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Business and it’s Environment Solutions Paper 1

Business Activity 💡

(a) Define the term ‘opportunity cost’. [2]​

The potential benefits of the next best decision a business gives up, ​when it decides on one business opportunity over another.​

(b) Explain two reasons why many new businesses fail in their first year of operation. [3]

Sufficient finance is not secured. A business may not have cash coming in from sales, or enough start up capital to pay their debts so the business is forced to close.​

Poor market research. Businesses forecast demand for their product on service based on what they project their sales will be. If the demand forecasts are not accurate, sales will be lower than expected, and the business does not have enough incoming revenue to continue trading.

Other Acceptable Answers:

A lack of business/management experience causes poor decisions to be made.
 
Competitor behaviour – to make market conditions more difficult for new businesses.

Change in the economic conditions (like a recession or global pandemic) radically changing consumer behaviour

Social Enterprise 💡

(a) Analyse the impact of social enterprises on the development of a country. [8]

A social enterprise is a private enterprise that uses profits to pursue environmental or social objectives. Therefore, social enterprises empower people who may need additional support to contribute positively to the development of the country.  For example, social enterprises provide micro-finance to small business people who can’t access capital from banks. This means that these small business people now positively to the country’s economy leading to increased employment and GDP for the country.

Social enterprises can also focus on parts of the economy that may be ignored by companies focused solely on profits and return on investment to investors. For example, a social enterprise may focus on sustainable eco-tourism, a new market that may take a long time to develop. This means that economic activity becomes more diversified as more potential markets are explored. This has a positive impact on a country’s economy as it means the economy is more innovative and robust and not just focused on a few small sectors.

Social enterprises can also provide education and training that may not be provided by the government or local businesses.  For example, training farmers how to use more sustainable methods for growing crops.  This means that the country’s land becomes more productive in the long term and leads to sustainable growth in the economy. If the farmers don’t farm in sustainable ways it may mean harvest failures in the future that will lead to a negative impact on the economy. 

Other Acceptable Answers:

Provide services to larger companies.

Redistribute their profits to help less well off or more vulnerable members of a county.

Fund projects if spending is cut from NGOs or charities.

Economic Sectors 💡

(b) Explain two advantages that a business in the public sector may have that a business in the private sector may not.  [3]

Easier to access capital as the government can offer loans to public sector businesses at lower interest rates even if they already have  high levels of debt. 

Private sector business often find it difficult to secure loans from banks and may have to pay high costs for capital.

Public sector business like water, health or electricity are usually providing services to the public so are not expected to make a profit, their performance is judged by how effectively they provide their services. 

Private sector businesses must at aim to provide a profit and a return on investment for shareholders or owners.

Other Acceptable Answers:

Public sector organisations often very large organisations that can utilise economies of scale.

Business Objectives in the Private Sector and Public Sector 💡

Explain why the objectives of a business may change over time. [5]

Objectives are the measurable targets that a business sets out to achieve and can include survival, growth and profit maximisation.

As many businesses fail in the first year after they begin, many start up businesses have the objective of survival. However, if a business successfully makes it past the difficult start up, phase their objective could change to growth or increasing profits.

In a negative economic environment such as a recession, businesses may need to change their objectives from growth or profit maximisation to survival.  

This is because in a recession many businesses fail and it becomes much more difficult to keep customers.  By changing to a survival objective businesses can’t cut back on unnecessary costs, reduce prices and ensure they can make it through the difficult economic circumstances.

Other Acceptable Answers:

Competitive environment

New leadership style

Technology 

New opportunities arise with internal and external growth such as globalisation

Objectives and Business Decisions 💡

(b) Discuss why the shareholders of a public limited company might not support corporate social decisions responsibility (CSR) as a business objective. [12]

Shareholders primary focus is for a business to make profits and provide a return on their investment in a PLC. Corporate Social Responsibility focuses the objectives of business not just on what is beneficial for shareholders but on the interests of wider society.  This means that a PLC must take responsibility for the impact of its decisions on the environment and other stakeholders in the business. As this may negatively impact profits shareholders may disagree with CSR.

CSR can increase costs. Netflix offers 52 weeks of paid parental leave to all it’s staff.  This will significantly increase labour costs as Netflix will have to pay for the staff who are spending time with their kids and hire a replacement.  The decreased profits could mean shareholders dividends are reduced and/or less retained profit to fund future growth.

However, this CSR policy could be beneficial to Netflix as it allows them to attract the best staff, reduce turnover as staff don’t want to motivate employees and will motivate employees as it shows Netflix care about the wellbeing of staff and their families.

Furthermore, CSR may distract the PLC leaders from focusing on their core objectives. For CSR to work effectively leaders throughout an organisation must consider the impact of all of their decisions on the environment and local community.  For example, Unilever’s aim to be “a force of change for the good in the world” will require managers to analyse each decision on the basis of CSR,  and they may miss profitable opportunities due to potential conflicts with other stakeholders.

However, if CSR is embedded in the corporate culture, Unilever can benefit from enhanced reputation and decrease the exposure to legal action or corporate scandals – which can lead to stable long term growth.

Shareholders may be ethical investors. For example, only investing in companies that’s don’t pollute or treat workers badly. As CSR ensures a PLC’s activities contribute positively environmentally and socially it will be favoured by ethical investors.

This means these types of shareholders will support CSR and pressure the business to maintain high ethical standards.

CSR can build customer loyalty. For example, IKEA allows customers to sell back unwanted furniture to reduce waste. This means that business with CSR can reduce marketing costs for finding new customers.

Furthermore by building a strong relationship with customers this will lead to repeat purchases and long term revenue growth.

If shareholders take a longer-term view – the costs associated with CSR with being offset with higher longer-term growth. There is a growing agreement among CEO’s that thinking only in a corporations interests is damages society and the environment in the long term. Therefore in order to secure the stability and prosperity of the business environment in the future, shareholders should adopt CSR as a business objective. Shareholders may disagree with CSR as an objective if they are seeking short term returns and high dividends.

Other Acceptable Answers:

Shareholders may well believe that it is the aim of businesses is to make profits, not to do social good.

Shareholders may believe a company following the law is enough with legislation – not CSR.

Business Stakeholders 💡

Explain how the interests of two stakeholder groups could affect the decisions of a business. [5]

Stakeholders are people or groups who have an interest in or relationship with a business. Businesses, especially market-oriented businesses increasingly must make decisions based on the interests of customers. 

Customers want a good product but also to keep their identify safe. Apple recently changed it’s privacy policies so social media companies like Facebook find it more difficult to access personal data of Apple consumers. This is in response to growing customer concern about their privacy at risk from technology companies. 

Private and public limited companies must respond to the interests of shareholders. 

Shareholders are interested in increasing profits so dividends will increase and increasing the value of the business so the value of their shares will increase. This means that shareholders will pressure companies like Apple to put profits first and may be unwilling to protect customer data if it means lower revenue. 

Other Acceptable Answers:

– employees – management
– shareholders –– suppliers – local economy – local /national government – pressure groups.

 Business decisions of interest to stakeholders include: how profits are shared
– expansion–business ethics

Different stakeholders will have views on such business decisions that
may lead to stakeholder for example shareholders vs. employees with regard to wages salaries

The Importance and Influence of Stakeholders 💡

(b) Discuss the view that a public limited company should prioritise the aims of its shareholders rather than those of other stakeholder groups. [12]

Shareholders are the owners of public limited companies. For example in Coca-Cola or Microsoft they control companies by setting the direction of leadership, This means their aims are prioritised by PLC’s as business leaders are accountable to the shareholders.

The aims of making a profit and increasing value are prioritised as this will lead to higher dividends and share value for shareholders.

Furthermore, shareholders have taken a risk that the business will be profitable in the long term, therefore they should be rewarded through high annual dividends and by long-term growth in the share prices. As we have seen with the recent collapse of Brookes Bros and GNC, if a company goes into liquidation the shareholders lose all of their stake in the business.

Shareholders argue that as they finance a company they are the most important stakeholder and their aims should therefore be prioritised.

However, other stakeholders (groups who are impacted by the PLC’s decisions) should also be considered in business decision-making. Internal stakeholders like employees and managers should not have bad pay or working conditions just to make sure that shareholders have higher profits. Pilots at British Airways went on strike to demand higher pay and a greater share or companies’ profits.

These employees argued they are crucial to the British Airways success.

Customers in gas and electricity companies have complained that they are forced to pay higher prices just to maintain profits for shareholders in utility companies. This raises questions of business ethics if poorer customers are pushed into poverty as they must pay higher prices to heat their homes.

Furthermore, the local community are also stakeholders and can be hugely negatively impacted if a firm pollutes. Oil companies like Shell and BP may have cut costs to protect profits for shareholders, leading to insufficient safety procedures to protect the local community from oil spills.

Therefore, there is a strong case that PLC’s should not prioritise shareholders above other stakeholders.

If this means their activity will have a negative impact on the people or the environment. Top US PLC CEO’s have changed their aims from making profits for shareholders to improving society, protecting the environment, and acting ethically.

However, to change the prioritisation of shareholders to other stakeholders will require a huge change in company culture. PLC’s are currently accountable only to their shareholders. But companies like Unilever have shown that PLCs can balance the need to reward shareholders and act responsibly to other shareholders.

Other Acceptable Answers
• Discuss further stakeholders, duties, responsibilities,
rights, contributions.
• Discussion if one stakeholder might deserve special treatment
favourable treatment.
• How equal should stakeholders be?
– Corporate governance.
•  Different kinds of shareholders (big and small).
•Can plc’s address all stakeholder needs?
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