is about providing customers with products and services in
the most efficient way possible.

Setting operational objectives

Operations management turns inputs into outputs with the aim of adding value, Added value The
which is essential for a business to make a profit. The value of the output (product or amount added to the
service) should be greater than the value of the inputs needed to produce it. Added value of a product or
value is the difference between the price of a finished product or service and the cost service, made up of the
of the inputs involved in making it. Adding value is therefore one of a number of aims difference between the
of operations management. cost of producing it and

Operations management is no different to other functional areas in that it has its own the amount received when

set of objectives, which will be SMART. The attainment of these objectives leads a itis sold.

business towards achieving its overall business long-term goals. Further examples of
operational objectives are:
= Costs — relates to efficiency and includes productivity, unit cost of production and It is not only operations
capacity utilisation. ; management that adds
m Quality — relates to the whole process of producing and selling in terms of value. Marketing can too.
wastage, defect rates, reliability and customer complaints.
= Speed of response and flexibility — relates to how quickly a business can Lead time The time
respond to changes in demand, e.g. in terms of order lead times. it takes from ordering
ms Dependability — this is the reliability of the business. stock to when the order is
received by the customer.
= Environmental objectives — relating to the amount of packaging used, energy
efficiency, waste disposal and the use of sustainable resources.
Knowledge check 34

The value of setting operational objectives Outline briefly how

environmental concerns
Operational objectives are important for a business for a number of reasons:
have an impact on
= They promote efficiency and can make savings in terms of time, money and less
operational objectives.
waste,
m Unit costs may be reduced as a result of the efficiencies gained.
Profitability is therefore likely to improve. Knowledge check 35

m Those responsible for achieving the objectives may benefit from increased Identify four reasons
motivation. why it is important
m Evaluation of the objectives set may be used as a measure of achievement. for a business to set
operational objectives.
External and internal influences on operational objectives and decisions
Operations managers do not operate in isolation. Any decisions made will have
implications for the other functional areas of the business and may be affected by the
wider external environment.

Topics 1-6 37
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Diss

External
External influences usually involve the following factors.
Political or legal influences
Businesses always have to be aware of the legal environment and potential changes in
legislation. With greater awareness of health and safety and environmental issues, changes
to legislation in these areas could have a significant impact on operational objectives.
Economic influences
Changes in the economic environment can impact on operational objectives as
demand is likely to fluctuate with changes in the economic cycle. Added to this is the
effect of greater globalisation, which enables businesses to source both supplies and Globalisation The
produce from almost anywhere in the world. tendency of businesses
to move beyond domestic
Technological influences
and national markets to
These have had a tremendous effect both on the way consumers purchase goods and
other markets around the
services and on production. The advent of the internet has led to consumers who are
globe, thereby increasing
more aware and demanding in terms of price, quality and customer service. There
the interconnectedness of
are apps for just about anything and the growth of social media influences operations
markets and businesses.
objectives. Not only has technology influenced consumer awareness, it has also
had a profound impact on the production of goods and services. Production can be
undertaken with the use of robots, the process of innovation is quicker, books and
newspapers can be read online and music and films simply streamed or downloaded.
Competitive influences
Greater awareness means a business has to work hard to maintain customer loyalty.
This places pressure on operations to maintain levels of quality, reliability and
customer service.

Internal
Internal influences are usually studied in terms of other functional areas: Corporate objectives
= Finance — as any operational decision is likely to involve considerable investment, The overall business

the availability of finance is a key influence. objectives that influence

strategic decision making
m Marketing — it may be that the marketing activities of a business determine the
and towards which each
quantities produced and the type of good manufactured.
functional area (operations
= Human resources — it is likely that the skills of the workforce determine the
management, finance,
quality and numbers produced. This emphasises the importance of the workforce.
marketing and human
As well as the above, the overall corporate objectives are also likely to influence resources) will work.
operational objectives.

Analysing operational performance

Interpretation of operations data
As with other objectives, operational objectives should be measurable, enabling Productivity A measure
managers to analyse and interpret the results. Four main areas are outlined in the of the efficiency of a
AQA specification and we will look at each of these in turn: person, machine, factory,
m labour productivity ™@ capacity ; etc. in converting inputs
™ unit cost (average cost) ™ capacity utilisation into useful output.

38 AQA A-level Business

 Decision making to improve operational performance
——$—S
see ——

Calculation of operations data

Labour productivity
This relates to the efficiency of individual workers and is of interest to human
resources as well as operations managers. It is a measure of the output per worker in a
given time period and is calculated as follows:
output per time period
Labour productivity =
number of employees

Therefore, if an output of 3,000 units is achieved in a given time period by 25

workers, the labour productivity is 120.
Unit cost (average cost) 'Exam tip|
This is the cost of producing one unit of output and is sometimes referred to as
average cost of production. It is calculated as follows: ss Rey ASL e
calculate unit cost for
; total cost of production a business producing
Unit cost = ———___—_#£!
output a single product, but
more difficult for a multi-
Therefore, if the total cost of producing 3,000 units of output is £90,000, the unit cost
product firm.
is £30.
Capacity
This refers to the maximum output possible for a business in a given time period.
Using the example above, although production is 3,000 units it may be possible for a
business to produce 4,000 units in the same time period. Therefore, 4,000 units is its
maximum capacity. However, there is no point in producing at this level unless the
demand exists, as otherwise this would incur unnecessary costs.
Capacity utilisation
Capacity refers to the total possible production in a given time period, but capacity
utilisation measures what percentage of that capacity is actually used. It is calculated
as follows:
actual output per time period
Capacity utilisation = x 100
maximum possible output per time period
In the example above, if maximum capacity is 4,000 units and actual output is 3,000
units, capacity utilisation is 75%.

The use of data in operational decision making and planning

Data can be useful in making operational decisions and, with the greater use of
technology, they can be easier and quicker to identify and collect. The analysis of
operational data enables problems to be spotted at an early stage. This might be
in terms of productivity, unit costs or capacity utilisation. If demand is shown to
be increasing, it may be necessary to find some way of increasing capacity to avoid
problems of lack of capacity. If unit costs are increasing, an analysis of why may
enable corrective action to be taken. If an early indication of falling productivity is
shown, it may be possible to take corrective action before it becomes a real problem.

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Content Guidance

Operational data are likely to be a starting point for any operational decisions that are
made and therefore have an important role to play in decision making.

Making operational decisions to improve performance:

increasing efficiency and productivity
Operational efficiency is defined as the ratio between the inputs to run a business and
the outputs gained. The aim is to achieve the greatest amount of outputs from the lowest
amount of inputs without compromising other aspects such as quality or customer service.
When looking at
The importance of capacity capacity utilisation, it is
It is important for a business to have the right level of capacity. If it has too much important to look at the
spare or excess capacity, this represents wasted resources as it will be paying for space circumstances of the
it is not using which will have an impact on unit cost. If, however, it is operating at individual business. Has
full capacity, the business will be unable to take on new orders and could miss out on its capacity utilisation
valuable sales and may even damage its reputation. been rising or falling?
How has it performed
How to utilise capacity efficiently against an industry
Capacity utilisation in the UK averaged 72.82% from 1958 to 2018 and was at its average? Any judgement
highest (85.2%) in 1988. Ideally, a business requires a level of capacity utilisation as made must be in context.
close to 100% as possible but in practice this is unlikely for most firms. However,
having some spare capacity is advisable as this gives the business the flexibility to be Knowledge check 37
able to take on new orders. For some businesses, demand may be seasonal, resulting
What do you understand
in working flat-out at certain times of year while having spare capacity at other times.
by the term ‘excess
An individual business, therefore, will be aware of its optimal and most efficient level
capacity’?
of capacity utilisation and will aim to operate at this level.

The importance of efficiency and labour productivity

The efficiency of a business might be improved by increasing labour productivity, i.e.
the output per worker. This might be achieved by getting a greater output from the
existing workforce in the same time period, but this requires a market and demand
for the extra output. On the other hand, it might be achieved by producing the same
level of output from a smaller workforce. In both cases, the cost of labour per unit is
reduced (assuming labour costs do not change). Labour productivity is a key figure,
particularly in businesses that rely on a high proportion of labour in production. Knowledge check 36
Improvements in productivity have a significant impact on efficiency.
Distinguish between
capacity and capacity
How to increase efficiency and labour productivity utilisation.
Labour productivity can be improved in a number of ways:
m Reduce the labour force. If the labour force can be reduced while maintaining
the same level of production, productivity will improve.
m Invest in technology. Many operations in manufacturing are undertaken by
machines and robots. In the service industry, examples such as online banking reduce
the need for labour, thereby improving the productivity of the remaining staff.

40 AQA A-level Business

 Decision making to improve operational performance

= Improve training and motivation. Increasing the skill set of workers may make Knowledge check 38
them more efficient and, if this is linked to motivation and reward, productivity
List four ways in which
may be improved.
labour productivity may
= Job redesign. This can also have an impact on productivity as changing the way
be improved.
things are done can make the whole process more efficient.

Difficulties of increasing efficiency and labour productivity

Although improving labour productivity might seem a straightforward aim in theory, it
can lead to significant difficulties: Whether or not
m Quality. Increasing the output per worker may compromise other factors such as productivity
the quality of a product or service. improvements can be
m Resistance of employees. Productivity increases may be resisted by employees made effectively depends
who fear they may result in redundancies. on the circumstances of

w Costs. It is also possible that workers may demand pay increases in recognition of the individual firm and the

their improved performance or to reward new skills developed through training. costs involved.

The benefits and difficulties of lean production

Lean production is about getting more from less. It involves eliminating waste and, Lean production
where possible, using fewer materials and less labour, space and time. It is about Means getting more
making the organisation more efficient and, in turn, reducing costs. There are perhaps from less by cutting out
four aspects of lean production: waste in terms of labour,

m Just-in-time (JIT) production, where materials are received just as they are materials, space and time.

needed for production, eliminating the need for large levels of stock. Just-in-time (JIT)
= Time-based management, which aims to reduce the time wasted in operations, A strategy that some
through faster product development and shorter lead times. companies employ
= Total quality management (TQM), which is a quality assurance ideal where in order to increase
all workers have responsibility for getting it right first time. (See p. 44 for more efficiency and decrease
information on quality assurance.) waste by receiving
= Continuous improvement, which is a culture where all workers are involved in goods only as they are
making improvements in production and quality. needed in the production
process, thereby reducing
Lean production can be applied both to manufacturing and the service sector and inventory costs.
brings with it a number of efficiency benefits. These include improved productivity,
reduced waste and improved customer service.
The AQA specification makes specific reference to just-in-time operations, where
materials are received as they are required for production or needed for sale. Such a
system places a greater responsibility on employees, not just for ordering and ensuring
sufficient materials arrive but also in terms of flexibility in adjusting to variable levels
of demand. There are a number of benefits of using just-in-time:
= Reduced costs. Less space is needed for storage, fewer workers are required for
looking after stock and there is less wastage due to damaged stock. Less money
is tied up in holding stock, so the business's cash flow position is likely to be
improved.
= Greater motivation. There is greater worker participation in decision making and
jobs are likely to be more interesting and carry more responsibility as a result.

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ooo
ee

There are a number of drawbacks in adopting a lean production approach:

= Loss of production. If there is any interruption in the supply chain, materials
may not arrive on time. This might be because of weather disruption or problems in
the supplier's production process i.e. when a tsunami struck Japan in March 2011,
destroying many supplier firms to the car industry. It is one of the major problems
that could result from the UK leaving the EU without a withdrawal agreement.
u Reliability and flexibility. Tremendous trust is put in suppliers by such a system.
This is not just based on their ability to supply reliably and be flexible, but also
their ability to produce goods of a consistently high quality.
m= Bulk purchase savings. These may not be available as each order will be for a
small quantity.

Knowledge check 39
It may be that a business will not lose out from not buying in bulk. This is because through Outline two benefits
the course of a year it is still likely to order the same amount and, theoretically, the supplier and two drawbacks of a
should also benefit from a lower requirement for storage space. just-in-time approach to
production.
How to choose the optimal mix of resources
The inputs needed in business are often referred to as the factors of production.
These are the resources used in the production of goods and services. They include:
g land — the physical land and the natural resources of the planet
w labour — the staff who work in a business
m capital — the machines and equipment used in a business
m enterprise — the skill of combining the other factors of production
When considering the optimum use of resources, it is usually in relation to the mix
of capital and labour. Some businesses may put a great emphasis on capital (capital
intensive), whereas others place more emphasis on labour (labour intensive).
The car industry is a capital-intensive industry in which money has been invested
in technology and robots for mass production. This brings higher productivity and
efficiency in terms of reducing human error and wastage but comes with a high initial
cost and, unlike labour, lacks flexibility and creativity.

An example of a labour-intensive organisation is a restaurant or hotel that is heavily Knowledge check 40

reliant on customer service. Its staff can be used flexibly according to demand: they
Distinguish between
can tailor-make products, add personal touches and give feedback on production.
capital-intensive
Along with labour, however, comes the potential for labour-relation problems: workers’
and labour-intensive
efforts can be inconsistent, in the long term they can be more expensive and there
production.
may be problems acquiring workers with the correct skills.
The optimal mix of resources depends on a number of factors:
u The type of product being made. Mass-produced products are likely to be more
capital intensive, whereas those aimed at a niche market may be more labour intensive.
u The size of the business and finance available. Smaller businesses may not be
able to justify investment in large items of capital equipment.
u The nature of the industry. A service industry such as-the hotel trade is more
likely to be labour intensive as customer service is paramount.

42 AQA A-level Business

 Decision making to improve operational performance
——
eee

How to use technology to improve operational efficiency

Technological developments have had a significant impact on all aspects of business,
research and development, production and sales. This influence has been apparent
in every sector, making operations more efficient. Computer-aided design (CAD)
and computer-aided manufacture (CAM) make innovation quicker and manufacture
more accurate, reducing wastage and improving quality. Computers enable quicker
communication and large amounts of data to be stored and processed. Goods and
services can be purchased online at the touch of a button. Information can be spread
via social media in an instant. Technology continues to develop, enabling further
efficiencies. Providing a business has the finance to invest and the skills to use the
technology, the benefits in terms of efficiency are enormous:
a Cost reduction — this can be achieved in manufacturing due to less waste,
speedier production and reduced labour. It can be achieved in the service sector in
terms of online sales, reducing the need for high street shops and sales assistants.
a Flexibility — this might be in production, for example car manufacturers can
build cars specifically to meet customer requirements for colour and extras.
= Innovation — this may speed up processes, resulting in new products becoming
available sooner.

Making operational decisions to improve performance:

improving quality
Quality is a measure of excellence — the state of a product or service being free from
defects, deficiencies and significant variation. It requires a consistent commitment to
set standards to satisfy consumer requirements.

The importance of quality

Most businesses operate in a competitive environment, which means that consumers
Knowledge check 41
have a choice when it comes to the purchase of a good or service. As a result,
businesses look to gain a competitive advantage, which means that consumers choose Define the term
to buy their product or service over others that are available. Having a high quality ‘competitive advantage’.
product or service is one way of achieving this. Quality might be in the form of:
m the reliability of the product or service
m the customer service provided, including after-sales service Some businesses might
m having a superior product or service put greater emphasis
The importance of quality is in creating a happy consumer who, having purchased on aspects other than
a product or service once, will have no hesitation in purchasing it again or quality — such as price
recommending it to friends and family. A business may therefore aim for ‘quality this — and attempt to gain a
time, next time and every time’. competitive advantage
through value for money
Methods of improving quality rather than overall quality.

A manufacturing business might use the following measures of quality:

= amount of wastage
= number of returns
= number of complaints
In the service sector, punctuality and time taken to serve a customer could be used.
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Targets for improvements in any of these areas might therefore be set in an attempt Quality assurance
to improve the overall quality of a product or service. The main methods used for A system that aims
improving quality and achieving targets would be through a quality control or to achieve or improve
quality assurance system. There is no requirement in the AQA specification for an quality by organising
understanding of quality control, but it is worth outlining and comparing with quality every process to get the
assurance, which is required. product or service right
first time and prevent
Quality control involves physical inspection by a quality controller to check both
mistakes happening.
materials received and completed work. Such a system aims to prevent faulty goods
reaching the consumer.
Knowledge check 42
Quality assurance, on the other hand, is the responsibility of all workers. It occurs Identify four possible
throughout the production process and is concerned with trying to stop faults measures of quality.
happening in order to achieve zero defects. With all staff responsible for this system,
quality should be more consistent with less wastage and greater involvement and
Kaizen A Japanese
motivation of the workforce. There are a number of ways of achieving quality assurance:
term meaning continuous
m Kaizen is a Japanese business philosophy based on making positive changes on improvement and an
a regular basis. In practice, it means that all team members in all parts of the approach to work that
business are continuously looking for ways to improve operations. This results in a seeks to achieve small
culture that encourages participation and involvement. incremental changes in
= Total quality management (TQM) occurs where there is a culture of quality processes in order to
running through the organisation and involving the whole workforce. Its aim is to improve efficiency and
get it right first time. quality.
Underlying these methods of improving quality is having the right attitude and Total quality
having the commitment to quality while giving employees the skills and freedom to management (TQM)
participate in the quality process. A comprehensive and
structured approach
to organisational
TQM should not be viewed as a separate approach from Kaizen; Kaizen can be seen as management that
part of a TQM process. seeks to improve the
quality of products and
The benefits and difficulties of improving quality services through ongoing
Improving quality can bring with it a number of benefits. refinements in response

m Increased sales due to an enhanced reputation. to continuous feedback.

= Lower costs as a result of less wastage and fewer returns.

Knowledge check 43
w A unique selling point (USP) may be established as a result of high quality.
m A firm may gain a competitive advantage leading to consumer brand loyalty. Why might the attitudes
of employees cause
Improving quality seems easy in theory, but in practice it may be difficult to difficulties in improving
implement. There are a number of obstacles that need to be overcome: quality?
w The attitude of employees is important as they can be resistant to change. They
may not believe there is a problem and may see any change as a threat to job
security. If their responsibilities are increased, they may seek a higher reward.
m There may be problems with finance because improving quality does not come without
some financial cost. The cost of training and the technology required can be high.

44 AQA A-level Business

 Decision making to improve operational performance

The consequences of poor quality Knowledge check 44

If a business does not address issues of poor quality, there could be far-reaching and Explain why ‘a business
damaging consequences: ignores quality issues at
m Sales — poor quality is likely to have an impact on sales as consumers might its peril’.
purchase a product once but they would be unlikely to make repeat purchases.
= Costs — these are in terms of waste, returned products and extra time spent on
administration and repair. As a result, unit costs may begin to increase.
= Reputation — a good reputation can be destroyed overnight.
m= Waste — in terms of materials and poor quality products but also time and space.
As sales decline, so will capacity utilisation. Assets are not used efficiently and
labour may become idle, resulting in layoffs and potential labour-relation problems.
In today’s competitive global environment, a business ignores quality at its peril.

Making operational decisions to improve performance:

managing inventory and supply chains
Inventory Also known as
Inventory is the business term used for stock. A business might hold inventory in the
stock, this is the goods or
form of materials for production, materials that are in the process of being produced
materials that a business
(work in progress) or finished products. The supply chain encompasses the steps
holds for the ultimate
it takes to get a good or service from the supplier to the consumer. Supply chain
purpose of resale or
activities transform natural resources, raw materials and components into finished
repair.
products that are delivered to consumers.
Supply chain The
Ways and value of improving flexibility, speed of response and network of businesses
involved in getting a
dependability
product or service
When buying a product, consumers (whether B2B or B2C) look for the following to the consumer. In
characteristics. manufacturing, for
Flexibility example, the supply chain
includes sellers of raw
The ability to be flexible may give a business a significant advantage, whether it
materials, manufacturers,
is a supplier who is prepared to accept varying orders rather than a set order each
wholesalers and retailers.
month or a manufacturer who is able to tailor production to a consumer's exact
requirements. The process of tailoring a product to consumer requirements is known Mass customisation
as mass customisation and is now apparent in many industries. For example, A marketing and
when buying paint it can be mixed in the shop to give an exact match to a consumer's manufacturing technique
sample. Again, closer links with suppliers and improvements in communication and that combines the flexibility
technology may be the key to improvements in flexibility. of personalisation that
comes with custom-made
Dependability/reliability goods with the low unit
Dependability can mean that a business starts and finishes a particular job at a costs associated with
set time. Whether it is the supply of materials, the supply of a finished product mass production.
or the provision of a service, it is essential that things happen at the appointed
time. Any disruption has implications for the business. If supplies do not arrive on
time, production may be delayed; if a consumer does not receive goods on time, a
business's reputation may be damaged; if the installation of new equipment is delayed,
production may be disrupted. Therefore, dependability is important as any breakdown

Topics 1-6 45
Content Guidance

could have significant cost implications. Improvements could be made through closer
relationships with suppliers and consumers and the introduction of communication
Whether a business needs
technology.
to make improvements
Speed of response in these areas depends
Consumers require and expect a quick response to any order or request and again this on the nature of the
can be achieved by businesses establishing close relationships with consumers and business. In producing
improvements in communication technology. a luxury car such as an
Aston Martin, speed of

How to manage supply to match demand and the value of doing so response may not be that
crucial but flexibility might
A business wishes to maximise its sales and key to this is matching supply to demand.
be, in terms of colour and
If it runs out of stock and cannot satisfy demand, sales revenue and potential profit
accessories.
are lost. If it produces.too much, there will be costs associated with storage and
wastage, reducing potential profit. There are a number of ways in which an operations
manager might match supply to demand:
m Flexible workforce. This might be achieved by employing part-time or temporary
staff or by employing staff on zero-hours contracts. This way, employment can
be increased easily to cope with sudden increases in demand. Similarly, having a
workforce that is multi-skilled may enable the business to cope with fluctuations in
demand.
= Increase capacity. This might be a long-term solution if any increase in demand
is seen to be permanent rather than a temporary or seasonal variation.
m Produce to order. This is where a business produces a product only when
an order has been received. Examples of this are tailor-made suits, aeroplane
construction or a meal in a restaurant. It would not be suitable for every business
and requires a skilled and flexible workforce.
# Outsource production. Also sometimes called subcontracting, this is where
another business is tasked with producing products. Although outsourcing enables
a business to satisfy demand quickly, it does have some problems. (See p. 48 for
more information on outsourcing.)

Influences on the amount of inventory held

Inventory refers to the stock held by a business and it is important in order to ensure
that customer orders may be satisfied quickly and efficiently. There are a number of
influences on the amount of inventory held:
@ nature of the product
m@ nature of demand
@ opportunity cost

It is important that inventory is managed carefully and therefore an inventory control

chart might be used, as shown in Figure 11. The features of this chart include:
m Buffer inventory — the minimum amount of inventory (stock) that a business
wants to hold. This is to cover for emergencies such as supplies not arriving on time
or a sudden and unexpected increase in demand.
= Reorder level — the level at which a new order for stock is made. It depends on the
lead time and buffer inventory.

46 AQA A-level Business

 Decision making to improve operational performance
_—[{$—_—$—$
EEE —

m Lead time — the time it takes from the order being placed to actual delivery of
stock. The lead time determines when an order has to be placed in order to prevent
the stock level going below the buffer inventory.
Reorder quantity — the amount that is reordered at any particular time.

Maximum stock level

level
Stock

Reorder
quantity

Buffer
inventory

Time

Figure 11 An inventory control chart

The result of having an effective inventory control system is that orders are made and Knowledge check 45
supplied on time and that demand is predictable. Distinguish between
buffer inventory, reorder
Influences on the choice of suppliers level and reorder quantity.
When deciding on which supplier to use, the operations manager considers a number
of factors:
= Quality — good quality, reliable materials and components.
The relative importance of
= Cost — having the right quality at the right price and with attractive payment
any one factor depends
terms. on the individual business
= Dependability — reliable suppliers who deliver on time. and the clues to this are
= Flexibility — if demand is variable, the supplier will need to be flexible. contained in any stimulus
= Ethics — greater consumer awareness means ethical issues have become material provided. Read
increasingly important. it carefully and apply the
information effectively.
How to manage the supply chain effectively and efficiently and the value
of this
The supply chain encompasses the steps it takes to get a good or service from the
supplier to the consumer and includes the providers of materials, components, finance
and people. In order to manage this effectively, it is necessary for managers to make
decisions in terms of what and how much to produce and which suppliers to use.
These decisions are influenced by a number of internal and external factors:
@ Internally, the supply chain is influenced by:
— forecasts produced by the marketing department
— financial procedures, policies and finance available
— the corporate and associated functional objectives set

Topics 1-6 47
Content Guidance
(SS
ee tei

mw Externally, the supply chain is influenced by the dependability of the supplier

and quality of product and service. Ethical issues are increasingly also taken into
consideration.
These internal and external factors are considered in order to manage the supply chain
with the aim of getting the right supplies to the right place at the right time. If this can
be achieved, it enables the business to maximise sales while avoiding criticism from
pressure groups for using suppliers that employ child labour in sweatshops or scandals
such as the use of horse meat in products for human consumption.

The value of outsourcing

There are a number of advantages of outsourcing to an outside supplier:
= Speed of response. Outsourcing may enable a business to respond quickly
to changes in demand, especially if it has established good relations with an
outsourcing firm.
= Saving costs. Where capacity is limited but demand insufficient to warrant the
investment in extra capacity, outsourcing may be the ideal solution, saving on
investment costs while generating additional revenue and profit.
= Core activities. A business may see itself as being innovative and creative and
wish to focus on this aspect rather than the actual production process.
However, outsourcing is not the solution for every business:
® Quality. The outsourcing firm may not have the same high standards, which could
lead to a damaged reputation. Knowledaecheck 46
& Costs. Outsourcing may be costly and this cost has to be evaluated against the
benefits. Outline the benefits
m Trade secrets. The business may have to allow the outsourcing company access to acs fe a of
confidential information regarding a product or service. outsourcing.

Summary

In this section you need to know about:

mw The value of operational objectives; internal and external influences on them.
m The calculation, interpretation and use of operational data, including labour
productivity, unit costs, capacity and capacity utilisation.
= Operational decisions related to efficiency, including capacity utilisation,
labour productivity, optimal use of resources, JIT and lean production, and
the role of technology in operational efficiency.
Operational decisions related to quality, including the importance of quality,
the consequences of poor quality, methods of improving quality and the
benefits and difficulties of doing so.
Operational decisions to improve performance, including the value
of improving flexibility and ways of doing so, speed of response and
dependability, the value of managing the supply chain, influences on the
amount of inventory and influences on the choice of supplier.

48 AQA A-level Business

 Decision making to improve financial performance

Bi Decision making to improve

financial performance
Financial performance means measuring the results of a business's policies and
operations in monetary terms. It examines how a business might make decisions to
improve its financial position.

Setting financial objectives

The aim of most businesses is to make money (profit), but financial objectives may
also determine the amount of money needed, the time frame in which it must be
made and how it will be spent. Objectives in this area are influenced by the overall
corporate objectives and coordinated with the other functional areas. Financial
objectives are goals or targets set by the finance function of a business. Possible areas
for financial objectives include:
™ return on capital employed (return on investment)
® cash flow targets
m profit and shareholder returns
@ cost minimisation

The value of setting financial objectives

There are a number of benefits that illustrate the value of setting financial targets:
m They act as a focus for decision making and so may enable greater coordination and
efficiency. Knowledge check 47
mw They provide a yardstick against which the success or failure of a business may be Identify three benefits
judged. of setting financial
m Shareholders may be able to assess whether an investment is worthwhile. objectives.
m Outside organisations, particularly suppliers, may be able to judge the financial
viability of a business.

The distinction between cash flow and profit

Cash flow relates to the money flowing into and out of a business. The rate at which = Gash flow The amount
money flows into and out of a business requires careful observation and analysis. of money that flows into
The last thing a business wants to do is run out of cash as this could threaten its and out of a business over
whole existence. Having finance (cash) readily available for day-to-day expenditure is a period of time.
essential. Generally, businesses have to pay for resources (e.g. materials and labour)
long before they have made any sales, and they need cash for this. New orders mean
greater revenue in the future, but a business must have the cash available to purchase
resources in the first place. Short term, therefore, cash is essential for the very
survival of a business.
As we have already seen, profit is the money left over after all costs have been taken
from the money achieved from sales (revenue). (See p. 7 for the method for calculating
profit.) Profit or the potential for future profit is essential for the long-term survival
of a business. In the short term it is possible to survive without making a profit. For
example, during the first few years of existence, or in periods of economic downturn,

Topics 1-6 49
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businesses may incur losses, but providing there is confidence in the long-term Knowledge check 48
potential of the business it may be able to survive.
Distinguish between cash
flow and profit.
The distinction between gross profit, operating profit and profit for the
year
Profit may be looked at in a number of different ways.
Gross profit
Gross profit is the difference between the revenue and the direct costs of producing a
good or service and is calculated by subtracting the direct costs of sales from the sales
revenue.
The gross profit margin is expressed as a percentage and calculated using the Gross profit margin
following formula: A profitability ratio that
gross profit x 100 measures how much of
Gross profit margin = every pound is left over
sales revenue
after paying the direct
This is more useful than just a figure for gross profit as it enables more meaningful costs of the goods sold.
analysis and can be compared to previous years or other businesses.
Operating profit
Operating profit margin A profitability
ratio that measures how
When calculating gross profit, only the direct costs of producing a good or service are
taken into consideration. Operating profit is calculated by subtracting all the costs much of every pound

of producing the good or service from the sales revenue. The additional costs here is left over after paying

are often referred to as expenses and include such things as administrative costs, both the direct costs and

directors’ salaries and marketing expenses. expenses of production.

The operating profit margin is expressed as a percentage and calculated using the
following formula:
It is possible for gross
operating profit 2 profit to increase but
Operating profit margin = 100
sales revenue operating profit to decline
and an understanding of
Operating profit margin can be used to make comparisons with past years and can
why this might happen is
give an indication of how well a business is controlling expenses. It can also be
important.
compared with other businesses.
Profit for the year
When calculating operating profit, certain items are not included such as interest
charges, taxes on profit, any interest received or income from any investments.
Therefore, profit for the year takes into consideration all income received and all
costs incurred and is the final profit figure. In a public limited company the board
of directors decides how much to retain in the business and how much to give to
shareholders by way of a dividend.

Knowledge check 49
Revenue, costs and profit objectives
Explain briefly how it is
As part of its financial objectives, a business sets specific targets for revenue, costs
and profit. These targets are influenced by the overall corporate objectives and have possible for gross profit
to stay the same while
to be carefully coordinated with the other functional areas. For example, it might
operating profit increases.
be difficult to increase revenue significantly if operations lack the capacity to boost

50 AQA A-level Business

 Decision making to improve financial performance
ue

production or the marketing department lacks the resources to improve or extend a

marketing campaign.
m Revenue. Revenue targets need careful consideration as many markets are highly
competitive, making increased revenue difficult to achieve. However, in a growing
market or for a new business, a revenue target may be useful for both focusing
decision making and assessing performance.
= Costs. In a competitive market it may be difficult to achieve improved profit using
revenue objectives as the costs associated with generating greater revenue (for
example, marketing) may outweigh the benefits. In these circumstances, focusing
on cost reduction may provide an alternative approach to greater profit.
m Profit. Profit targets may be illustrated in a number of ways such as a figure, a
percentage or an improved margin. A figure on its own means little and needs to be
compared to previous years or similar businesses.

Cash flow objectives The focus of any cash

Cash flow is essential for the survival of a business. The idea that ‘cash is king’ rings flow targets varies from
true for many businesses as without it they can quickly become insolvent (unable business to business
to pay their way). As a result, cash flow targets might focus on one or more of the and depends on their
following: individual circumstances.
m reducing the time taken for customers to pay It is therefore essential
™ increasing the credit period allowed by suppliers to look at the particular
circumstances of a
m reducing borrowings and/or interest charges
business.
m reducing seasonal swings in cash flow

Objectives for investment (capital expenditure) levels

Capital expenditure is money spent on long-term investment in a business, such as
expenditure on fixed assets like buildings and equipment. Do not confuse it with
revenue expenditure which is money spent on the day-to-day running of a business
such as the purchase of raw materials.
Capital expenditure is necessary in a business for a number of reasons, for example
financing growth through the purchase of new facilities and equipment or updating
existing assets like computer systems, machinery and equipment (necessary in order
to maintain competitiveness). On the other hand, it may be required to finance the Knowledge check 50
development of further assets such as a new drug for a pharmaceutical company or a
Distinguish between
new oil field for an oil company. Targets set for capital expenditure therefore depend
capital and revenue
on the type of business and the market in which it operates. The state of the economy
expenditure.
and the financial position of a business are also likely to affect a business's capital
expenditure.
Linked to the idea of capital investment targets is the concept of return on Return on investment
investment. This can be measured using the amount of profit generated from the A performance measure
investment and is calculated as follows: used to evaluate
net profit the efficiency of an
Return on investment = x 100
investment or to compare
amount invested
the efficiency of a number
A business could therefore set a certain percentage as a target or use the calculation of different investments.
when comparing a number of potential investments.
Topics 1-6 51
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Capital structure objectives Capital gearing

A financial ratio that
The capital structure of a business refers to the way in which a business has raised
compares borrowed funds
its long-term finance. There are two key sources of long-term funding for a business
to total capital employed
— borrowing and share capital (or equity) — and the relationship between these is
(equity + borrowing).
important. This is because money that has been borrowed attracts interest payments
and has to be paid back, whereas share capital does not have to be paid back and
Knowledge check 51
investors receive only a return (dividend) from any profit. The relationship between
borrowing and equity can be measured and is known as capital gearing. It is Explain briefly why it
expressed as a percentage and calculated using the following formula: may be important for a
loan capital (borrowing) business to control its
Capital gearing = x 100 capital gearing ratio.
total capital employed (borrowing + equity)
A figure of over 50% indicates a highly geared company (i.e. one highly dependent on
borrowing) that might be at risk should interest rates increase. Targets may therefore
A high gearing ratio is
be set to reduce gearing.
not necessarily bad if

External and internal influences on financial objectives and decisions interest rates are relatively
low and a business can
There are a number of external and internal influences on financial objectives.
easily service the interest
External influences payments from profit.

m Market factors — whether the market is growing or declining has a big impact.
= Actions of other businesses — all businesses operate in a competitive
environment.
= PEST analysis — this refers to the political, economic, social and technological
influences on a business.

Internal influences
= Overall corporate objectives — if an overall objective is growth, the directors
may be willing to accept a higher level of gearing and a lower level of profit margin
in order to achieve this.
= Operational factors — profitability may be impacted by operational capacity.
= Resources available — includes both finance and human resources that may
affect profitability.

Analysing financial performance

How to construct and analyse budgets and cash-flow forecasts
Budgets
Budgeting lies at the foundation of every financial plan. It is about understanding how
much money a business has, where it goes and how best to allocate those funds. A
budget is a financial plan that estimates revenue and costs over a period of time. Budget An estimation of
the revenues and costs
Although each area within a business is likely to have its own budget, we normally
over a specified future
distinguish between three types of budget:
time period.
™ expenditure budget, which sets out the expected expenditure (costs) for a business
m revenue budget, which provides a projection of the future sales of the business
m profit budget, which combines both expenditure and revenue budgets
52 AQA A-level Business
 Decision making to improve financial performance
eee eee

When constructing a budget it is important to use figures that are as accurate as

possible. The starting point is a forecast for the expected sales and revenue. Once
a business knows the expected sales, the likely expenditure can be estimated.
Finally, revenue and expenditure can be put together to show the expected profit.
The budget would normally be set out on a month-by-month basis, as shown in
Figure 12.

January February March April May

£ (000s) £ (000s) £ (000s) £ (000s) £ (000s)
Income
Sales revenue 27.0 28.0 28.0 30.0 Syalb
Expenditure
Materials 15.0 VERS 15:5 16.0 16.5
Labour 8.0 8.0 8.0 8.0 8.0
Administration 1.0 1.0 1.0 1.0 1.0
Marketing 2.0 2.0 2.0 2.0 2.0
Total 26.0 26.5 26.5 27.0 27:5
Profit 1.0 1.5 1.5 3.0 4.5

Figure 12 A simple budget hicelvoeinn sana dea sia

process of explaining the
Perhaps one of the most important aspects of budgeting lies in the analysis of the differences (variances)
figures. This is normally undertaken in the form of variance analysis, where actual between budgeted figures
figures are compared to budgeted figures, as shown in Figure 13. and actual figures.

January February March April May

£ (000s) £ (000s) £ (000s) £ (000s) £ (000s)
Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual
Income
Sales revenue ZILO Weck 28.0 27.5 28.0 raf 30.0 28.0 a ae
Expenditure
Materials 15.Oats Deeb 15.5 15.5 15:5 15:3 16.0 (eR) 16.5 16.0
Labour 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0
Administration 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Marketing 2.0 2.0 2.0 2.0 2.0 2.0 2.0 eo) 2.0 20
Total 26.0 > 26.0) LOselene hunt 26.5 26.5 27.0 27.0 Pi. eid
Profit ——
Ell
1.0 1.0 ie 1.0 1.5 1.0 3.0 1.0 4.5 ibe

Figure 13 Comparing budgeted and actual figures

Variance means the difference between the budgeted figures and the actual figures. Knowledge check 52
The variances
.
for the five
°
months given
.
in
.
Figure
.
13 are shown in
.
Figure
. 14.
Ueto eu indeokart
In the variance column there is a note to state whether the variance is favourable (F) by the term ‘variance
or adverse (A). The variance is favourable if the actual profit is higher than in the analysis’?
budget, for example if sales are greater than expected or costs less than expected. The
variance is adverse if the actual profit is lower than expected, for example if sales were
less or costs higher than budgeted.

Topics 1-6 53
Content Guidance

Budget Actual Variance |Exam tip |

£ (000s) £ (000s) £ (000s) j
The importance of
Income ; sea
variance analysis is
Sales revenue 145.0 139.0 6.0 (A) Hot in thetackthaka
Expenditure variance occurs — it
Materials 78.5 77.5 1.0 (F] would be surprising to
Labour 40.0 40.0 0 have all income and costs

Administration 5.0 5.0 0 OXENYA SOR ae

; is in understanding the
Marketing ee ged whe
10 eee OA)
DN) reasons for any variance.
Total 133.5 133.5 0 Once these have been
Profit 11.5 5.0 6.0 (A) analysed, it can be
determined whether
Figure 14 Variance analysis
any action is required or
Cash-flow forecasts future budgets should be
modified.
A cash-flow forecast is a prediction (forecast) of money coming into and flowing
out of a business. At first sight this may seem similar to a budget but it is important
to understand how they are different. The overall budget gives an indication of the
likely profit at the end of the set time period, whereas the cash-flow forecast shows
the likely bank balance at the end of the set time period. In the cash-flow forecast,
inflows and outflows are recorded when they are likely to occur and therefore a
business can easily see if it is likely to run out of cash. A simple cash-flow forecast is
shown in Figure 15.

January February March April May

£ (000s) £ (000s) £ (000s) £ (000s) £ (000s)
Cashin
Sales 10.0 11.0 1 12.0 1205
Cash out
Materials 7.0 7.5 Veo) 8.0 8.0
Labour 1.0 1.0 1.0 1.0 1.0
Administration 0.5 0.5 0.5 0.5 0.5
Other costs 0 0 0 0.5 0
Total 8.5 9.0 9.0 10.0 Ta)
Net cash flow 1.5 2.0 2.5 2.0 3.0
Opening balance (5.5) (4.0) (2.0) 0.5 Zak
Closing balance (4.0) (2.0) 0.5 2.5 55

Figure 15 A cash-flow forecast

The key points to note are:

m net cash flow is the difference between all cash in and all cash out
® opening balance is the amount carried forward from the previous month
(that month’s closing balance) :
@ closing balance is the sum of the net cash flow and opening balance
54 AQA A-level Business
 Decision making to improve financial performance

Cash-flow forecasts are important as they can give an early indication of any cash |Exam tip |
shortages and enable corrective action to be taken. They are also important in support
When analysing cash
of loan applications as they will give a bank manager an indication of a business's
flow, remember that the
ability to service monthly repayments.
cash position is being

The value of budgeting calculated at the end of a

month, not profit.
Budgeting is important for a number of reasons:
ms Planning — budgets require planning which may help avoid unnecessary
expenditure.
= Assessing performance — using variance analysis it is possible to make an
assessment of business performance.
= Motivation — budgets can be motivating for the budget-holder.

How to construct and interpret breakeven charts

A breakeven chart is a graph used in breakeven analysis to illustrate the output at
which a business’s total sales revenue is equal to its total costs and it neither makes
a profit nor a loss (i.e. it breaks even). In order to construct a breakeven chart it is
necessary to understand the following terms:
m@ revenue
m fixed costs
@ variable costs
m total costs
The first stage in constructing a breakeven chart is to establish the x (horizontal) and
y (vertical) axes. Output is plotted on the x-axis and for this you will need to know the
maximum output of the business. Costs and revenue are plotted on the y-axis. The extent
of the axis is determined by the maximum amount of revenue achievable by the business.
Having established the axes, it is now possible to plot:
= Total revenue. Calculate the total revenue at maximum output (sales price per
unit x output) and plot this on the chart. Then connect this point to the origin.
m Fixed costs. Fixed costs stay the same no matter what the output and what you
will have on your chart is a horizontal line running parallel to the x-axis at the level
of fixed costs.
m Variable costs. Calculate the variable costs at maximum output (variable costs per
unit x output). Plot this point on your chart and connect this point to the origin.
= Total costs. Add together the fixed costs and variable costs and plot this point on
your chart. Then connect this point to the value of fixed costs on the y-axis.
These lines are shown in Figure 16.

How to calculate and illustrate on a breakeven chart the effects of

changes in price, output and cost
When drawing a breakeven chart, it is always worth checking its accuracy by Contribution The
calculation. This can be done using the concept of contribution, This is the
a ; difference between sales
difference between revenue and variable costs and is calculated as follows:
revenue and variable
Contribution = sales revenue — variable costs costs.

Topics 1-6 55
Content Guidance

7) Maximum
a profit
3 at full
capacity
Breakeven point
cos?
ot)

Variable costs

Fixed costs

Margin of safety

Breakeven output Maximum output

Quantity (units)
Figure 16 A breakeven chart

It can also be calculated as contribution per unit as follows:

hale _ sales revenue — variable costs
Contribution per unit = ——___—__\
output

Or, another way to calculate contribution per unit:

Contribution per unit = sales price per unit — variable costs per unit

It follows from this second calculation that total contribution can also be calculated
by multiplying the unit contribution by output. Below the breakeven point any
contribution goes towards covering the fixed costs of production and above the
breakeven point any contribution is profit. Therefore, at the breakeven output the
value of total contribution is equal to the value of fixed costs. From this knowledge
comes the formula for calculating the breakeven output: divide fixed costs by the
contribution per unit to arrive at the number of units that need to be produced to
exactly cover the fixed costs:
fixed costs
Breakeven output =
contribution per unit
Knowledge check 53
It is worth pointing out that contribution can also be used as an alternative way
of calculating profit. Contribution is calculated by deducting variable costs from How is contribution used
revenue, so if we take this further and deduct the fixed costs from the contribution to calculate the following?
total we will arrive at the profit figure as follows: (a) Breakeven output
(b) Profit
Profit = total contribution — fixed costs

Breakeven charts can be a useful analytical tool for investigating the impact of
changes in price and cost on breakeven point and profit.
= Impact on breakeven point. A rise in price leads to a lower breakeven point,
whereas a fall in price leads to a higher breakeven point. A change in costs has the
opposite effect: a rise in costs leads to a rise in breakeven point, whereas a fall in
costs leads to a fall in breakeven point.

56 AQA A-level Business

 Decision making to improve financial performance
Eee

a Impact on profit. A rise in price leads to a rise in profit at any given output above
breakeven point and a fall in price leads to lower profit at any given output above
breakeven point. A rise in costs leads to lower profit and a fall results in greater
profit at any given output above breakeven point.
Another useful concept relating to breakeven analysis is that of margin of safety.
This is the difference between the actual output of a business and its breakeven
output:
Margin of safety = actual output — breakeven output
This indicates the cushion or amount by which sales could fall before a business
becomes loss-making.

The value of breakeven analysis

Breakeven analysis is a simple and easy-to-use tool for managers, particularly for
smaller businesses and those offering a single product. It can be useful in support of
an application for a bank loan as it provides evidence of business planning and ability
to service a debt. It can also be useful when analysing potential changes in price or Service a debt To make
costs and how such changes may affect profitability. the repayments on any
loans.
Breakeven analysis, however, does have its limitations and these are associated with its
simplicity. Not only does it assume that all products are sold, it also assumes that they
are sold at the same price, which in practice is unlikely on both counts. It also assumes Knowledge check 54
costs remain the same, which again is unlikely. Fixed costs are likely to rise over time Outline briefly the main
and variable costs might change, for example as a result of bulk buying. Finally, it problems associated with
becomes difficult to use breakeven analysis when looking at a multi-product business. breakeven analysis.

How to analyse profitability

When looking at profit on p. 50, two ratios were identified:
gross profit
Gross profit margin = x 100
sales revenue
operating profit
Operating profit margin = x 100
sales revenue

We can add to these a further equation, which is profit for the year margin:
profit for year
Profit for the year margin = x 100
sales revenue

Ratios are key to the analysis of financial performance — in this case, profitability.
A figure for profit on its own tells the reader little other than whether it has risen or
fallen. What the analyst really wants to know is whether there has been an overall
A profit figure on its own
improvement. This can only be shown when comparing figures for previous years or
tells us little and in order
figures for other businesses, and this is achieved by examining profit margins. The
to be useful it needs to be
percentage figure arrived at indicates how much of every pound of sales is profit.
compared. This is most
A 5% operating profit margin tells us that 5p of every pound sold is profit. This
effectively done by the
is a much more effective way of analysing a business's profitability and provides a
use of profit margins.
meaningful judgement on performance.

Topics 1-6 57
Content Guidance

How to analyse timings of cash inflows and outflows Payables Money owed
to trade creditors by a
The cash-flow forecast is an important document that can be used to support loan
business.
applications as well as analysing the cash position of the business. This is usually in
relation to the timings of inflows and outflows. Receivables Money
owed by trade debtors
The money leaving the business is referred to as payables and the money coming
(customers) to a business.
into the business as receivables. It is important to investigate how quickly a business
pays its trade creditors (those it owes money to for resources) and how long it takes
to receive payments from its trade debtors (those who owe money to the business Knowledge check 55
for goods and services received). These are measured in days and, if there is a big
Distinguish between
difference between the number of days taken to pay and the number of days for
trade creditors and trade
receivables, this could indicate potential cash flow problems. The practice of allowing
debtors.
customers time to.pay or not paying immediately for goods and services received is
known as trade credit.

The use of data for financial decision making and planning

Budgets, cash flow and breakeven analysis provide managers with a huge amount of
information and data. The analysis of this data, coupled with profitability data and
analysis, provides the basis for financial decision making. This makes for a more
scientific approach and therefore helps reduce risk in decision making. This is not
only illustrated by the importance of cash-flow forecasts in loan applications, it also
involves every decision the business makes, such as launching a new product or
investing in new production facilities. All of these factors have a financial implication
that needs careful consideration and analysis of data in order to reduce risk.

Making financial decisions: sources of finance

A business obtains its finance from a source. Finance may be raised internally or
externally and be either short term or long term.

Internal and external sources of finance

Internally, the most important source of finance is retained profit, which is profit Retained profit The
that is reinvested back into the business. Although shareholders who adopt a short- profit that is kept within
term approach might be upset at losing potential dividends, the hope is that using the business rather than
profit in this way creates growth in the long term. It also has a number of benefits paid out to shareholders
over external sources of finance. Loans carry interest payments and eventually have to as dividends.
be paid back. Issuing further shares dilutes ownership.
Another source of internal finance is the sale of assets, which involves selling off an
asset that is surplus to requirements. Like retained profit, the sale of assets has the
big advantage of no interest payments and no payback. Once sold, however, the assets
are removed from the business so it needs to be sure it no longer has a need for them.
Although these internal sources of finance may be used for short-term purposes, they
are mainly long term in nature. On the other hand, external sources can be split into
distinct short- or long-term sources.
Short-term external sources of finance include overdrafts, debt factoring and trade
credit. An overdraft is a short-term loan from a bank. Debt factoring involves
passing debtors’ invoices to a debt-factoring business for collection. Up to 80% of the
58 AQA A-level Business
 Decision making to improve financial performance
—$—
ee ———

value of the invoices is received immediately and the rest, less any costs, once the
factoring company has collected them. Trade credit involves receiving materials now
but paying for them at a later date.
In the long term, major external sources of finance fall into two categories: equity
and borrowing. Equity is share capital and borrowing involves loans from a bank.
Also included here are venture capital and debentures. Venture capital is finance
that is provided by venture capitalists for small to medium-sized businesses and this
source of finance is, by its nature, more risky. It may be in the form of loans or equity.
A debenture is a specific type of loan.

Advantages and disadvantages of different sources of finance for

short- and long-term uses
The advantages and disadvantages of internal sources of finance are covered above.
External sources have the following benefits and drawbacks:
m Overdrafts are generally quick to arrange and the business benefits from paying
interest only on the amount overdrawn and not the full amount of the overdraft. It When analysing potential
therefore represents a flexible form of short-term finance. long-term sources of
m Debt factoring is useful when finance is required quickly and it does save a business finance, an examination
the administrative expense of chasing its debtors. Its main disadvantage is that a of a business’s capital
percentage of the money owed by debtors goes to the debt-factoring company. structure and capital
m Trade credit is useful as it is a means of delaying payment for materials and gearing are likely to be
services, but as a result the business may lose out on certain prompt payment key factors influencing the
bonuses. final decision made.
m Equity has the benefit of not having to be paid back and has no interest to be paid
and dividends are given to shareholders only from profit. It does, however, result Knowledge check 56
in dilution of share capital and for family businesses that turn public they may
Outline briefly the benefits
eventually lose their controlling interest.
of raising money through
m Borrowing can be quick to set up and avoids dilution of share capital, but it does
equity rather than
have a number of drawbacks. It has to be paid back and incurs interest payments. As
borrowing.
a result, servicing debt can become a problem, especially if interest rates are rising.

Making financial decisions: improving cash flow and profits

Businesses are always looking for ways to improve cash flow and profits.

Methods of improving cash flow

There are a number of ways in which a business might improve its cash flow position:
= Speed up inflows. A business could try to speed up its inflows by perhaps being
more rigorous in chasing late payments and debtors (better credit control) or by
shortening the credit period allowed.
= Slow down outflows. A business might try to negotiate more favourable credit
terms in order to slow down outflows.
= Debt factoring. By using the services of a debt-factoring agency, a business
receives the money it is owed sooner.
= Short-term borrowing. Many businesses use an overdraft facility in order to
overcome a difficult cash-flow position.

Topics 1-6 59
Content Guidance
Ne er ee ae, | ee ee ee

Methods of improving profits and profitability

There are a number of ways in which a business might improve profitability:
m Reduce costs. If costs can be reduced while maintaining the same selling price
and sales level, profits will improve. This might be achieved by improvements in
efficiency such as the introduction of new technology or the employment of lean
production methods, as well as by moving production to a cheaper location or
sourcing cheaper suppliers.
m Increase prices. If prices can be increased without a fall in demand, profits are
likely to improve. This may be possible only for goods and services that are inelastic
in nature.

Difficulties of improving cash flow and profit

In highly competitive markets and where suppliers also face financial pressures,
improving cash flow and profits may be difficult in practice.
Attempts to improve cash flow can result in difficulties. Changing credit terms to
customers or being more rigorous in chasing debtors can mean that relationships with
customers are harmed: a slightly longer credit period is a USP and this may be the
reason why customers come to the business rather than a competitor. Relationships
with a supplier might also be damaged by trying to extend the business's credit
period, while changing to a cheaper supplier may affect flexibility and reliability. Debt
factoring and overdrafts also come with costs that may worsen the situation in the
long term.
Knowledge check 57
Attempts to improve profits by the reduction of costs may lead to quality issues with Aas
A seh ait ; Explain briefly why
a product or service, or perhaps ethical issues if goods are sourced from sweatshops
; ; ; attempts to improve cash
overseas. If labour is reduced because of the introduction of new technology or
. ; , ; : flow may lead to damaged
redundancies occur because of relocating overseas, a business's reputation may be atte
¥e : , : Ae ; ; relationships with
harmed. Raising prices is also likely to lead to criticism about putting the interests of ’
customers and suppliers.
shareholders before those of customers. A
aeTs

Summary
In this section you need to know about:
The value of financial objectives and the internal and external influences on
them.
The distinction between cash flow and profit; the distinction between gross
profit, operating profit and profit for the year; calculating margins.
The construction, interpretation and value of budgets, cash flows and
breakeven charts.
The interpretation of profitability ratios including gross, operation and profit
for the year; how data may be used in financial decision making.
The internal and external sources of finance; short- and long-term sources.
The methods and difficulties of improving cash flow and profit.

60 AQA A-level Business

 Decision making to improve human resource performance

B Decision making to improve

human resource performance
Human resources (HR) is the function of an organisation that is focused on the
activities of employees. These activities normally include recruitment, training,
retention, motivation, welfare and benefits.

setting human resource objectives

Human resource management involves matching the workforce to the business needs
— having the right number of staff in the right place and with the correct skills.
Human resource objectives focus on the recognition of human capital as a resource
that drives business success.

The value of setting human resource objectives

The value of setting human resource objectives includes:
= Employee engagement. Creating an environment in which employees are
enthusiastic and motivated about their jobs all the time.
= Compliance. Aligning company policies with government laws regarding health
and safety and employment.
= Turnover and retention. Reducing turnover and increasing the retention of
employees thereby reducing recruitment.
= Employer of choice. Being the company that all employees would be happy to be
a part of.
As a result, a business might set objectives in the following areas:
= Employee engagement and involvement. Having employees engaged and
involved in a business leads to greater motivation and, as result, greater output and
quality.
= Talent development. The recognition of potential within certain ‘star’ employees
and the development and retention of those employees.
m Training. The improvement of workforce performance through the development of
skills.
= Diversity. This concept encompasses acceptance and respect. It means
understanding that each individual is unique and recognises individual differences.
This can be along the lines of race, gender, age, sexual orientation, physical ability,
religion, etc.
= Alignment of values. Bringing together employee values and business values.
= Number, skills and location of employees. Over time, the nature of a business
and production changes and it is crucial that the human resources department
ensures that they always have the right employees in the right place with the
correct skills.

Topics 1-6 61
Content Guidance
Ds

Internal and external influences on human resource objectives and

decisions
Like the other functional areas, objectives and decision making within human
resources are affected by a number of internal and external factors.
Internally, the overall corporate objectives and the resources available (especially
finance) have an impact on objectives and decision making, The type of product,
whether it is a hi-tech innovative industry or one that simply assembles products on a
production line, also has an impact. The style of management adopted is likely to have
a big impact, whether a hard or soft approach is used:
m A hard approach to management is one in which employees are treated simply as
a resource. With such an approach there is minimum communication and little
empowerment and delegation. Appraisal systems focus on judgements about Appraisal system
good or bad performance, and pay is at a minimum wage in order to recruit and The process by which a
retain staff. manager examines and
m A soft approach to management involves regular communication with the evaluates an employee’s
workforce and having employees empowered and encouraged to take responsibility. work by comparing it with
Appraisal systems focus more on identifying and addressing employee needs, and pre-set targets.
pay structures are competitive and may encompass performance-related rewards
such as profit sharing. Knowledge check 58

Externally, PEST factors have a big impact on objectives and decisions: Distinguish between a
hard and a soft approach
m Politically. Keeping abreast of legislation in terms of employment and health and
to human resource
safety laws, which are subject to regular refinement.
management.
= Economically. The stage of the economic cycle, together with changes in
interest rates and exchange rates, has an ongoing effect on demand and therefore a
business's requirement for labour resources.
m Socially. A business needs to recognise changes in attitudes and ensure that its
human resources policies are diverse and encompass all.
um Technologically. The technological environment is in a state of constant
development and the human resources department needs to keep up to date,
ensuring it has the right number of workers with the correct skills to embrace new
developments.
As well as these factors, the human resources department also has to consider the
wider market and competitive environment as changes here will have a big impact on
workforce requirements, both positively and negatively.

Analysing human resource performance

Calculating and interpreting human resource data
As a means of analysing human resource data, there are a number of calculations that
may be undertaken. These calculations relate to the effectiveness of the workforce,
the cost of the workforce and its turnover and retention.
Labour productivity
Labour productivity measures the output per employee over a specified time period
and is calculated using the formula given on p. 39.

62 AQA A-level Business

 Decision making to improve human resource performance

This is a key measure of business efficiency and is of particular importance as labour Knowledge check 59
costs make up a significant proportion of a business’s costs. The more units that can
Outline briefly the
be produced per worker, the fewer workers that are needed. This may result in lower
labour costs and increased competitiveness. factors that affect labour
productivity.
Productivity, however, is likely to be affected by a number of factors such as the
amount of investment in technology and the skills and motivation of the workforce.
The state of the economy may also have an impact.
Labour cost per unit
This measures how much it costs in labour to produce one unit of output and is
calculated as follows:
._ _labour costs
Labour cost per unit = ————__ Natural wastage
output
The reduction in size
Labour cost per unit is related to productivity: if productivity rises, unit labour cost of a workforce through
falls and if productivity falls, unit labour cost rises. Improving productivity may voluntary resignation or
therefore be targeted in order to reduce labour cost per unit. retirement rather than
redundancy.
Employee costs as a percentage of turnover
As an alternative to unit labour cost it is also possible to calculate labour cost as a
percentage of turnover. This is calculated as follows:
A certain amount of
labour cost labour turnover is
Employee costs as a percentage of turnover = ——____- x 100
turnover inevitable and this level
varies from industry to
For many businesses, labour represents the biggest single cost. This is particularly
industry. It is therefore
true for premiership football clubs and some independent schools. Keeping
important to compare
labour costs within a sustainable percentage of turnover is therefore crucial to the
labour turnover and
survivability of these businesses.
retention figures to the
Labour turnover and retention rates average for a particular

These next two calculations measure how effective a business is in retaining its staff. industry in order to make

They are calculated as follows: a useful judgement.

number of employees leaving over the time period 2

Labour turnover = 100
total number of employees Knowledge check 60

number of employees employed for more than | year x 100 Distinguish between
Labour retention = labour turnover and
total number of employees
labour retention.
Although it is inevitable that some employees will leave over time because of
natural wastage, the business will seek to avoid large and unnecessary labour Human resource
turnover and, as far as possible, will wish to keep its most valuable and skilled staff. planning The process
High levels of turnover and low levels of retention are likely to indicate an unhappy that links the human
workforce. resource needs of
an organisation to its
The use of data for human resource decision making and planning strategic plan to ensure
Human resource planning is a key activity as it is essential that the business has that staffing is sufficient,
the correct amount of labour with the correct skills. For example, rapid changes in qualified and competent
technology have affected both the manufacturing and service sectors and human enough to achieve
resources should plan effectively for these changes. Human resource managers need organisational objectives.

Topics 1-6 63
Content Guidance
I

to be aware of current developments and gather information and data related to these
as supporting evidence for future plans and skills development.
Data on the business’s existing workforce can be useful in developing plans. Trends
may be spotted indicating potential problems ahead, for example if labour turnover
rates are edging up. It may be possible to compare existing data with those of other
firms or an industry average, which may help in identifying problems at an early
stage. On its own, a slow improvement to the labour productivity figure may seem
acceptable, but if competitors are showing a more rapid rise this could spell future
problems that need to be addressed immediately.

Making human resource decisions: improving organisational

design and managing human resource flow
Organisational structure is the formal framework of policies and rules within which |Exam tip |
an organisation arranges its lines of authority and communication and allocates rights 4, ,an resource flow
and duties. It determines the manner in which roles, power and responsibilities are is a term new to this
delegated, controlled and coordinated and how information flows between levels of specification, so it is
management. Organisational design is a process that is likely to change and evolve important to make sure
over time in order to enable an organisation to operate more efficiently, learn faster you understand what it
and change more easily. means.
The human resource flow refers to the flow of workers through an organisation
and was first coined by Michael Beer in 1984. Beer recognised people as the main
asset of an organisation and therefore how employee influence plays a major role. In
order to have fully engaged workers, the human resource flow needs to be carefully Why is it important

managed, from recruitment, transfer and promotion through to termination of to have fully engaged

employment. The organisation must meet employee requirements in terms of reward employees?

systems and work systems in order to achieve full commitment and engagement to
the organisational needs.

Influences on job design

Job design is the process of deciding on the contents of a job in terms of its duties
and responsibilities, the methods used to carry out the job, and the relationships that
should exist between the job holder and their superiors. A well-designed job is likely to
be more interesting and lead to better performance and engagement of the employee.
In order to achieve greater engagement, a number of ideas have been put forward
related to job design.
Job rotation
Rather than simply having one set task, employees may be asked to rotate round a
number of tasks. Although this provides variety and may relieve the monotony of
undertaking only one task, it requires the employee to learn more tasks without
necessarily any greater reward.
Job enlargement
This is similar to job rotation, but instead of rotating round different jobs the role itself
is increased to include more tasks. Often referred to as ‘horizontal loading’ as the tasks
are all at the same level, it suffers from the same disadvantages as job rotation.

64 AQA A-level Business

 Decision making to improve human resource performance
ee

Job enrichment
This differs from job enlargement in that it is vertically loaded — it is not only about
increasing the number of tasks but also their complexity. Employees are given more
responsibility for managing themselves and problem solving. As a result, jobs should
be more satisfying and lead to greater engagement and commitment.
Empowerment
This is related to job enrichment and is a term used today to describe the process of
redesigning a job to give workers greater control over their working lives. The concepts
of enrichment and empowerment are taken further in the Hackman and Oldham Empowerment The
theory, as shown in Figure 17. concept in management
that if employees are
Critical Personal
Core job given the right information
‘ 2 psychological and work
dimensions
states outcomes and resources and a
degree of control over
Skill varielety Experienced High internal :
their work, they are likely
Task identity meaningfulness work motivation to be more productive.
of the work
Task significance High quality work
Experienced performance
responsibility for , :
Autonomy tao panna! BY ee High satisfaction
work with work

Knowledge of the Low absenteeism

actual results of and turnover
Feedback ee
the work
activities

Individual’s
need for
growth

Figure 17 The Hackman and Oldham job characteristics mode!

This model is based on the idea that the task itself is key to employee motivation.
A boring, monotonous job stifles motivation, whereas a challenging job enriches
motivation. Variety, autonomy and decision making are three ways of adding challenge
to a job. It states there are five core job dimensions (skill variety, task identity, task
significance, autonomy and feedback) that impact on three critical psychological
states (experienced meaningfulness of the work, experienced responsibility for
outcomes of the work and knowledge of the actual results), which in turn influence
personal and work outcomes (work motivation, work performance, work satisfaction
and low absenteeism). The five core job dimensions can be combined to form a
motivating potential score for a job that can be used as an index of how likely a role is
to affect attitudes and behaviour.
The model suggests high motivation is related to experiencing the three critical
psychological states while working. In turn, each of these three states is derived from — yjtine briefly the
certain characteristics of the job. From knowing these critical job characteristics, so Hackman and Oldham job
the theory goes, it is then possible to derive the key components of the design of the bhiyacterstica model.
job and redesign it.

Topics 1-6 65
Content Guidance
OOOOeee

Influences on job design can be categorised into three main groups: Chain of command
m= Organisational factors such as the nature of the work and the culture of the The order in which
business, which determine the extent and willingness of an organisation to design authority and power in an
jobs in such a way that enrichment and empowerment exist. organisation is wielded
and delegated from top
s Behavioural factors and the extent to which a job or task offers autonomy,
management to every
diversity and the use of skills.
employee at every level.
a Environmental factors such as the availability of employees and their abilities as
Authority flows down
well as their socio-economic expectations.
the chain of command,
whereas accountability
Influences on organisational design
flows up.
Organisational design is the process of constructing and adjusting an organisation's
structure to achieve its goals. The organisational structure defines how tasks are
divided, grouped and coordinated in an organisation. This is sometimes shown in an
organisation chart that demonstrates the hierarchy of the business, with a chain of
command that provides a line of authority from the top of the organisation to the
bottom and shows who reports to whom.
The structure of the organisation also determines and depicts the span of control.
This is the number of subordinates an individual manager can efficiently and
effectively control. Organisations with wider spans of control require fewer managers
and have a flatter structure, as shown in Figure 18a, whereas those with narrower
spans are likely to have more managers and taller structures (Figure 18b). Flatter
structures with wider spans tend to become more predominant as this gives greater
scope for worker empowerment lower down the hierarchy.

(a) (b) 2

ss or meee ete Gee

Bsus
uti dtaeBe
ceisler ee

RELERAAEEARLA RAL RRR OR

Ca beat
UUULIEITISISIZITELIT
ITSITTITTISITIT
Figure 18 (a) A flat hierarchy/wider span of control; (b) A tall hierarchy/narrower span of control

An important element of an organisational structure is delegation. This relates to

how authority passes through the organisation and it is a vital process. In a large
organisation, it is impossible for one manager to take all the decisions. Therefore,
delegation relieves them of the more routine decisions and allows them to concentrate
on important strategic areas. Effective leaders use delegation to balance workloads
and provide staff development opportunities. As a result, good delegation can create a
positive motivating and engaging environment for employees.
Knowledge check 63
Another aspect of organisational structure is centralisation and decentralisation,
What do you understand
which determine where decision making and authority lie. If top management
by the terms ‘hierarchy’,
make all the organisational decisions with no input from lower-level personnel, the
‘span of control’ and
organisation is centralised. The greater the number of lower-level personnel involved
‘delegation’?
in decision making, the greater the degree of decentralisation.

66 AQA A-level Business

 Decision making to improve human resource performance
ee eee

The following factors also influence organisational design:

m Size. The larger the organisation the more complex it is likely to be.
w Life cycle. Organisational structure will evolve over time.
m Strategy. A company whose corporate objective focuses on innovation will need a
different structure to one that simply operates within a mass market.
s Environment. A stable environment will require a different structure to a
dynamic environment.
ws Technology. This is used in almost all industries but the extent to which it is or
can be used may to some extent help determine an organisation's structure.

Influences on delegation, centralisation and decentralisation

A number of factors affect the extent of delegation, centralisation and
decentralisation:
a Uniformity of policy. If an organisation has uniform policies, these must be kept
consistent and there will be little scope for decentralisation.
w Size of the business. Larger businesses tend to be far more complex and Knswisdae chook 64
therefore provide greater scope for decentralisation.
s Philosophy of the management. An autocratic approach tends towards a Outline how the style

centralised structure, whereas a more democratic approach leans more towards a of management and

decentralised structure. uniformity of policy

influence the extent
w Skills of the workforce. A decentralised approach requires the workers to have
of centralisation and
relevant skills. If these skills are not apparent, a more centralised approach is likely
decentralisation.
to be adopted.
External factors, such as the state of the economy and developments in the market, may
also have an impact. Technology can also have an impact, e.g. the availability of greater
data may lead to a more decentralised structure that is responsive to consumer needs.

The value of changing job and organisational design

An organisation would not consider changing job or organisational design unless it
expected potential benefits from doing so. In other words, some form of competitive
advantage would be expected. This might come in the form of lower costs. For example, as
a result of introducing a flatter structure (delayering), the cost of the managerial positions |Delayering The process
no longer in existence would be saved. Making jobs more interesting and rewarding may of cutting layers of
create a more engaged and motivated workforce, leading to higher productivity and better management from an
quality and resulting in lower unit labour costs. In summary, the value of such changes organisational hierarchy.
should come in helping a business to achieve its human resource objectives.

How managing human resource flow helps meet human resource

objectives
Human resource flow is the movement of people through a business, starting with
recruitment. However, before recruitment can take place, some form of human resource
planning is required. This is the process that identifies the competencies a business
needs to fulfil its goals, a process that is shaped by organisational strategy. The aim of
human resource planning is to have the right number of people in the right place, with
the right skills, at the right time, in order to fulfil its organisational objectives.

Topics 1-6 67
Content Guidance
(

Recruitment and selection

The first stages in the recruitment and selection process are the drawing up of a
job description and person specification. These outline the role and duties to be Job description A
performed and the skills and attributes required to fill the job. Once this has been broad written statement
done, the organisation has to decide whether to recruit internally from within the of a specific job based
business or externally. If externally, advertisements need to be placed, applications on the findings of job
invited, shortlists drawn up and interviews undertaken before a final appointment is analysis. It generally
made. includes the duties,
purpose, responsibilities,
Internal recruitment is cheaper than external recruitment and it benefits from the
scope and working
recruit already being familiar with the organisation. On the other hand, by recruiting
conditions of a job.
externally it may be possible to acquire the specific skills needed and also to bring
new ideas into the business. Person specification
A statement of the
Training knowledge, skills,
This is an important part of the human resource flow that involves employees education and experience
acquiring and developing their skills and is strongly associated with talent required of an applicant
development. It might be undertaken either on the job, learning from present for a particular job.
employees, or off the job, on specific work-related courses at training centres, colleges
and university. Training can improve efficiency and quality within a business as well
as motivation of the workforce. However, training does not come cheap and it is
important to retain employees once they are trained, otherwise money will be wasted.
Dismissal/termination
The final stage in the human resource flow is dismissal of an employee or termination
of employment. Dismissal occurs only in specific circumstances:
m Gross misconduct — such as theft or violence toward a customer or colleague.
m Persistent minor misconduct — if, after regular warnings (verbal and written), an
employee persists in an offence such as regularly turning up late for work they may
be dismissed.
= A substantial reason — this could be not agreeing to reasonable changes in
employment terms.
m Redundancy — an employee is made redundant if their job no longer exists.
This might be as a result of production moving elsewhere, the business closing
or technology replacing labour. If those made redundant have been employed for
two or more years, they are entitled to compensation. Redundancy may take place
on a voluntary basis and an organisation must consult with individual employees
as well as worker representatives if 20 or more people are made redundant at the
same time. As an alternative to redundancy, workers may be offered redeployment
(alternative employment) within the business. However, this may not be popular if
such an offer means moving to a different location or if the terms and conditions
are vastly different to the existing contract.
Employment may be terminated by the employee, perhaps because of retirement,
promotion or family reasons. Such termination is known as natural wastage and
occurs in all organisations. Employees may also leave because they are unhappy in
their job and, if this is the case, it is more worrying for the organisation and should
be investigated. This emphasises the importance of analysing labour retention and
turnover figures. (See p. 63 for more information on retention and labour turnover.)
68 AQA A-level Business
 Decision making to improve human resource performance

Having the right people in the right place, with the right skills, at the right time, in Knowledge check 65
the right number, and being able to retain them, means a more engaged, committed
What are the main areas
and motivated workforce that is likely to lead to the achievement of the human
covered by the human
resource objectives.
resource flow?

Making human resource decisions: improving motivation

and engagement
The benefits of motivated and engaged employees
Employee engagement is the state of emotional and intellectual commitment to
an organisation. If workers are not engaged with what they do or the people they
work with they will lack motivation and will not be committed to the success of the
company. Employee engagement could lead to the following benefits:
m improved employee performance
m increased consumer satisfaction
m decreased labour turnover and greater retention of employees
m greater financial success
Engaged employees are likely to say consistently positive things about the
organisation, stay with the organisation and strive to achieve above and beyond what
is expected in their daily role (Figure 19).
Greater labour retention and loyalty
Engaged : Greater
Eriplovecs ne More productive workforce —— Brotitabiity
More caring and committed workforce
Figure 19 The benefits of engaged employees

How to improve employee engagement and motivation

Perhaps the first step in improving engagement in an individual organisation is
to identify the causes of any problems. Once this has been done, if any efforts to
improve employee engagement are to be successful, they need to be tailored to the
needs of the individual. The following ideas may help towards this.
Leadership
Leaders need to show a genuine interest in their employees and understand their
needs and aspirations. They need to show employees they are valued by listening to
their suggestions and creating a rewarding environment in which to work.

Nature of the work

This needs to be meaningful and employees should believe that they are
undertaking an important and valuable job. The connection between individual
roles and the success of the business need to be apparent. Setting goals may also
give a sense of purpose, and if workers have a degree of autonomy over the way work
is done and involvement in decision making, this is likely to make work all the more
meaningful.

Topics 1-6 69
Content Guidance

Recognition Knowledge check 66

Workers like to be recognised for their effort and praised for a job well done. How might the nature of
Managers who recognise when they have gone the ‘extra mile’ are likely to encourage the job lead to a more
them and boost their performance. Such praise may elevate a worker's status within a engaged workforce?
business. In addition, competitive pay rates, benefits and overall working conditions
also need to be good.
Opportunity
Many employees look for opportunities to demonstrate their skills and progress in a
business. In this context, training and career development are important issues.

Culture
The culture of the’business may also be important in establishing an engaged
workforce. A people-focused culture that promotes the idea that employees are
listened to and valued is perhaps more likely to have an engaged workforce.

The value of theories of motivation

Motivation of employees has been the subject of many articles and books with
numerous theories put forward. The AQA specification identifies three writers in
particular: Taylor, Maslow and Herzberg. These writers can be split into two groups:
the scientific school of thought and the human relations school of thought.
Scientific school of thought
Frederick Winslow Taylor is perhaps the most important writer in this area. His
theories on motivation are based on the belief that employees are motivated only by
money. He saw employees as cogs in a machine rather than human beings. Therefore,
anything that could be done to make that machine work better — that is, produce
more and therefore potentially lead to more pay for employees — should be embraced
by employees. As a result, Taylor undertook work study to improve the way the work
was done (efficiency). He looked at tools and equipment and modified them to suit
individual jobs. Training was also undertaken and piece-rate pay used. This theory
is based on completing the job more efficiently and is well documented in Taylor’s
writings related to Bethlehem Steel.
Human relations school of thought
This school of thought was brought to the fore by Elton Mayo. The key weakness of
the scientific school was that it ignored the needs of the individual. Although Mayo
himself was a follower of the scientific school, his research threw up some interesting
observations, the most notable of which were his studies at the Hawthorne Works in
Chicago. The conclusions he drew from this were that:
@ individual workers cannot be treated in isolation but must be seen as members of a
group
® monetary incentives may be less important than belonging to a group
™ managers must be aware of and cater for the social needs of employees
Later writers in the human relations school have often been referred to as the
neo-human relations school and into this group come Abraham Maslow and
Frederick Herzberg.

70 AQA A-level Business

 Decision making to improve human resource performance
eee

Maslow’s hierarchy of needs

According to Maslow, workers have five types of needs and these form a hierarchy, as
shown in Figure 20. In terms of employee engagement and motivation, this hierarchy
comprises:
@ physiological needs — working conditions, pay, holidays, etc.
safety needs — security needs such as a safe working environment
belongingness and love needs — team-working and contact with other employees
esteem needs — achievement and recognition, chances for promotion
self-actualisation — having challenging tasks that enable someone to reach their
full potential

Self-fulfilment needs
(1) Highly engaged

e What can | do for others? e | love working here Self-ac

e | inspire others to do their best 1! ama high flyer ievj
Achiev

(2)engaged|
e | am a vital part of the e | am an achiever
business e | will leave if something much
e | feel important at work better comes along Motivators
e | am really busy and very
likely highly stressed = Psychological needs

((3) Almost engaged |

¢ | know | am part of e | am proud to work here but
something bigger | would not necessarily shout
e | am almost engaged but _ it from the rooftops
there are times when e | might leave if | am tempted
lam not e There are no career /
development prospects here /

(4)Notengaged| e| don’t like my manager /

¢ | am interested in overtime or a Demotivators
: or working in my team_

e |BaaAiticarc
have poor working but | get on with it
e | read the job adverts
Spite ite
/ y. Basic needs

(5)Disengaged |
j
e | am here for the money ¢| ama clock-watcher /
elam leaving when! can e«lamajobs-worth / Physiological needs
e | am not satisfied with | Food, water, warmth, rest
the job | do }
¢ My work does not excite /
me (

Figure 20 Maslow’s hierarchy of needs

Using Maslow’s hierarchy, it can be seen that simply providing good working
conditions and a secure environment will not on its own create an engaged workforce.
In order to become engaged, it is necessary to satisfy the esteem and self-actualisation
needs. This idea is further supported by Herzberg’s two-factor theory.
Topics 1-6 71
Content Guidance

Herzberg’s motivation—hygiene theory Knowledge check 67

Herzberg divided the factors that motivate people into two groups: Distinguish between the
u Motivating factors. Herzberg claimed certain factors lead to motivation, such as scientific and human
giving responsibility, recognition and the chance for advancement. relations schools of
w Hygiene factors. On their own, these do not create motivation but are necessary thought.
in order for workers to be motivated, as they remove dissatisfaction — pay, job
security and working conditions.
The theories outlined above each provide a slightly different approach to the
motivation of employees, but what value do they have for management?
m Taylor. Although he ignored employees’ social needs and assumed they were
motivated only by money, his work does have some value. He established the
management of business as a subject for study and the ideas of work study and
piece rate are still used today.
mu Mayo. Perhaps his greatest contribution is in the importance of group- or
team-working.
= Maslow and Herzberg. Although different, there are some similarities in the
work of these two theorists and this is perhaps where their value lies. The higher
esteem and self-actualisation needs of Maslow link clearly to the motivators of
Herzberg. As we have seen earlier when referring to worker engagement, recognition,
responsibility, status and involvement in decision making are essential to motivation.

The use of financial methods of motivation

Workers can be motivated by different methods of payment:
m Piece rate. This is where workers are paid by each item they produce. It
encourages them to produce more but quality could suffer and higher levels of
supervision may be required.
= Commission. An employee is rewarded according to sales achieved.
m= Wages and salaries. Wages are paid on an hourly rate and should be at or above
the minimum wage. Any worker undertaking extra hours is paid overtime, often at
a higher hourly rate. Salaries are paid at an annual rate and divided into 12 equal
instalments. There is no extra pay for working additional hours.
m Performance-related pay. This is a method of payment linked to performance
and usually measured against pre-agreed targets. Such a method may well be
linked to an appraisal system.
Other financial methods that might be used include bonuses, fringe benefits and
share-ownership schemes.

The use of non-financial methods of motivating employees

Non-financial methods of motivation can be linked to the ideas of Maslow and
Herzberg in that they often try to give greater responsibility, recognition and
involvement to the workforce. We have already looked at the importance of job design Quality circles A
and the concepts of job enrichment and empowerment (p. 65). The importance of good group of workers who
training has also been discussed on p. 68. All these areas can be seen as non-financial meet regularly to identify,
methods of motivation. Added to the above should be that of team- or group-working in analyse and solve work-
the form of autonomous work groups and quality circles. related problems.

72 AQA A-level Business

 Decision making to improve human resource performance

Influences on the choice and assessment of the effectiveness of financial Knowledge check 68
and non-financial reward systems Using examples,
There are a number of factors that might affect the choice and effectiveness of a distinguish between
reward system. financial and non-financial

= Cost. A business must operate within its means. methods of motivation.

m Type of work. Not only the type of work but the skills involved. Reward and
conditions of work need to be appropriate to attract and retain employees.
m Culture. The type of management system involved; whether it has a hard or soft
approach to human resources.
m External factors. It may be difficult to have performance-related pay systems in
times of economic recession.

Making human resource decisions: improving employer—

employee relations
Influences on the extent and methods of employee involvement in
decision making
Good employer—employee relations are essential to the efficient running of a business.
The extent of employee involvement in decision making, however, is likely to depend
on a number of factors:
m The management style and approach to human resource management. A hard
approach is likely to have minimal involvement, whereas a soft approach may
encourage involvement.
m The nature of the work and skill set of employees. Employees who are highly
skilled and working in technical industries are likely to have more involvement in
decision making than those working on a production line.
= Legislation may also impact on employee involvement in decision making, such as
legislation relating to works councils and trade unions.
There is no common structure for employee representation and participation in the
workplace and the extent of participation varies from organisation to organisation.
As an individual’s views usually carry little weight, employees are often represented
collectively, either in the form of a trade union or works council.
Trade unions are often
Trade unions seen in a bad light, but
Trade unions are organisations that represent the interests of employees in order to they actually undertake
protect and advance their position in the workplace. Their role includes: a great deal of good
a negotiating with employers on pay and conditions work and this should

Lag discussing major changes in the workplace such as redundancy

not be overlooked.
Improvements made
™ accompanying members in disciplinary and grievance meetings
in worker safety and
® discussing members’ concerns with employers
conditions of work have,
a providing members with legal and financial advice
in part, come about as
The major benefit of membership of a trade union lies in the collective a result of trade union
representation of the workforce when negotiating over pay and conditions, and in pressure.

Topics 1-6 73
Content Guidance

the past this has often shown trade unions in a bad light. Despite this, trade unions Knowledge check 69
undertake a great deal of good work relating to the other points above.
Outline briefly the role of
Works councils trade unions.

Works councils are bodies composed of both employee and employer representatives
elected to negotiate with management about working conditions, wages, etc.
As their members are usually elected and include both employer and employee
representatives, works councils may provide better communication and increased
employee involvement, resulting in a more conciliatory relationship than that between
a business and a trade union.

How to manage and improve employer—employee communications and

relations
Strong employer—employee relationships often lead to greater employee happiness,
retention and significantly improved productivity. This relationship does not just
happen; it needs to be worked on and managed effectively. Key to this, perhaps, is
communication that is open, honest and facilitates contribution from all. This requires
a certain style of management and the necessary structures to be in place, e.g. having a
soft approach to management and empowerment of the workforce.
Sometimes disputes arise between employers and employees and when this happens it is Advisory,
important that they are resolved quickly. If this cannot be achieved within the business, Conciliation and
the services of the Advisory, Conciliation and Arbitration Service (ACAS) may be Arbitration Service
employed. Conciliation is when a third party encourages both parties to come together (ACAS) A government
and continue discussions. Arbitration is when a third party makes a judgement on a organisation that provides
dispute and puts forward a settlement. This may be binding or non-binding. information, advice,
training and conciliation
Value of good employer—employee relations for employers and

A happy workforce is more likely to be productive and good employer—employee relations employees to help prevent
or resolve workplace
contribute to that happy workforce. The benefits of a good relationship are:
problems.
m Objectives — an organisation is more likely to meet both its human resources and
corporate objectives.
Knowledge check 70
= Motivation — a good relationship should lead to a well-motivated workforce.
Outline briefly the
= Decision making — it is likely decision making will be more balanced by taking
main benefits of good
all views into consideration.
employer—employee
mw Change — where good employer—employee relations exist, it is likely that change will
relations.
be easier to implement as all perspectives are involved and taken into consideration.

In this section you need to know about:

The value of human resource objectives and the internal and external influences on them.
Human resource data including the calculation of labour turnover and retention rates, labour
productivity, labour cost per unit and labour costs as a percentage of turnover.
Human resource decisions including job design, organisational design and the value of changing
design, and managing human resource flow.
Employer—-employee relations including the value of good relations, influences on and methods of
employee involvement, and how to manage and improve relations.

74 AQA A-level Business

 Questions & Answers

Questions & Answers

This section contains a variety of exam-style questions that you are likely to
encounter. These include multiple-choice, short-answer and essay questions (Paper 1),
data-response questions (Paper 2) and a case study with questions (Paper 3). The
multiple-choice and short-answer questions aim to give a broad coverage of the
content of this book. For the essay, data-response and case study questions, although
the focus of the questions is the content of this book, you are encouraged to draw
upon your broader knowledge of the whole syllabus, where appropriate, when
answering.

For each short-answer, essay, data-response and case study question you will find
sample answers with exam advice. One of the sample answers will be a good response
and the other a weaker answer, with the aim of illustrating common errors made by
students and examples of good practice in the hope that you will, with practice, be
able to develop your own skills.

Questions
Along with the knowledge check questions in the Content Guidance section of the
book, the multiple-choice and the 3—6-mark short-answer questions are useful in
testing your overall knowledge and understanding of the specification. The higher
mark allocation short-answer questions (7—9 marks), and the data-response, case study
and essay questions will not only test your knowledge and understanding but also your
ability to apply that knowledge appropriately and, where necessary, in an analytical and
evaluative way.

Sample answers
The sample answers and the commentary that accompanies them should provide
you with hints and clues on how to improve your examination technique. Resist the
temptation to study the answers before you have attempted the questions. If you make
a mistake here it is not the end of the world, and practice in developing your own
responses will help you to hone your skills. Once you have written your answer, look
at the sample responses and identify the strengths and weaknesses of your own work.
Using the Questions & Answers section in this way should result in the quality of
your answers improving and higher marks in the future.

Assessment
A-level exam papers do not just test how well you know the content of the subject.
There is a clear set of skills that are tested and it is essential that you are aware of
these and have some idea of how to satisfy them. The following skills are tested:
= Knowledge and understanding (AO1). This relates to the content of the
specification and how well you know and understand the various business
concepts, theories and ideas.

Topics 1-6 75
Questions & Answers
ESSE SF ae a ae Oe Seeee RS

a Application (AO2). This focuses on your ability to relate your knowledge and
understanding of the subject content to a particular situation or scenario (context
— such as that in a particular case study).
mw Analysis (AO3). This is the ability to develop an extended line of argument
related to a particular question. Remember that the line of argument developed
needs to be in the context of the data given or the case study.
= Evaluation (AO4). This is making a judgement by weighing up the evidence
provided. For example, don’t just say that A is better than B, but say why it is better
for the particular business in question, thus once again providing context.
It is important to understand that not all questions test all the skills set out above and
as a result it is important that you are able to recognise which skills are being tested.
The basis of all questions will be some element of knowledge, but what other skills
will be required? The clue to this is in the question command words. Some commonly
used ones are outlined below.

Application
The following command words require you to apply your answer to the context of the
question or case study:
m@ Explain...
m Calculate...

Analysis
The following command words require you to develop a relevant argument:
m Analyse...
m Explain how/why...
@ Examine...
Remember that your answer has to be in context (application).

Evaluation
The following command words require you to make a judgement:
mw Evaluate...
m Discuss...
mw To what extent...?
m Justify...
In an answer that requires evaluation, your judgements will be based on your analysis
of the situation and its context.
It is worth remembering that most students who have studied Business
seriously and who under-perform do not do so because of a lack of
knowledge but because of a lack of good exam technique. If you understand
the skills that are being tested, recognise how to develop them and are
prepared to practise them, you will be one step ahead of the game.

76 AQA A-level Business

 Paper 1 Multiple-choice questions

2aper 1 Multiple-choice questions

\ll multiple-choice questions are worth | mark.

Question 1
Nhich of the following best describes a country club manager in the Blake Mouton grid?
\ Leaders try to maintain a balance between company goals and needs of people.
3 +Leaders focus on both team and people.
, Leaders have a high focus on people but low focus on task.
) Leaders have a high focus on task but low focus on people.

Question 2
‘he total of all direct costs of production are also known as:
1 Total costs
3 Variable costs
, Production costs
) Fixed costs

Question 3
Vhich of the following is not a method that might be used in scientific decision making?
\ Market research data analysis
3. ~=©Decision trees
y Investment appraisal
) Gut reaction

Question 4
n a relocation decision, which groups of stakeholders are likely to have the most impact and power?
1 Employees and government
3. ~Government and local community
» Local community and shareholders
) Shareholders and employees

Question 5
\t a price of £10 the quantity demanded is 155,000. At a price of £12 the quantity
lemanded is 139,500. The price elasticity of demand is therefore:
ho 2
» 60.55
> 0.5
) -2

Topics 1-6 77
Questions & Answers

Question 6
In the Boston Matrix a product with a low market growth
and high market share is a:
A Star
B Cash cow
C Problem child
D Dog

Question 7
Which of the following is not an item of operations data?
A_ Labour productivity
B Capacity utilisation
C Market growth
D_ Unit cost

Question 8
Improvements in quality may relate to:
A Customers and complaints
B_ Product and returns
C Product and wastage
D_ All of the above

Question 9
In an inventory control chart, buffer stock refers to:
A One-third of total stock
B_ The level of stock at which a new order is made
C The minimum amount of inventory a business wishes to hold
D The maximum level of inventory

Question 10
Outsourcing refers to:
A Moving activities out of a business organisation
B_ Buying resources from outside a business's main market
C_ The delegation of authority within a business
D The sourcing of employees from an external agency

78 AQA A-level Business

 Paper 1 Multiple-choice questions
ES

Question 11
[he breakeven output is calculated using the following formula:
\ Fixed costs / output
3. Fixed costs / contribution total
> Fixed costs / contribution per unit
Total costs / output

Question 12
Nhich of the following is not a method of job design?
A Job analysis
3. Job rotation
Job enrichment
Job enlargement

Question 1
Correct answer C
For this question you need to know your theory. This emphasises the need for thorough
revision.

Question 2
Correct answer B

Direct costs are those that vary directly with output so variable costs is the correct
answer.

Question 3
Correct answer D

Scientific decision making is the use of analytical tools to reduce risk in decision
making. Gut reaction does not do this, so D is the correct answer.

Question 4
Correct answer D

Since all stakeholders may be affected in some way this type of question requires
careful thought — which two groups will be most impacted and have the potential
to exert most power over a business? In a relocation decision, employees are likely
to be heavily impacted due to the disruption. Also, as the aim of such a decision
is likely to be improved performance, shareholders are also likely to be heavily
impacted.

Topics 1-6 79
Questions & Answers ;
Oe ee ene

Question 5
Correct answer C

A straightforward calculation provided you know the formula for price elasticity of
demand:

percentage change in quantity demanded / percentage change in price

Question 6
Correct answer B

An easy mark if you know your theory.

Question 7 :
Correct answer C

Market growth is an item of marketing data.

Question 8
Correct answer D

Quality can be related to each of the areas mentioned, making D the correct answer.

Question 9
Correct answer C

The buffer stock is a minimum amount that helps protect against late delivery of new
stock.

Question 10
Correct answer A

Again, a thorough knowledge of the specification would make this a straightforward

question.

Question 11
Correct answer C

Although once again a straightforward answer, never rush: read the question and the
responses carefully before making your final decision.

Question 12
Correct answer A

Job analysis is usually undertaken before making a job description or specification. It is

not a method of job design.

80 AQA A-level Business

 Paper 1 Short-answer questions

Paper 1 Short-answer questions

1 Briefly explain the difference for a supermarket between pricing tactics and

25
pricing strategies. (4 marks)
]

|Just a straightforward brief explanation required here.

| Student A answer

| Pricing strategies are medium- to long-term policies such as

| skimming or penetration pricing aimed at achieving the supermarket’s
This response demonstrates a good
marketing objectives. Tactics however are short term, designed understanding and is set in the context
to suit particular situations, such as loss leaders which aim to get of a supermarket.
consumers into the store. 4/4 marks awarded

| Student B answer
Pricing strategies are plans developed to achieve marketing There is some understanding but no
| objectives whereas tactics are the actual pricing policies used context in this response.
| such as skimming or loss leaders. 2/4 marks awarded

2 Awell-known and successful soft drinks manufacturer, ABC Ltd, is looking to

expand. Briefly explain how this expansion might be financed. (6 marks)

| For some students there may be the temptation to write all they know about sources of
finance. Do not fall into this trap. Note that the question asks you to explain briefly and
also that it is a ‘Ltd’ company: this will provide some context for your answer.

| Student A answer

| There are a number of options available to ABC Ltd: retained profit, loans
and share capital. Since ABC is a successful company it may well be that
jit has retained profit it can use. This would be the quickest and cheapest
‘method. Also, being successful it should be able to easily negotiate a
| loan from its bank, this would take a little longer and there would be
interest to pay on the sum borrowed. If the sum needed was particularly A number of options are briefly
|large, ABC, which is a private limited company, might consider becoming explained here and clearly set in the
a plc and issue shares to the public, although this is likely to expose it to context of the drinks manufacturer.
greater scrutiny from the business world. 6/6 marks awarded

Student B answer
C
; L oans, shares and profit are sources of finance. Loans can be
| tiated for a fixed time period but interest would have to be
Profit can be used immediately and would not involve any
‘est payments or need paying back. Shares also have no interest This answer demonstrates knowledge
ents (although shareholders would like a dividend payment) and understanding but is distinctly
e unlikely to be repaid. For ABC Ltd it would all depend on lacking in context.
hat the loan is for and how much is needed. 3/6 marks awarded

Topics 1-6 81
Questions & Answers
eee
I

3 The following information relates to XYZ plc and the market it operates in:
Market size 2018 £115
XYZ plc market sales 2018 £35m
Market growth from 2017 12%
(a) Calculate to two decimal places:
() XYZ’s market share "(8 marks)
(i) Market size in 2017 (3 marks)
(b) Assuming XYZ had sales of £33.5m in 2017 what was its market share for
that year? (3 marks)

This question is testing your numeracy skills. Where appropriate, write down formulas
and make sure you show all your workings.

Student A answer

(a) (i) Market share is calculated using the following formula:

XYZ sales
7a
ae
Total market sales
35
— x 100
115
= 30.43%

(ii) Market size in 2017 is calculated as:

2018 sales
————-} x 100
112 Three correct answers with all workings | |
415 shown. 9/9 marks awarded .
— = 1.0267 x 100 = £102.679m
112

(b) Market share for 2017:

33.5 Incorrect answer — 2 decimal places
102.679 * 100 = 32.63% stipulated. If this student had shown
; 3 a formula and their workings it might
have been possible to award some
Student B answer marks, but as the answer stands there
h is nothing of worth.
(a) (i) Market share = 31% 0/3 marks awarded

115m ~ 12% = 101.2 | 0/3 i markar

s award | |
This is an incorrect answer but is
correct based on their market size
figure of £101.2m. Marks can be
awarded using the own figure rule.
b) Market share 2017: 33.10% 2/3 marks awarded

82 AQA A-level Business

 Paper 1 Short-answer questions

4 Asmall local takeaway pizza business has identified a positive correlation between
its well-known local team playing live on TV and the sales of its pizzas. Analyse
how the owner might use this information to benefit the business. (9 marks)

Not only does this question require knowledge and understanding of correlation, it
| also requires you to demonstrate how such a positive correlation might be used in
| the context of a takeaway pizza business. As the key command word of the question
| suggests, you must analyse.

» Student A answer
i Correlation refers to the connection between two or more variables.
|In this case there is a positive connection between the sale of
| pizzas and the local football team’s live appearances on TV. This is
4 extremely useful information, enabling the business to better prepare
and plan. It will want to make sure it doesn’t run out of ingredients
| and that it has enough staff to cope with the increase in demand. This
lis likely to involve arranging extra capacity for delivery and perhaps
| an extra worker in the kitchen preparing pizzas. Such preparation
| would help cope with the extra demand in an uninterrupted way
This response demonstrates a depth
| meaning there would be less likelihood of complaints due to having to
and range of knowledge that is well
| wait or slow deliveries. As such this would enhance its reputation as a developed, is in context and answers
business and could even lead to more customers at other times, all of the question set.
which will help generate greater revenue and profit for the business. 9/9 marks awarded

Student B answer

Student B appears to have a good grasp

of this area of the specification and
provides some analysis but there is a
ult a business may wish to increase production in preparation for clear lack of context, limiting the marks
ew advertising campaign. Thereby it can ensure it is able to fully that can be awarded.
Satisfy demand and not miss out on potential revenue and profit. 4/9 marks awarded

Topics 1-6 83
Questions & Answers
Po ee ee ee ee

5 Amir and Khaled run their own businesses: Amir a small cafe in their home town
and Khaled his own plumbing business. Although both businesses are profitable
Khaled suffers from cash-flow problems while Amir has no real financial problems.
Analyse the possible reasons for this difference. (9 marks)

For this question you will need knowledge and understanding of cash flow but as
the key command word is analyse you are required to develop the reasons for
the difference in cash flow. This should be undertaken in the context of the two
businesses mentioned.

Student A answer

Cash flow refers to the money moving in and out of a business

and it is very important to control this carefully in order to avoid
problems. It is quite possible for a profitable business to fail due to
cash-flow issues and Khaled will need to be careful this does not
happen to him. The reasons for the difference include the nature of
the businesses. Amir has a cafe where customers will pay as soon as
they receive the service and he will not have to wait for cash to come
in or send out invoices. He also may receive a period of credit from
suppliers so providing his business is popular and he generates good
sales he is unlikely to have cash-flow problems. Khaled, on the other
hand, provides a service where he needs costly materials and where
jobs take time to complete. Customers will usually pay after the job
has been completed which leads to a second possible reason, that
of good management. Khaled will have to be efficient in sending
out invoices and collecting in the money owed, as any slowness in
This response clearly answers the
this area could lead to significant cash-flow problems. If he is a sole
question set, and reasons are
trader this could be a serious issue. As a plumber his key focus may developed in the context of the two
be getting work and completing the jobs rather than chasing those businesses in the question.
who owe him money. 9/9 marks awarded

Student B answer

Cash flow is very important to a business and if not managed

correctly can lead to serious problems. Many businesses fail not
because they are not profitable but because they have failed to
control their cash flow. Cash flow is the money coming in and going
out of a business and if more money is going out than coming in
over a given time period then problems will occur and solutions such
as overdrafts and debt factoring may be required. The reasons the
two brothers have such differing cash flow is likely to be due to poor
management. Amir probably manages his business well making sure
Although Student B has a good
he collects cash in on time and controls his outgoings. Khaled, on
knowledge of this area of the syllabus
the other hand, probably has problems, perhaps too many outgoings there is again a clear lack of context.
such as having too much money tied up in stock. Maybe he is slow Also, only one reason, poor
getting money in perhaps because he is slow sending out invoices or management, has been developed.
fails to chase up non-paying customers. ’ 4/9 marks awarded

84 AQA A-level Business

7 Paper 1 Short-answer questions

6 A furniture manufacturing business has managed to increase its labour

productivity by 25% over the last two years. Examine the impact this is likely
to have on the unit costs of the business. (7 marks)

This question requires a knowledge and understanding of unit costs and with the
command word examine you need to analyse or, in this case, demonstrate the impact
on unit costs of the 25% improvement in productivity (context). You might use a simple
calculation to do this.

Student A answer

Unit cost of production refers to the cost of producing one unit

and is calculated as total costs / output. Labour productivity refers
_ |to the amount produced per worker in a given time period and is
calculated by output / number of employees. If labour productivity
has improved by 25% it means that the amount produced per
worker has increased, say from 100 units to 125 units in a given
time period. Assuming the same number of workers and that there
is no significant increase in costs, this would lead to a decrease in
unit cost. If 100 employees produced 10,000 products at a cost of
£10,000, unit cost would be £1 per unit. If 12,500 units were now
produced (25% increase) at the same total cost, unit cost would be
|
£0.80,
ie
a decrease of 20%. ; Improving labour productivity therefore
:
is eh are Naess cael
demonstrating through a simple
likely to result in a decrease in unit cost, the extent of which will be calculation the impact of the 25%
_| dependent on the ability of the manufacturing business to hold costs increase in productivity.
‘| relatively stable. 7/7 marks awarded

| Student B answer

a productivity refers to the amount produced per worker over

eh
a time period while unit costs of‘production relate to the cost

This response demonstrates an

understanding of the relationship
between productivity and unit cost but
not in the context of a 25% increase.
It then drifts into the reasons for an
improvement in productivity which is
not required and irrelevant.
3/7 marks awarded

Topics 1-6 85
Questions & Answers
888
sss. ss sss...

7 Amanufacturing business is having issues with motivation. Examine how the

Hackman and Oldham job characteristics model might help in resolving these issues. (9 marks)

The focus of this question is a knowledge and understanding of the Hackman and
Oldham model. With the command word examine you are required to analyse or
develop the ways in which the model might help in resolving motivation issues.
Remember also that the context is a manufacturing business.

Student A answer

The Hackman and Oldham model might be a good starting point

in trying to resolve the motivation issues this manufacturing firm is
experiencing. The model identifies three critical psychological states: .
meaningfulness of work, responsibility for outcomes and knowledge
of results. These are then impacted by five core job dimensions:
skill variety, task identity, task significance, autonomy and feedback
which can influence outcomes at work, motivation, performance
and satisfaction as well as lower absenteeism and labour turnover. It
follows then that a manufacturing business needs to address the core
values perhaps by giving greater empowerment, where employees can
identify with the task and its significance and be given feedback which
should impact on their psychological state, giving more responsibility
and meaningfulness to what they do. In turn this should lead to
greater motivation, quality of product and satisfaction at work. How
An excellent response demonstrating
a manufacturing firm goes about this will depend on the individual
a full understanding of the model and
circumstances and tasks to be done. The model therefore does not developing how it might be used in the
provide the answer to motivational problems but a starting point for context of a manufacturing business.
implementing changes that could lead to improved motivation. 9/9 marks awarded

Student B answer

The Hackman and Oldham model can be very useful to management

in resolving motivation issues. The leadership characteristics are:
very important and whether they focus more on production or on the
people will have a big effect on motivation. Five characteristic styles
are shown in the model. Where leaders tend to be authoritarian,
thinking only of the task, workers are unlikely to be happy. Where
leaders focus on employees but not the task, the employees may be
happier but not fully focused. Some leaders may be impoverished
and have little focus on the task or the employees while others may
adopt a more middle of the road approach, neither of which will get
the best out of the workforce. To get the best out of the workforce a
Unfortunately this student has confused
more team approach is needed where both the task and employees
the models, something that can often
are focused on and there is trust and empowerment of the workforce.
occur in the pressure of the exam
A manufacturing business could use this model in resolving its room. This shows the need for thorough
motivation issues by trying to adopt a team approach: more revision and perhaps the development
involvement of the workforce with empowerment and responsibility, of aids to help remember key facts and
and a clear focus on getting the task completed. theories. 0/9 marks awarded

86 AQA A-level Business

 Paper1 Essay question

Paper 1 Essay question

} Towhat extent do you believe that the quality of their products is the most
important factor that contributes to the success of all manufacturing businesses. (25 marks)

| Essay questions are rarely straightforward and planning is essential. Writing an essay
is like embarking on a long journey — you need to plan and know your final destination
| or conclusion before you start. Looking at the essay question above, you might start
| the planning process by asking yourself a few questions. For example, is it just the
quality of the product that is important? Are there other aspects of the business that
| may affect success? Might quality of the product be the most important factor for
| some businesses but not others? Asking yourself such questions not only contributes
j towards the planning process but is more likely to result in a more evaluative
| approach — product may be the most important for some but not others, other aspects
of quality may also be important or indeed other factors altogether. An answer can
| now be developed in detail, supported, where appropriate, by relevant examples of
manufacturing businesses.
r

} Student A answer

_| The success of a manufacturing business will depend on a number

_| of factors. For some quality may be the most important factor but not
| perhaps for all. It will probably depend on the type of product being
| produced and the individual consumer involved.

Quality of the product in a competitive market almost goes without

:saying — if the product is of poor quality few consumers are likely to
| buy. Furthermore the individual manufacturer is likely to earn a poor
\ ‘reputation and if action is not taken to improve quality it is unlikely to
| survive for long. In contrast, a manufacturer with a reputation for high
quality is likely to gain sales. This would most particularly be true for
consumer durable products where consumers are more likely to look
for quality, reliable long-lasting products. Sony had a reputation for
high quality which enabled it to charge premium prices, so quality =
Overall this response clearly answers
|contributed to success. [}
the question set. It is well balanced
|
This might not be the case for non-durable goods, however, where and judgemental throughout,
jthere is abundant choice in a competitive market. Here price might making good use of examples to
) be more important to the consumer — why pay £2 for a loaf of bread support the argument. § The first
paragraph sets the scene and gives
from the local bakery when it can be bought in Lidl for 79p? Here
an indication of where the answer
| consumers are looking for value for money where one loaf of bread is going. [}The second paragraph
is very much like another. For some consumers this might also apply develops circumstances where
| to consumer durables — why pay for a Nissan Qashqai when a Dacia quality is important but with a hint of
| Duster can be bought for half the price? The quality of finish may be judgement in that it may be more true
slightly superior for the Nissan but the performance and reliability of for consumer durables. fi) These
paragraphs provide balance, suggesting
| the Dacia is almost identical. &
quality might not be the most important
This suggests that consumer perceptions and attitudes are important factor for all goods and that marketing
in the purchasing of manufactured goods. Value for money and and consumer perceptions might be
| affordability is key here. The manufacturer can perhaps influence more important.

Topics 1-6 87
Questions & Answers
BO 8 sss sssss sssss sss eee

perception through its marketing — as in Dacia’s ‘You do the maths’.

Promotion here is more important than the overall quality of the
product. fi)
Overall then the quality of the product may be important for the
success of some manufacturers but not all. If you are buying a Rolls E The concluding paragraph draws the
Royce or Bentley it certainly is. For manufacturers of other products, answer together along the lines set out
success is likely to depend on factors such as price, marketing and in the opening paragraph.
the attitude of consumers. & 25/25 marks awarded

Student B answer
Quality of the product is essential to the success of a manufacturing
business. This involves not just the product but everything to do
with the producing, selling and after-sales service. Without a quality
product and service, sales are likely to be low and success limited.

The product itself must be of high quality as a high-quality product

will almost sell itself. Consumers will talk about it, give it rave reviews
and this will encourage more sales. If quality is poor, however, this will
have the opposite effect as consumers will pass on the word, often
through social media, and sales will decline. If the product does not
do what it is supposed to do, is difficult to operate or breaks down
this will lead to consumer complaints that will inevitably lead to poor
reputation and lower sales. [f
This all means that every stage of the production process should
be involved with quality. Each part or component used needs to
be top quality. This means the manufacturer needs to make sure it
has a good relationship with its suppliers and that they are reliable.
It is quite possible for a business to suffer poor quality through its
suppliers’ faulty components thereby damaging its own reputation
and chances of success.

A further area of quality is that of after-sales service and once

again it is essential that this is first-rate. Problems can occur with
manufactured products from time to time, and consumers may
accept this if their complaints are dealt with quickly and without Overall a disappointing response that
fuss. This again links into reputation — a manufacturer noted for its is lacking in balance and judgement.
support and aftercare service is likely to win customers and therefore PND A rather bland opening paragraph,
concentrating solely on quality which
quality in this area once again is important to the success of a
is further developed in the second
manufacturer. /) paragraph. 8 These sections look at
Without a quality product and service there is very little incentive other aspects of quality but add little
for a consumer to buy from an individual manufacturer. If a product to the quality of the answer. & The
final paragraph merely sums up the
has a high level of returns or a business has poor after-sales service,
importance of all aspects of quality. The
customers will not return to that particular product or business or idea of quality is well understood and
recommend it to others, severely inhibiting the chance of success. developed in the essay, but the lack of
Quality of the product therefore would appear to be the most important range and balance restricts the overall
factor contributing to the success of a manufacturing business. & mark. 12/25 marks awarded

88 AQA A-level Business

 Paper 2 Data-response questions

Paper 2 Data-response questions

Scotch Water
The north of Scotland is not perhaps the most obvious place to be setting up a new
bottled water ‘empire’ but husband and wife team Max and Alex McBride believe they
may have hit on a unique selling point. Having identified a number of natural springs
and taking inspiration from the worldwide success of the whisky industry, where the
water used influences the colour and taste of the product, they believe there may be a
gap in the market for a new niche bottled water.

Having previously worked in the whisky industry Max believes he has the contacts to
enable him to gain the support necessary to promote the product as the perfect mixer
for numerous distilleries. He also believes the unspoilt beauty of Scotland would give
added impetus to the promotion of their natural water product which would support a
later move into the mass market.

Initial feedback from family and friends and within the local communities where the
springs are situated proved very positive. As yet, however, everything is based on gut
feeling rather than detailed scientific research.

Although the north of Scotland is rather remote, Inverness does provide good road,
rail and even air links to the central belt of Scotland and beyond. Additionally, the
_ couple's off-the-cuff running costs of the business look very attractive indicating a
very persuasive breakeven figure of 100,000 units. This does not include any set up costs.

Initial running cost estimate:

£50,000
Variable costs of 500,000 units £125,000
Sales price 75p

(a) Explain the benefits to Max and Alex of operating within a niche market. (5 marks)

In answering this question you are required to link the benefits of niche marketing to
the context of the case.

(b) Using calculations, demonstrate that Max and Alex are correct in predicting a
breakeven figure of 100,000. (6 marks)

i
ee
Se With a calculation question it is recommended you show both the formula used and
all your workings. Doing so will ensure that even if you make an error in calculation,
marks can still be awarded. The key to this question is recognising the need for and
calculating the contribution per unit.

(©) Analyse the potential operational drawbacks of setting up production in the north
of Scotland. (9 marks)

With the command word analyse you are required to develop an answer in the context
of the case related to operational problems. You are not required to undertake any
evaluation.

Topics 1-6 89
Questions & Answers

(d) The couple appear to base their optimism for the success of the business on gut
feeling rather than scientific tools. With reference to individual scientific methods, to
what extent do you believe they would benefit from a more scientific approach? (15 marks)

The command words to what extent mean that a judgement has to be made. Also note
that the question refers to scientific methods, so avoid focusing on only one — two
will be sufficient.

Student A answer

(a) A niche market is a smaller section of a larger market, in this

case a small section of the bottled water market. The first benefit
that might be gained by operating in a niche is that competition
would be limited. They would not, at least initially, be trying
to compete with the large bottled water producers and they
might quickly establish a place in the market. This would be
particularly so if the whisky industry was supportive. Also, in
Niche marketing is clearly understood
producing a niche product they might be able to charge premium and the benefits explained in the
prices and quickly become a profitable business, an important context of Scotch Water.
consideration for a new business start-up. 5/5 marks awarded

Student B answer

(a) Aniche market refers to a small part of a larger market, e.g. Aston
Martin is a niche product as it targets a small section of the much |
bigger car market. Niche marketing has a number of benefits in
Niche marketing and its benefits are
that it offers the potential to charge higher prices (Aston Martin) understood but there is no context here,
as competition is likely to be limited in this particular area of the a pity as it limits the marks available.
market. Profit therefore can be made quite quickly. 3/5 marks awarded

Student A answer
fixed costs
(b) Breakeven is calculated by:
contribution per unit
£50,000
contribution per unit
nea } 125,000
Contribution per unit = 75p — |———— = 75p
- 25p = 50p
500,000
50,000
Breakeven = = 100,000
Correct calculation with full workings
Breakeven therefore is 100,000 units. shown. 6/6 marks awarded

Student B answer
fixed costs
(b) Breakeven = This student knows the formula but has
contribution
been unable to make the calculation
50,000
= 100,000 from the information given.
1/6 marks awarded

90 AQA A-level Business

 Paper 2 Data-response questions

|(c) Operational issues relate to efficiency of production, quality,

. managing the supply chain, flexibility and dependability. There
are a number of operational issues the business may face — first,
as a new Start-up it may struggle to achieve an efficient level of
production. At the moment there are no data to base production
levels on, so the couple will be unsure of what level of production
to set. This could result either in under-used capacity or, if sales
go well, failing to satisfy demand. The business is also based
in the north of Scotland which presents a number of logistical
issues. Bottle suppliers will need to be sourced who are happy to
supply to the area, which might result in extra costs or perhaps
taking a higher level of supplies at a time. The business would :
This response is clearly based around
be unlikely to operate on a just-in-time basis as supplies could
the operational issues of capacity
easily be disrupted by weather or accidents on key transport
utilisation, supply chain and inventory
routes. Thus a higher level of buffer stock would be required and management which are developed in
inventories would need to be carefully managed. The couple may the context of Scotch Water. It therefore
also need to take measures to ensure that as a business they are clearly answers the question set.
reliable and dependable. 9/9 marks awarded

Student B answer

“that a business operates ata high level, e.g. 90%. This means it
} is
shea at an efficient level where its unit cost of ‘Production
Although this student understands
what is meant by operational issues
the response itself is rather weak.
Scotch Water is mentioned in the
last sentence but the development
t its Poicae and ii to a fall in sales and therefore profiit.
of potential problems is not linked in
eae
5 toa French water company iy Ga its water was any way to the business, resulting in
a descriptive rather than an analytical
response, which is lacking in context.
3/9 marks awarded

) Student A answer
|(d) Scientific management is about using analytical tools to reduce
risk in decision making. In this case it is the risk of setting up a
new bottled water business where at the moment the couple are
basing their chance of success on the encouragement of a few
friends, some contacts in the whisky industry and gut feeling
that it is a good idea. While this can sometimes work, particularly F The opening paragraph demonstrates
with new and innovative products, this is perhaps not the best a Clear understanding of the
approach for a new bottled water product and they would be well question, sets the scene nicely and is
advised to adopt a more scientific approach. § judgemental in approach.

Topics 1-6 91
Questions & Answers
ee en ee ee

As a first step in a more scientific approach they should undertake

some detailed market research. Such research should be targeted
specifically at whisky drinkers to see if they want the product. It is
all very well spotting a gap in the market for this bottled water but
for all they know the reason the gap is there is because no one
wants the product. They could also survey the whisky producers i The second paragraph develops
one way in which a more scientific
to see if there is a real commitment there for the product and
approach might be of benefit.
whether perhaps any tie-ups could be made in distribution. [§

The couple also need to be more detailed in their costs. At the

moment there is no mention of set up costs and no indication
of where this money will come from. If they had this information
as well as an idea of expected sales from market research they
could undertake investment appraisal. This would give them an
idea of how long it would take to pay back the investment as well
as the expected average rate of return. A discounted cash flow
& The third paragraph suggests a
would also give an indication of the potential for this business.
further way that a more scientific
While with some new innovative products it may be difficult approach might be useful. & The final
to undertake a detailed scientific approach as consumers are paragraph draws the answer together
unaware of the product, with a new water product | believe it to clearly, supporting the view that a more
scientific approach would be beneficial.
be essential. There is a high risk this product might fail and since
This judgement is supported throughout
consumers are aware of the product, detailed market research
the response and although the analysis
can be undertaken which can be linked to investment appraisal perhaps lacks a little depth in places
thereby reducing the chances of failure. The couple would very there is enough here for a very good
much benefit from such an approach. mark. 13/15 marks awarded

Student B answer

|
(d) Scientific management involves using specific tools to aid decision
making. One important tool is that of decision trees which are
tree-like diagrams that can be used to determine the best course of
action when several alternatives are possible. To undertake this, the
cost of each option, the potential outcomes and their probabilities
must be known. Once calculated the best option can be chosen.
There are a number of marketing tools that can also be used. The
Boston Matrix is very useful as it looks at a product in terms of its
market growth and market share. A product with high market growth
and high market share is a star whereas one with low growth and
share is a dog. Having such knowledge enables a business to make
marketing decisions related to that product, in the case of a dog
to stop making it perhaps. It is also possible to undertake market
mapping which can help a business spot a gap in the market. [5 This response demonstrates
an understanding of scientific
Another scientific tool that might be used is investment appraisal.
management but does not really
There are three methods: payback, which looks at how long
address the question. ERs It
it takes to pay back the initial investment, average annual rate describes various scientific tools:
of return and net present value. All can be used to judge if an decision trees, Boston Matrix, and
investment is worthwhile. & investment appraisal.

92 AQAA-level Business
 Paper 2 Data-response questions
——_—
ear a

Scientific tools are different to gut feeling or intuition in that they

use actual data to analyse the situation. As a result, providing
the data used are accurate, it enables a business to reduce risk
and increase the likelihood of success. With intuition, on the
other hand, you just think something will succeed and although
sometimes you might strike lucky, there are no guarantees. Gut *)There is some development of why
feeling is unlikely to persuade others to support your idea whereas they are better than intuition and a
with a scientific approach others may be more easily persuaded. f) judgement that they would be of benefit
but this is not based on any relevant
Overall therefore a scientific approach to management would development or context.
be of benefit as it reduces the risk of failure. 4/15 marks awarded

SailAway
SailAway is a business based around the reuse of sailcloth to make a variety of
different bags and accessories of all sizes from old sails and rope.
Its mission statement is ‘to make high quality products in a way that helps provide
solutions to environmental issues while at the same time delivering a profit to shareholders’.

Central to the brand are two key pillars, recycling and sustainability, which are
_essential in contributing to a better environment. In addition SailAway also has a clear
objective of achieving a 20% profit margin.
Based in Cowes (Isle of Wight) it now has six outlets along the south coast of England
as well as a worldwide following on its website. Waste is minimal and the numbers and
patterns on some sails can make for unique designs and products. Customers may
also ask for their own markings to be printed on the product. Such attention to detail
_makes for a highly price-inelastic product as shown in the latest sales figures following
_ aprice rise earlier in the year.

Retail outlets Online

PA
; *Cost of running and updating website (outsourced)
® Increase in sales price: 2019 20%
_ ® Average set-up cost of new retail outlet: £150,000
_@ Average running costs of retail outlet: £75,000
_ (@) Has SailAway achieved its objective of a 20% profit margin over the last two years
of trading? Use calculations to support your answer. (5 marks)
)

Make sure you read the question carefully as the profit margin for the last two years
is required. Remember to show all workings to make a direct answer to the question:
does it achieve 20% in both years?

Topics 1-6 93
Questions & Answers
Oe ee a ee ee mE ee re

(b) Explain why SailAway might have decided to outsource the running of its website. (7 marks)

| The command words here, explain why, mean that analysis is required, which should
| of course be undertaken in the context of SailAway.

(c) Analyse the importance of product design and low wastage to the success of
SailAway. ~ (9 marks)

| Use of the command word analyse requires you to develop an in-depth argument as
| to the importance of product design and low wastage specifically in the context of
|SailAway.

(d) To what extent do you believe digital sales through its website rather than
new retail outlets are the key to SailAway’s future success? (15 marks)

| Use of the command words to what extent means that judgement is required. Try to
| look at both sides and draw conclusions using context to support your answer.

Student A answer
(a) Profit margin refers to the percentage of revenue that is profit. It
is calculated by:
rofit
heen:
revenue
1.175
2018 73 x 100 = 16.10%

1.875
2019 a x 100 = 20.83%

SailAway has only achieved its objective in 2019 as in 2018 the profit
margin was only 16.10%. This is probably why it increased its prices Correctly answers the question.
for 2019 in order to achieve the 20%. 5/5 marks awarded

Student B answer
(a) Profit margin is calculated by:
profit
—_— x 100
revenue
1.875
x 100 = 20.83% Only the profit margin for 2019
has been calculated.
Yes, it has achieved its objective of a 20% profit margin. 3/5 marks awarded

Student A answer

(b) Outsourcing or subcontracting involves getting an external

business to produce a product or provide a service for you. In
this case SailAway has outsourced the management of running
its website. There are a number of reasons why the company
might have done this. One of the most important reasons is

94 AQA A-level Business

 Paper 2 Data-response questions

’ likely to be the cost, particularly when it is trying to reduce

4 costs and achieve a 20% profit margin. To run it themselves
t would involve the employment of at least one full-time employee
{ who would command a high salary and who might not be fully
occupied. By outsourcing to a specialist firm SailAway is likely
to be able to negotiate a fixed-term contract at a lower price
than an employee. It will be able to provide a clear brief for the
outsource firm and benefit from the expertise and skills of that
firm’s range of employees. The outsource firm is also likely to
provide a good service as in this case its own success and
reputation is dependent upon the service it provides for clients.
An excellent response demonstrating
This leaves SailAway and its employees free to concentrate on a good understanding and analysis of
other aspects of the business such as product designs and new why outsourcing benefits SailAway.
product development which is a key feature of its success. 7/7 marks awarded

bse B answer

(b When a company outsources it subcontracts another business to

_ undertake some aspect of its business. This is often undertaken

acking in capacity to fulfil demand and in order not to disappoint

customers and ensure high revenues and profit it outsources
ome production to another firm. In this case SailAway has
outsourced the running and updating of its website to another
firm. It may have done this because it was having problems
_ with it and customers were becoming dissatisfied. Perhaps it
_ lacked the experts within the business to do the job properly
_and anyway someone from outside could provide a fresh look
Outsourcing is understood and there is
at the issues and come up with new ideas to improve customer some development of the benefits but
} sfaction. This would be especially so as the outsourced this is not linked to the circumstances
iness is likely to be an expert in the field and will have lots of of SailAway and therefore lacks
good ideas. context. 3/7 marks awarded

|Student A answer
|(c) SailAway doesn't just produce any bag or accessory, it produces
. durable well-made products that consumers can rely on. In
,

|
| addition to this, the products can be designed to effectively
y use any logos or numbers on the sail cloth which can make a
|
product unique. This of course is something that consumers
would be attracted to and from a business point of view is
something SailAway could charge a little more for. This helps
generate greater revenue and also profit. Also SailAway can print
__ individual logos or emblems on to products, something which
| again can generate sales.
a

eel

Topics 1-6 95
Questions & Answers

Low wastage is another important issue and it is important that

it makes maximum use of the sailcloth and ropes bought in.
The lower the wastage, the greater the potential revenue from
each sail. It should be possible to achieve this as it produces
a variety of products, from large shopping bags to small purse
size bags, resulting in almost every square inch of the sail
being used. This is important in that it can both reduce costs
of overall supplies needed and generate greatest revenue from
each sail used.
This student clearly answers the
Overall then product design and low wastage are important to
question set, analysing the importance
the business in terms of generating greater sales and reducing of both product design and low wastage
costs, all of which hopefully contribute to greater overall sales in the context of SailAway.
and achieving a 20% profit margin. 9/9 marks awarded

Student B answer

(c) Product design can be crucial to the success of a business as.

an innovative design or unique design can be very appealing
to consumers. The fashion industry is a great example where
celebrities want to wear something that stands out and is unique
to them. If a business can find a way to produce unique designs
for its product or print a particular logo on it not only will this help
generate sales but it is also likely to attract a premium price, all
of which will generate higher sales revenue and profit.

Low wastage is also important in the success of a business in that

it can help to reduce costs. In the fashion industry it is important to
have every inch of cloth used in order to keep costs to a minimum. This student understands and
demonstrates how product design
Also the product needs to be well made to avoid returns as this is
and low wastage can contribute to the
another aspect of wastage that needs to be avoided. So by having
success of a (fashion industry) business
innovative designs and low wastage a business can significantly but it does not address their importance
improve its chances of success through greater revenue, lower. to SailAway and therefore is lacking in
costs and therefore higher profit. context. 4/9 marks awarded

Student A answer

(d) Traditional retailers appear to be suffering at the moment with

an increasing amount of sales being generated online or digitally
— this is true for almost every business. For a business not to
offer the opportunity for online sales would seem to be a cardinal
error. SailAway has embraced the idea of digital selling with
significant success. Despite the increase in retail outlets, digital
sales continue to outstrip those from retail shops. In fact the
growth in sales achieved digitally during 2019 was 25% whereas
the growth from shops in the same period was 20%. Online sales
are also 100% greater than retail sales at £6m compared to £3m.
This would suggest that digital sales are the key to SailAway’s
future growth and success.

96 AQA A-level Business

 Paper 2 Data-response questions
Eee eee eae

Furthermore, the costs of selling online are significantly lower

than those associated with traditional retailing. Although it would
also need storage space and employees to deal with orders,
the running of the website has a cost of only £25,000. Each
retail outlet, however, has a running cost of £75,000 before even
considering the one-off set-up costs. This would clearly point
to digital selling being the way to go. With pressure on costs
already and the aim of a 20% profit margin, digital selling seems
to be the way to go. [§
This may not be the whole story, however, as some form of
physical outlet can still be beneficial, particularly if positioned
strategically. lt would make sense to have some retail outlets
A well-balanced response that clearly
positioned on the coast close to holiday and sailing centres. answers the question set. EME! The
At the moment it has outlets along the south coast — maybe first two paragraphs demonstrating
it would want to have outlets along the east or west coast or the value of digital retailing are well
even in Europe. It would not have to be many, but what it would developed and in context using relevant
do is increase the exposure of SailAway to new customers who figures and calculations. § The third
paragraph provides balance and again
perhaps were not aware of the product. Being based in holiday
is well developed and in context. This
centres would give a wide exposure. Each individual shop
balance provides evidence of good
may not generate great sales but once consumers know of the judgement but also note the response is
product they can go online and purchase. & judgemental in tone throughout. ff)The
judgements made in the final paragraph
While it would seem that online sales are likely to produce the
are therefore based on and well
greatest growth in sales in the future, retail outlets cannot be supported by the foregoing analysis.
ignored. More sales may come digitally but physical shops There is no hesitation in awarding
placed strategically can give consumers a chance to see the maximum marks.
product and certainly help extend the consumer base. 15/15 marks awarded

Student B answer
EME: The first two paragraphs here
(d) The high street is suffering with shops closing down left, right demonstrate some understanding of
and centre. The key reason for this is the growth of digital sales the question and could, if developed
correctly and in context, lead to a good
— retailing as we have traditionally thought of it seems to be
answer. As examiners, we often see
coming to an end. This would all seem to suggest that SailAway’s
a little note and rough plan but this
future success is dependent on digital sales. 7 invariably adds nothing to the response
Selling digitally also significantly reduces costs. Rather than and more often than not indicates
the student is finding difficulty with
lots of individual retail outlets located in expensive-to-run high
the question. ® A student would be
streets, the business can be run from one warehouse located in far better advised to try to develop
a cheaper cost area. Amazon provides a good example of this: one of the points in more detail, for
it also has a good deal of automation within its warehouses and instance saying why retail may still
costs are significantly lower, demonstrating that SailAway could have a place, and if this and the earlier
also benefit from such cost savings. [} paragraphs could be set in the context
of SailAway there would be the basis
Global market for a reasonable mark. As it is though,
a weak response, and the student
Compete with larger businesses
clearly ran out of time.
Retail still has a place though & 4/15 marks awarded

Topics 1-6 97
Questions & Answers
Pe ee a de ee ne ele

Paper 3 Case study

BusCo
Introduction
Established in 1919, BusCo is a UK manufacturer of both single and double-decker
buses for the global market. Its development has not been without problems and its
future was only recently secured, when in 2015 a major foreign multinational based
in Asia, with interests in banking and vehicle manufacturing among other things,
bought the company, clearing all outstanding loans in exchange for new shares in
the business. This move left only 10% of shares in private investors’ hands. At the
same time, the business also reverted from plc status to private limited, a move that
did not go down well with those remaining private shareholders who have become
increasingly disgruntled over the years.

Organisational position
Before the takeover the company operated from three separate sites. This involved
the decentralisation of authority and created significant inefficiencies. As part of
the takeover the new owners insisted on a move to a new purpose-built factory,
bringing all operations together and a more centralised management structure. This
restructuring of operations, paid for by the sale of existing sites, was completed by the
end of 2017, resulting in significant cost savings with more to come. The new owners
also brought significant advantages in terms of the supply chain through their own
contacts and negotiating ability.

Workforce
BusCo had traditionally benefited from good employer-employee relations having
successfully gained union agreement for a single union deal in the mid-1980s, which
at the time was considered a major and very forward-thinking achievement. Although
there were inevitably some redundancies and employee grumblings as a result of the
restructuring, the good employer-employee practices utilised by syste made fora
relatively problem-free transition in this respect.

Product
The key attraction for the foreign investor was the advances the company had made
in the development of lightweight, low-carbon and particularly electric buses, in which
it is a leader in the field. The business has won numerous national industry awards
for innovation, air quality, low-carbon and electric buses. Not only did the investor
anticipate benefits in terms of increased worldwide sales but also benefits from the
intellectual property of BusCo which could be used in its existing businesses.

Market details
The market, however, is very competitive with, until recently, a reluctance by bus
companies to invest in new electric buses. BusCo see this as the way forward with
the development of both single and double-decker all-electric buses. As the UK
government and local authorities are now placing more emphasis on the environment,

98 AQA A-level Business

 Paper 3 Case study

sales can only grow. At the moment there are just 329 fully electric buses on the UK’s
roads but the government is set to help fund 263 new zero-emission buses in 2019,
almost doubling the number. With governments across Europe setting new directives
for the proportion of new buses being clean, the opportunities are immense.

Financial data
Table 1 Financial position 2018-19
2018 2019

Bis) Sia
Operating profit / loss

2018 2019

Other European sales m m

Non-EU (mainly middle

Table 3 Number of shares in issue Table 4 Share price

Number of shares in issue Share price
2015 2018 2015 2019
600m __|6,000m £0.01
The future
Having eradicated its debt and streamlined its production, the future of BusCo
now seems on a much firmer footing. Although still loss-making, costs have fallen
considerably and should continue to fall and with governments across the world
becoming increasingly environmentally conscious, the company is well placed to
prosper and regain the confidence of its remaining shareholders.
(a) Private shareholders of BusCo have become increasingly disgruntled over recent
years. Examine the reasons for their discontent. (12 marks)

The command word examine implies the need for analysis. The clues for the
shareholder discontent are within the case study and you need to use these to develop
your answer in context.

©) Analyse the benefits to BusCo of creating a more centralised business structure. (12 marks)

| Once again, the command word requires analysis and your answer needs to be
> developed in the context of BusCo.

\ Topics 1-6 99
Questions & Answers

(c) BusCo was able to undertake the restructuring of the business with very little
opposition from its workforce. Evaluate why this may have been the case. (16 marks)

The command word indicates that evaluation is required. Reasons need to be

developed in context with judgement.

(d) To what extent would you agree that product represents the most important
aspect of BusCo’s marketing mix? (16 marks)

The command words to what extent imply that judgement or evaluation is required.
To make a judgement regarding the product you will need to set this against other
aspects of the marketing mix.

(e) Although BusCo has significantly reduced its costs and its losses over the last
financial year the company is still not profitable. Evaluate the factors that are most
likely to contribute to a return to profitability. (20 marks)

Evaluation is required as to the factors (plural) that are most likely to contribute to
future profitability. There are a number of clues in the case study that your answer can
be developed around and that provide context.

Student A answer

(a) Shareholders buy shares for two principal reasons: to receive a

dividend and to increase their capital. Clearly BusCo has failed
on both counts. The company is loss-making and although this
loss has reduced over the last year, at £8m there seems little
hope for future dividends. To compound the issue there are also
now 10 times more shares in issue so should any future dividend
be declared the shareholders will receive a tenth of what they
could have. As to the potential for capital gain, their shares have
declined from £1 to 1p — a very sad state of affairs. With so
many shares now in issue there seems little likelihood of anyone
who bought at £1 getting their money back as £1 per share
would imply a ridiculous market capitalisation. Perhaps worst
An excellent response, demonstrating
of all for shareholders is the fact that the company has turned a Clear understanding and analysis of
private, making it very difficult for them to trade their shares. why the shareholders are disgruntled.
Shareholders, it seems, have every reason to be disgruntled. 12/12 marks awarded

Student B answer

(a) People buy shares for two very good reasons: to make a capital
gain and to receive a share of profit in the form of a dividend.
BusCo has failed in both regards, as its shares have now fallen
so low they are almost not worth having: £1,000 invested in 2015
A rather brief answer which is in context
is now worth only £10. Not only this but there also seems very
and which demonstrates knowledge
little hope for a dividend, with losses being made over the last and understanding, but lacks
two years and probably for a while before. Shareholders have detailed analysis.
every reason to be disgruntled. 6/12 marks awarded

100 AQA A-level Business

 Paper3 Case study
$$
eee

Student A answer

i (b) Operating from three separate sites would have caused BusCo
, significant inefficiencies such as duplication of roles and the
‘ difficulties involved in moving parts and buses around from one
; site to another. Having a decentralised structure would have
: meant delegating some power and authority to others and it is
i quite likely that those in charge of the three sites might work for
their own benefit rather than that of the business as a whole.
With a more centralised structure not only can production be
streamlined but so can decision making, with everyone singing
from the same hymn sheet. The great benefit of all this is that
| costs can be reduced, as can be seen from the figures for
| the last two years: the cost of sales as a percentage of sales
. has declined by nearly 13% from 94.11% to 81.48% and this
A well-developed analytical response
figure is likely to be reduced further in the future. It is therefore looking at a number of benefits in
not surprising that the new owners decided to centralise the context and using a calculation to good
business. effect. 12/12 marks awarded

_ more managers. Centralisation is where decision making is

_ kept in one place. It is easy to see why BusCo was initially

: _ duplication of roles and it may have been difficult to implement

This response demonstrates an
5 consistent practices across all three sites. By becoming
understanding of the terms but the
__centralised these inefficiencies can be overcome, common development is not always in context
_ practices for the whole business can be adopted, decision and as a result is rather descriptive
__ making can be quicker and it can be easier to control, all of rather than analytical of the situation at
hi _ which are likely to result in significant cost savings. BusCo. 6/12 marks awarded

Student A answer

(c) Getting the workforce on side particularly when big changes are
planned can be problematic for any business and often results
in disputes and even strike action. The fact that BusCo has been
able to undertake its restructuring with little opposition is a major
achievement though perhaps not surprising. A key reason for this
may be the fact that the company was in such a dire position.
It was clearly inefficient and making losses, and without the
takeover could easily have gone out of business altogether. The
workers therefore had perhaps little choice but to accept the
changes.

Topics 1-6 101

Questions & Answers
(UR

Although the above is in part likely there is also the fact that
the management has had a very good relationship with the
workforce. There is a long-standing single union deal making
A good response that develops two
any negotiations much easier. Communications are also likely
relevant issues in a judgemental
to have been good and if management communicated changes
manner and pulls this together in
fully, clearly outlining the reasoning and the consequences of not the final paragraph. This response,
accepting, and perhaps involving the employees in the planning although fully focused on the question
in some way then the workforce was more likely to accept them. set, would have benefitted from a
greater depth of analysis, e.g. by using
So although there may have been very little alternative for the relevant theory/theories such as Lewin
workforce it is likely that the long-standing relationship and or Kotter and Schlesinger, covered in
good communication between workforce and management the second year of the A level.
explain the lack of opposition. 13/16 marks awarded

Student B answer

(c) Having a motivated workforce is crucial to the success of a

business as not only does it mean employees are more productive
but it also means decision making can be quicker. The good
relationship BusCo has with its workforce implies a motivated
workforce that wants to do the best for the company andas
a result will be more willing to accept any proposed changes
provided it sees them as being to the overall benefit of the
business.
Motivation can be achieved in a number of ways such as good
working conditions and through the empowerment of the
workforce. This is supported by the theories of motivation, for
Although there is some attempt to
instance in McGregor’s Y theory. So if BusCo’s workforce is
answer the question set in the first
empowered and has good working conditions it is likely to be paragraph, the second paragraph drifts
motivated and a motivated workforce will be more accepting of the into motivation, leading to a lack of
proposed changes — provided of course it continues to have good focus on the issues related to BusCo.
working conditions and empowerment with the new arrangements. 6/16 marks awarded

Student A answer F\The opening paragraph sets the

(d) The marketing mix relates to the 7 Ps of marketing and for any scene nicely with a clear judgement
that is supported through the whole
business developing a marketing strategy it will wish to integrate
response. [|The second paragraph
its mix as effectively as possible. This implies that although an shows why product is important but
aspect or aspects of the mix may be more important than others suggests it will not always be the case.
it is very difficult to suggest that one specific element is the most
important. 2)
Product is certainly an important aspect for BusCo as it leads
the field in electric buses and its technology may be ahead of the
game. This is however a growing area of the market and there
are sure to be competitors who already have or are developing
their own buses. As a result, the product itself is unlikely to be
the most important aspect. [} ;

102 AQA A-level Business

 Paper 3 Case study

The price needs to be right to attract customers and it needs

to be competitive. Also, promotion has to be effective: this may
involve letting bus companies trial a product for a period before
purchase. This might be very important when trying to attract
worldwide sales and expanding its market overseas which
the sales figures indicate it is trying to do. This links to the P fat The third paragraph goes on to
of process, the way in which goods get to the consumer, and demonstrate the importance of an
integrated mix and the final paragraph
clearly shows the importance of an integrated mix. Also added to
draws the whole response together.
process is the idea of after-sales service, in other words not just Overall a well-planned and well-
supporting the customer through a purchase but also supporting executed answer that addresses
the customer after purchases. the question set and is judgemental
throughout but which might have
It follows then that although product is an important aspect of
benefitted from a greater depth of
the marketing mix for BusCo, it cannot be said to be the most analysis, perhaps by relating more fully
important as marketing relies upon an integrated marketing mix to the competitive environment.
of which product is only one element. f 13/16 marks awarded

| = place, people, process and physical environment. Product is

. _very important to a business such as BusCo. Its electric buses
are leaders in the field and this will only have been achieved by
*spending large amounts on R&D and making sure its product is
~ second to none. If your product is good enough it will sell itself.
This can be demonstrated by numerous other products such as
9 those produced by Apple, or Dyson vacuum cleaners. With these
companies their product stands out from competitors’ and they
7 almost sell themselves. Everyone, it seems, has an iPhone — it is

ean
F\The focus of this response is product,
showing why it is important to BusCo
in the opening paragraph but then
; aspect. Bon and ani fave found that competitors have
drifting to other examples. [ The
¥ ¢ tered their markets producing similar aes and as a result second paragraph emphasises the need
to keep up to date with the product
but again drifts away from the context
by using other examples. & The final
" answer to the euecten therefore for BusCo, product is at the
paragraph is typical of the response
nent the most important factor in their marketing mix. If it overall in that although the importance
remain so it must keep developing to remain the leader in of product is understood it lacks range
Id. This could be achieved through lighter and longer-life and a balanced judgement.
7/16 marks awarded

Topics 1-6 103

Questions & Answers
| ee a a ee

Student A answer

(e) There are a number of factors both internal and external that may
contribute to BusCo returning to profitability. Probably no one
single factor on its own will lead to profitability but a combination
of factors. 5
Internally, reducing costs has already led to a decline in the
losses made and as the benefits of working from just one site
are fully utilised, they are likely to reduce even further. There are
other areas where costs may be reduced, such as in costs of
supplies. Now having the backing of the takeover firm who also
operate in the bus market, BusCo may be able to benefit from
purchasing economies leading to a further reduction in costs.
This could therefore reduce losses but on its own is unlikely to
lead to profitability. [f
A second internal factor that could lead to profitability is that
of increasing sales. The more sales that are made, the more.
likely the business is to be profitable. Providing that each sale
more than covers the variable costs of production, the resulting
contribution will eventually cover fixed costs to break even and
then to profitability. There does appear to be considerable scope
for increasing sales — production now seems to be streamlined
in one factory, there is a greater environmental awareness and
the business does have an overseas presence which could be
further enhanced due to the takeover. Whether or not sales
increase, though, is probably dependent on a number of external
factors. &
The first of these is the general state of the economy and trading
relations. Due to Brexit there is a good deal of uncertainty at the
moment which may hamper sales particularly within Europe.
Growth within these economies and the UK economy appears
to be declining and should they move into recession this could
seriously hamper any growth in BusCo sales. This drawback,
however, could be offset by one big advantage and that is the
greater environmental awareness of governments around the
world. With governments passing new laws regarding emissions, & The first paragraph sets the scene.
particularly in cities, and in some cases providing subsidies for (AE: These paragraphs examine
investment into low carbon and electric vehicles, BusCo is in internal factors clearly in the context
prime position to take advantage. This could be a significant of BusCo. EEG The fourth paragraph
‘ ore looks at external factors and the whole
contributor to future profitability. @ response is drawn together in the final
Overall there are a number of factors that can contribute paragraph. The student has clearly
planned their answer and is aware that
to increased profitability but as a leader in the electric bus
it is not just one factor that will lead
field, BusCo seems uniquely placed to take advantage of the
to future profitability but a range of
increased environmental awareness. Providing the business factors. This provides good balance and
can stay ahead of competitors in this area, it should be able to judgement for the response.
return to profitability. 3 20/20 marks awarded

104 AQA A-level Business

 Paper 3 Case study
OO ——_-_- r—————————n—X—— _ |e

Student B answer

(e) Profit is the difference between the revenue and the costs of a
business and although BusCo is at the moment loss-making the
aim must surely be to make a profit. There are two ways that this
might be done. The first is to reduce the costs of production. By
restructuring to one site it has already begun to do this, resulting
in a reduction of its losses by £2m. We are also told there should
be further reductions in costs all of which should help towards
becoming profitable. 2)
The second method of improving profitability might be to
increase the volume of sales — the more it sells, the more likely F The opening paragraph demonstrates
it is to make a profit. This might be achieved through better an understanding of profit and looks
at the importance of reducing costs.
marketing or by targeting new markets. It leads the field in
fiThe second paragraph looks at how
electric buses and at the moment it does not appear to have the business might improve sales to
a presence in the USA so perhaps it could target this market. improve profitability. Clearly running out
Maybe it could find a way of better promoting its buses or finding of time, this student has developed a
new distribution channels. Perhaps it could reduce the price of couple of points with some context and
its buses. in so doing has scored a reasonable
mark. This is a much better approach
BusCo should therefore be able to achieve profitability by than writing a list of points when time is
lowering costs and increasing sales. % |limited. 9/20 marks awarded

Topics 1-6 105

Knowledge check answers
i sss

17 Consumers, employees, shareholders, suppliers, the

Knowledge check answers
local community and national government. -
1 To make money, to provide goods and services and to 18 Stakeholder mapping helps to identify the most
provide help and support to others. influential and powerful stakeholders involved in a
2 The mission statement paints the broad picture decision. Once these have been identified, a business
whereas the objectives are more specific. Objectives can then focus its attentions on these groups in order
are targets or goals that enable the business to to achieve success.
achieve its overall mission. 19 Sales value is the amount of sales in £s and sales
3 SMART means business objectives should be specific, volume is the number of sales in units.
measurable, achievable, realistic and time-based. 20 Internal influences include finance available and
4 Three advantages of being a sole trader include: it is expertise of personnel, whereas external influences
easy to set up the business, the owner takes all the include the economy and actions of competitors.
profit and their affairs remain private. 21 Market share refers to the proportion of total sales
5 An incorporated business has limited liability and is in a market that is controlled by one business. For
recognised as a separate entity in the eyes of the example, Tesco may control 28% of the grocery food
law whereas an unincorporated business does not market.
have a separate legal status from its owners and has 22 Qualitative information refers to the opinions and views
unlimited liability. of consumers collected through methods such as
6 A mutual is a business that is established for the focus groups, whereas quantitative information refers
benefit of its members who collectively own the to statistical data collected through surveys.
business. Examples include building societies 23 Sampling is important because it is impossible to
and insurance companies which were traditionally question all consumers. A small representative group
organised in this way. is interviewed with the assumption that they will
7 The ease of setting up, the risk involved and the reflect the views of the whole market. Sampling is a
product or service offered. cost-effective method of collecting market research
8 The share price might fall because of falling profit, information.
the expectation of falling profit or general economic 24 Correlation refers to the extent to which two or more
uncertainty. variables fluctuate together, for example there might
9 Market capitalisation represents the value of a be a positive correlation between the sales of a
business and is calculated as share price x number of business and the amount of advertising undertaken.
shares issued. 25 Demand falls, as do revenue and profit.
10 A business might benefit from a fall in interest rates 26 The Boston Matrix is used in product portfolio analysis
through increased demand as consumers have and shows a product in terms of its potential market
greater disposable income as a result of lower interest growth and market share.
payments on their loans and mortgages. The business 27 Skimming pricing is setting a high price in order to
itself might also benefit from lower interest payments skim off profit and an example is its use for new
on any loans, thereby reducing costs. innovative products. Penetration pricing is the setting
11 A business might adopt a fair-trade approach to of a low price in order to gain entry into a market and
enhance its reputation as an ethical business, which an example is a new magazine launch.
could generate greater sales. 28 A combination of the promotional methods used for a
12 The role of a manager includes setting objectives, product or group of products. It includes advertising,
analysing, making decisions, reviewing and leading. direct marketing, personal selling, POS displays and
13 Autocratic, democratic and laissez faire. merchandising.
14 The Tannenbaum Schmidt continuum shows the 29 E-commerce refers to the buying and selling of
relationship between the level of freedom a manager products and services through an electronic medium.
chooses to give a team and the level of authority of the 30 These Ps have become important because in the
manager. The Blake Mouton grid, on the other hand, service industry the people involved with selling
is amethod of analysing leadership styles in terms of a the product, the way it is sold and the physical
leader’s concern for people and concern for task. environment in which it is sold are crucial to the
15 The choice of decisions to be made and their cost, the success of a business. A manufacturer needs to
probability of success for each decision and the payoff consider these aspects as the way its product is sold
or financial outcome for each probability. and the physical environment in which it is sold can
16 This is the systematic approach of collecting facts have a big impact on the level of sales.
and applying logical decision-making techniques. It 31 In the growth stage the emphasis is on building
uses analytical tools such as decision trees instead a brand that differentiates a product from its
of generalising, trial and error, guessing or using gut competitors, whereas in the maturity stage efforts
feeling. ~ focus on building and maintaining customer loyalty,
perhaps with special promotions and incentives.

106 AQA A-level Business

 Knowledge check answers
———
ee

32 Lower costs owing to not having retail stores, and a 47 Three benefits of setting financial objectives include:
wider market as in theory the business can be global. they provide a focus to decision making; they provide
33 Operations management is concerned with converting a yardstick against which to measure performance;
materials and labour into goods and services in the shareholders might use them to analyse a potential
most efficient manner possible in order to maximise investment.
the profit of a business. 48 Cash flow refers to the money going into and out of a
34 Environmental concerns impact on operational business, whereas profit is the amount left over after
objectives in terms of the amount of packaging used, all costs have been taken from revenue.
energy usage and waste disposal. 49 The reason operating profit may increase while gross
35 Four reasons for setting operational objectives include: profit remains the same is because a business has
they promote efficiency within a business; unit costs been able to reduce its operating expenses.
may be reduced because of the efficiencies gained; 50 Capital expenditure is money spent on the fixed assets
profitability may improve as a result; they can be a of a business, whereas revenue expenditure is money
means of evaluating performance. spent on the day-to-day running of the business.
36 Capacity refers to the total or maximum amount a 51 It is important for a business to control its capital
business can produce, whereas capacity utilisation is gearing ratio because if this increases the business
the percentage of the total capacity it is currently using. becomes more exposed to increases in interest rates,
37 Excess capacity is spare capacity — the amount of which not only puts greater pressure on costs but may
potential capacity a business is not using. also reduce consumer spending on some goods.
38 Four ways to improve labour productivity include: 52 Variance analysis is the study of the reasons for
reducing the labour force without reducing production; differences between budgeted figures and the actual
investing in technology; improving training; motivation figures in a budget.
and job redesign. 53 Contribution can be used to calculate:
39 Two benefits of just-in-time production are reduced (a) breakeven output using the following formula:
costs and reduced damage/wastage. Two
fixed costs
drawbacks are related to the reliability and flexibility Breakeven oulput= +=
of the supplier: there are risks of production being contribution per unit
interrupted and bulk purchase discounts being lost.
40 Capital-intensive production is where there is a much (b) profit using the following formula:
greater reliance on capital and technology rather than Profit = total contribution — fixed costs
labour, whereas labour-intensive production is where
there is a much greater emphasis on labour rather 54 The main problems associated with breakeven
than capital and technology. analysis are that it assumes that all production is sold
41 Competitive advantage refers to an aspect of a and that products are sold at the same price. It is also
product or service that influences a consumer to difficult to apply accurately to a multi-product firm.
purchase one product rather than another. 55 A trade creditor is someone a business owes money
to in the short term (a payable), whereas a trade
42 Four possible measures of quality include: the number
debtor is someone who owes a business money in the
of complaints; the amount of wastage; the number of
returns; punctuality. short term (a receivable).
56 The benefits of raising money through equity rather
43 The attitudes of employees can cause difficulties in
than borrowing are that there is no interest to pay on
improving quality as they are often resistant to change
equity and it does not have to be paid back.
and may believe their job security may be threatened.
57 If a business tries to shorten the credit period allowed
44 Businesses ignore quality at their peril because, once
to customers in an attempt to improve cash flow,
damaged, a good reputation can be difficult to recover.
this could damage relationships as it may be a long
Consumers may buy a good once, but they will not
credit period that has attracted these customers in
make repeat purchases if they are unsatisfied with
the first place. If it tries to extend its credit period with
the quality of the product. A damaged reputation will
a supplier, the supplier may object to having to wait
spread quickly by word of mouth and social media.
longer to be paid.
45 Buffer inventory is the minimum amount of inventory
58 A hard approach to human resource management
(stock) that a business wants to hold and acts as a
is where employees are treated as a resource with
cushion against late delivery. Reorder level is the point
little in the way of communication, empowerment and
at which an order for more stock is placed. Reorder
delegation. A soft approach is where there is regular
quantity is the amount that is reordered each time.
communication and empowerment, and employees
46 Outsourcing may save a business costs, especially if are encouraged to take on responsibility.
an increase in demand is temporary, and it may mean
a quicker response. However, a business may suffer if 59 Labour productivity is likely to be affected by the amount
of technology employed in production, and the skills and
the quality and reliability of the outsourcing company
motivation of the workforce as well as by the external
iS not up to standard and outsourcing may be costly.
environment such as the state of the economy.
Topics 1-6 107
Knowledge check answers
—————n—n——l—l
a aaa eee

60 Labour tumover refers fo the number of employees whereas decentralisation may be more likely with a
leaving in a particular time period, whereas labour soft approach and non-uniform policy.
retention refers io the number of employees who have 65 The main areas covered by the human resource flow
been with a business for one or more years. are recruitment, selection, talent development and
61 It is imporiant to have a fully engaged workforce dismissal.
as this means that employees are likely fio be more 66 If ajob carries with it a degree of empowerment,
motivated and productive in the business. involvement in decision making, responsibility and
62 The Hackman and Oldham model looks at jobs in recognition, it is more likely to lead to engaged
terms of five core characteristics (skill variety, task employees.
identity, task significance, autonomy and feedback), 67 The scientific school of thought looked at employees
the impact of these on three critical psychological as a resource who were solely motivated by money,
states (experienced meaningfulness, experienced whereas the human relations school recognised the
responsibility for outcomes and knowledge of actual importance of employees’ social needs in motivation.
results) and how these in turn influence personal and 68 Financial methods of motivation include pay, bonuses,
work outcomes (high internal work motivation, high piece rate, commission and profit sharing. Non-financial
quality work performance, high job satisfaction and methods relate to general working conditions, flexible
low absenieeism). hours, health insurance and holidays, as well as things
63 Hierarchy refers to the levels of work and management such as recognition and involvement.
within an organisational structure; span of controlis 69 The role of trade unions is to represent their members
the number of subordinates that can be controlled in their place of employment. This is mainly in terms
effectively by one manager; delegation is the passing of of pay and conditions of work, but it can include
authority io a subordinate to carry out or manage a task. representing an individual in cases of unfair dismissal.
64 The style of management and uniformity of policy are 70 The main benefits of good employer-employee
likely to affect whether a business is centralised or relations are that they are likely to result in a more
decentralised in that centralisation is more likely with a engaged, motivated and productive workforce.
hard approach to management and a uniform policy,

108 AQA A-level Business

 Index
_——
SsSSSSSSSSSSSSSSSSSSSSSSSSS—S—S—SsMEAaAaa
— —— ——

Note: bold page numbers indicate contribution 55-56 empowerment 65

key term definitions. corporate objectives 38, 52 environmental issues 12, 37
corporate social responsibility equity 52,59
A (CSR) 7 ethics 18, 47
added value 37 correlation 24-25 expenses 50
advertising 33, 34 cost-plus pricing 33 extension strategies, product life
Advisory, Conciliation and costs 7,55 cycle 31
Arbitration Service (ACAS) 74
of labour 63 extrapolation 25-26
appraisal systems 62 reducing 43, 60
autocratic leaders 13, 14, 16 F
targets 51
average cost 39 factors of production 43
D fair trade 12
B data 23 finance sources 58-59
B2B (business to business) 35
financial 58 financial objectives 49-52
B2C (business to consumer) 35
human resource 62—64 financial performance, analysing
Blake Mouton grid 14-15 52-58
marketing 24-26, 27
borrowing 52, 59 financial reward systems 72, 73
operations 38—40
Boston Matrix 30, 31 fixed costs 7, 55, 56
debt factoring 58-59
branding 33 flexibility 37, 42, 43, 45, 46, 47
debt servicing 57
brand loyalty 21 decentralisation 67 forecasting
breakeven charts/analysis 55-57 decision making cash-flow forecasts 54—55, 58
budgeting 52-55 influences on 18 future sales 25—26
budgets 52 scientific 16-18
buffer inventory 46, 47
decision trees 16—17 G
bureaucratic leaders 13 globalisation 38
delayering 67
business culture 15, 70, 73 gross profit margin 50, 57
delegation 66, 67
democratic leaders 13, 14, 16
Cc H
demographics 12 Hackman and Oldham, job
capacity 39, 40
dependability 37, 45-46, 47 characteristics model 65
capacity utilisation 39, 40
digital marketing 36 Herzberg, Frederick, motivation—
capital expenditure 51
direct selling 33 hygiene theory 72
capital gearing 52
dismissal 68 hierarchy of a business 66
capital structure of a business 52
distribution, marketing mix 34 hierarchy of needs, Maslow 71
cash flow 49
difficulties of improving 60 human resource decisions
E employee motivation and
methods of improving 59 e-commerce 22, 34, 36 engagement 69-73
objectives 7, 51 economic factors 11—12, 22, 38, 62 employer—employee relations
cash-flow forecasts 54-55, 58 efficiency 40 73-74
centralisation 67 difficulties of increasing 41 human resource flow 64, 67—69
chain of command 66 ways of increasing 40—41 organisational design 64—67
charismatic leaders 13 elastic demand 26-27 use of data for 63-64
commission 72
employee costs 63 human resource flow 64, 67—69
competition 11, 18, 22
employee engagement 61, 69-70 human resource objectives 61—62
confidence intervals 25 Maslow’s hierarchy of needs 71 human resource performance 62—64
consumer profiles 23 employer—employee relations human resource planning 63—64
continuous improvement 41, 44 73-74
Topics 1-6 109
Index
CO DS SS.SSSSSSLSS.6505 950 08080808888 ...°°& =

I M operating profit margin 50, 57

impoverished management 14, 15 management types 13-15 operational decisions
income elasticity of demand (YED) effectiveness of 15—16 efficiency and productivity
26 influences on 15 40-43
incorporated businesses 8 managers, role of 13 inventory and supply chains
inelastic demand 26-27 margin of safety 57 45-48
interest rates 11-12 market capitalisation 10 quality 43—45
inventory control chart 46—47 market conditions 11 operational objectives 37-38
inventory (stock) 45 market growth 22 operational performance, analysing
influences on amount held marketing data, interpreting 24—26 38—40
46-47 marketing mix 29-35 operations data 38—40
investment 51 marketing objectives 21—22 opportunity cost 16
by shareholders 10 market mapping 23-24 organisational culture 15, 70, 73.
market positioning 28 organisational design 64
J market research 22-23 influences on 66—67
job characteristics model 65 value of changing 67
market segmentation 27—28
job description 68 organisational structure 64, 66—67
market share 22, 30
job design outsourcing 46, 48
Maslow’s hierarchy of needs 71
influences on 64—66 overdrafts 58, 59
mass customisation 45
value of changing 67
mass marketing 28 P
job enlargement 64
merchandising 33
job enrichment 65 partnerships 8
middle-of-the-road management
job rotation 64 payables 58 .
14, 15
just-in-time (JIT) production 41 payment methods, employee 72 -
mission statements 6, 10-11
penetration pricing 32
motivation of employees
K people, marketing mix 35
Kaizen 44
benefits of 69
performance-related pay 72
improving 69-70
person specification 68
L job characteristics model 65
PEST factors, impact on HR
labour costs 63 reward systems 72-73
decisions/objectives 62
labour productivity 40, 62-63 theories of 70-72
physical environment, marketing
calculation of 39 mutuals 9 mix 35
difficulties of increasing 41 piece rate 72
ways of increasing 40—41 N
place (distribution) decisions 34
natural wastage 63
labour turnover 63 positioning 28
niche marketing 28
laissez-faire leaders 13, 16 price elasticity of demand (PED)
leadership styles 13-15 non-profit organisations 9
26
effectiveness of different price leaders 32
15-16
O
objectives 6-7, 10-11 price takers 32
influences on 15 pricing decisions 32-33
financial 49-52
lead time 37, 47 primary research 22-23
human resource 67—69
lean production 41 private limited companies (Ltd) 8
marketing 21-22
benefits and drawbacks private sector 7—8
operational 37-38
41-42 privatisation 8
Oldham and Hackman, job
loss leaders 32 process, marketing mix 35
characteristics model 65

110 AQA A-level Business

 Index
—_
product design 31 resources, choosing optimal mix targets see objectives
product development 31 of 42 task management 14, 15
factors influencing 32 retained profit 58 Taylor, Frederick Winslow, work
productivity 38 see also labour retention of employees 61, 63 study 70, 72
productivity return on investment 51 team management 14, 15
product life cycle 30-31 revenue 7 technology
product portfolio analysis 30 and breakeven charts 55-56 improving labour productivity 40
profit 7 and budgets 52-53 improving operational efficiency
and breakeven analysis 56, 57 and elasticity 27 43
gross 50 and profit 7,50, 57 influencing operations goals 38
improving 60 targets 51 for marketing decisions 26
margins 57 total 55, 56 and new product development
operating 50 reward systems, employees 72-73 32
retained 58 and pricing decisions 33
targets 51 S termination of employment 68
vs cash flow 49-50 salaries 72 time-based management 41
for the year 50 sales growth 22 total costs 7, 55, 56
profitability sales/sales turnover see revenue total market size 22
analysing 57 sample size 25 total quality management (TQM)
methods of improving 60 sampling 24 41, 44
promotional mix 33-34 scientific decision making 16-18 total revenue 55, 56
psychological pricing 32 scientific school of thought 70 trade credit 58, 59

public limited companies (plc) 9 secondary research 23 trade unions 73-74

public sector 7—8 segmentation of market 27-28 training 41, 61, 68

public services 6 servicing a debt 57 turnover of labour 61, 63

shareholders 10 turnover of sales see revenue
Q share prices 10 two-factor theory, Herzberg 72
qualitative data 23 skimming pricing 32
quality 43 SMART objectives 6 U
unincorporated businesses 8
importance of 43 sole traders 8
unique selling point (USP) 11, 31
improving 43—44 span of control 66
unit cost 39
results of poor 45 stakeholder interests/needs 18-19
stakeholder mapping 19-20 unit labour cost 63
quality assurance 44
quality circles 72 suppliers, choice of 47
V
quantitative data 23 supply chain 45, 47—48 variable costs 7, 55, 56
survival of a business 7, 49-50, 51
variance analysis 53-54
R sustainable development 12
receivables 58
T W
recruitment 68
wages 72
redundancy 68 talent development 61 works councils 74
reliability 25, 42, 45-46 Tannenbaum Schmidt continuum 14
work study, Taylor 70, 72
reorder quantity 47 target market 27-28, 29

Topics 1-6 111

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 STUDENT GUIDE
AQA A-LEVEL

Business
Topics 1-6
Reinforce your understanding of managers, leadership and decision making
with this AQA A-level Business Student Guide. This book covers Topics 1-6
of the 10 themes in A-level Business, which can be examined in all three
A-level papers:
@ What is business?
@ Managers, leadership and decision making
@ Decision making to improve marketing performance
@ Decision making to improve operational performance
@ Decision making to improve financial performance
@ Decision making to improve human resource performance

This Student Guide will help you to:

® Identify key content for the exams with our concise coverage of topics
@ Avoid common pitfalls with clear definitions and exam tips throughout
@ Reinforce your learning with bullet-list summaries at the end of each
section
® Test your knowledge with rapid-fire knowledge check questions and
answers
@ Find out what examiners are looking for with our Questions & Answers
section

Other Student Guides for AQA A-level Business:

—
9781510471993 Topics 7-10 =———
—
——
—
—
Mike Pickerden _——
——
=—
———
———
—_—
_———
——=
———
—=
as
———
-—
——
bs

ISBN 978-1-5104-71
HODDER EDUCATION
t: 01235 827827
e: [email protected].).uk \
MT 781510"47

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