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AS Paper 1 Solutions

Table Of Contents

Business Activity

Size of business 8 marks

5 (a) Analyse the impact of small businesses on the development of a country. (8 marks)

The EU defines small business as either having fewer than 50 employees or turnover of up to €10 million Nearly, all businesses start small. Amazon started in 1995 in a garage selling books online with a start up capital of $250,000. Today it is a multibillion, multinational company. In this way small business may be the building blocks for future large businesses and become significant players in national and international markets. This means they can have a huge impact in the economic development of a country by providing tax revenue.

Small business can be more innovative. Facebook started in 2003 as a small business set up by a college student. By creating new ideas about how people interact socially in an innovative digital platform it grew to be a huge tech company. This not only inspired tech entrepreneurs to innovate in the USA but Facebook as continued to be involved in the research and development of new software and apps, like it’s move into Cryptocurrency in 2019. This has a huge impact on the technological and innovative development of a country.

Stakeholders 12 marks

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

Shareholders are the owners of public limited companies, and since the 70’s the argument from libertarian thinkers like Milton Friedman has been that PLC’s ultimate responsibility is their owners. Shareholders have invested capital in the business, without their capital the business could not function.

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 Thomas Cook and Wrightbus, 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 as they saw themselves as crucial to the companies 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 in 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. The US Business roundtable which represents the top US PLC CEO’s this year changed their purpose of a corporation from making profits for shareholders to improving society, protecting the environment, and acting ethically. In reality, to change the prioritisation of shareholders to other stakeholders will require a huge reformation of corporate governance. 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.

CSR/Business Ethics 12 Marks

Discuss why the shareholders of a public limited company might disagree with having corporate social responsibility (CSR) as a business objective. [12]


Shareholders want to make short term profits. Corporate Social Responsibility –  the interests of society by taking responsibility for the impact of their decisions – can increase business costs therefore reducing profits for shareholders.

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 shareholders 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, Unliver’s aim to be “a force of change for the good in the world” will require managers t analyse each decision they on the basis of CSR, and they may miss profitable opportunities as 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 disagree with CSR as an objective if they are seeking short term returns and high dividends. However, if they take a longer term view – the costs associated with CSR with be off set with higher longer term growth. Furthermore, there is a growing consensus among CEO’s that thinking only in a corporations interests is fundamentally damaging to society and the environment in the long term. Therefore in order to secure the stabilty and prosperity of the business environment in the future, shareholders should adopt CSR as a business objective.

 

 

People in Organisations

Leadership Styles 8 marks

5 (a) Analyse the difference between autocratic and laissez-faire leadership. [8]

An autocratic leader has complete command over employees and takes all major decisions. Without consultation from subordinates. It allows quick decision-making and may be applicable in emergency situations, for example when a supermarket is flooded and the manager needs to evacuate customers and protect any stock or equipment. It can also be suitable where employees are unskilled and where it is repetitive like a fast food outlet.

However, it can lead to low employee motivation and high labour turnover as subordinates feel undervalued and more like cogs in machines than actual people with feelings. Lassiez – Faire is where managers trust employees and delegate most of the decision-making to subordinates. Meaning literally “leave them to it” employees are allowed to perform the job as they see fit. Unlike autocratic where employees are tightly controlled and must follow the manager’s instructions to the letter. LF works best in situations with highly skilled, highly motivated employees who can accept responsibility. For example, a research team developing software for a smartphone.

Leadership Styles 12 marks

A democratic style of leadership is the most effective leadership style for a manufacturing business in a very competitive industry.’ Discuss this view.

Democratic style of leadership is where participation is encouraged, two-way communication used, and allows feedback from staff. The workers are given information about the business to allow full staff involvement. A manufacturing business in a very competitive industry would have to be innovative, flexible, and efficient to get the edge on competitors. For example in the car manufacturing business having a democratic leadership style will allow workers to become involved in decision-making to drive productivity improvements. Workers may also be more motivated and work harder. This should allow the production cost to decrease allowing for bigger margins than competitors. However, to enjoy the gains of democratic leadership there needs to be a suitable corporate culture in the manufacturing business and a higher-skilled workforce who can be trusted with greater responsibility. It will initially take more time to and resources to build this positive relationship with staff. Furthermore, it will mean decision-making will be slower. If the manufacturing business has to change product lines quickly in response to competitors this could be a disadvantage in a competitive dynamic industry. When a manufacturing business is considering which leadership style to implement it needs to evaluate what should be the focus that will give their business the greatest advantage. The productivity gains from a democratic leadership style may not be as great as investing in capital equipment which may be most cost-effective in improving efficiency and increasing margins. Furthermore, the successful implementation of democratic leadership depends on a number of factors, including employee skill level and motivation and the corporate culture of an organisation.

Marketing

Marketing Mix 20 marks

Discuss the likely impact on the marketing mix of a bank that decides to make increasing use of the Internet to provide its services.

The marketing mix is made up of four inter-related decisions − the 4Ps. These are product design and performance, price, promotion including advertising and place, where and how a product will be sold to consumers. The 4cs is a more modern view of the marketing mix focused on the customer based on Customer solution Cost to the customer, Communication with the customer, Convenience to customer. A successful firm will continually adjust and refine the marketing mix in line with customer needs and a dynamic business environment. A shift to online banking will require large changes to parts of the marketing mix in order to reflect the focus online rather than in brick and mortar banks. Virtually all traditional high street banks have had to rethink their marketing mix as online banking has become so popular. They also have to compete against new entrants to the market who are completely online like N26 and Munzo.

– Product / Customer – moving it services online will radically alter the customer solution. This means that customers can have instant access to their bank accounts to view the balance. Customers will be able to make payments, apply for loan overdrafts and mortgages. It will also allow banks to offer a large range of bank accounts – and much easier to switch between these accounts or set up the accounts. For example, banks could offer a current account with home insurance included in the monthly price.

– Place / Convenience – moving online gives customers the opportunity to manage your account wherever they are – on a laptop-tablet – phone. Instead of having to go to a brick-and-mortar bank, they can do their banking virtually. This is much more convenient for the majority of customers as they don’t have to travel to banks physically and means customers can have access to bank services 24/7. However, this may mean that they have to close their high street banks as less customers are using them. Traditional bank staff may lose jobs. This may make it less convenient for elderly customers or less tech-savvy customers who find it difficult to shift online after years of banking.

Price / Cost – potential reduction in location costs – although setting up an online system of banking will require a large start-up cost and maintaining the network will need a large increase in the IT budget, this will be hugely offset by the reduction in costs by automation. High street banking locations are highly expensive to rent and maintain. Furthermore, staff in a previously labour intensive service are a huge cost which can be massively reduced by moving online. However, with banking now available online with competitors like Munzo and N26 it means the barriers to entry of needing physical premises have been taken away. As their new competitors don’t have to pay for high street banks they can have much lower margins and charge lower prices to customers. This means that the bank will be under pressure to reduce its price to keep customers.

Promotion / Communication – significant change here – as the bank will have the opportunity to sell many more bank-related services such as insurance or a larger range of bank accounts. Moving communication online allows banks to sue the data of customers to target their promotion much more accurately and effectively. For example, they could target car loans at younger customers with a high income but low savings. Investment accounts to customers with high savings. They can also use email, social media like Instagram or their own app to target different customers and try and gain new customers.

Overall, the marketing mix will be affected mostly by place and promotion. Place because moving online will mean that for most customers most of their transactions and banking business will now be done online rather than going into a physical bank. This presents opportunities in terms of cost reduction but also a greater threat from competitors. It is also now much easier for customers to move to online banks that don’t need to have a physical presence near to their customers. The bank needs to put huge effort to make sure that the new “place/convenience to the customer” is easy to use, but also secure so customers feel their money is safe. They also need to make sure if there is a problem they can get the problem solved quickly and they still feel like a valued customer when the customer service management at the physical bank is no longer there.

This means promotion/communication with the customer is critical if the bank takes advantage of the opportunities afforded by moving online. The bank can retain its existing customers and add value through additional services if it communicates effectively and maintains a positive relationship through the transition. It will have to radically change its promotion strategy to keep its services relevant and competitive against the new entrants to the market and existing banks.

In reality, although place/promotion will be most impacted – all of the marketing mix will be hugely changed by moving online. It is probably the biggest innovation in banking since people first started using banks, so getting the right balance in the marketing mix between all the different elements will be crucial to capitalising on the opportunity.

Operations

Just in Time 12 Marks

Discuss the factors which could influence the successful operation of Just-in-Time (JIT) inventory management. 12 marks

Excellent employee–employer relationships are essential. If there is a bad relationship between management and factory workers in a car factory, a strike will lead to a halt in production. As Just in Time relies on finished stocks being taken away directly from the factory to the car dealerships this could lead to customers orders for cars not being complete. This will lead to damage to the car company’s reputation and lost sales as customers may cancel their orders or move to a competitor for their next car purchase as they are unsatisfied. Positive relationships between employers and employees is so important that many Japanese car firms insist on a no strike deal with unions if they are going to operate Just in Time.

Furthermore, relationships with suppliers need to be excellent. Suppliers must be flexible enough to cope with changes in demand for components with little warning from the factory. This is because Just In Time requires parts from suppliers to arrive very soon after they are ordered, and go straight onto the production line in order to be used in the manufacturing of the finished product. If suppliers can’t respond quickly to orders this will mean the parts do not arrive and the production line will be halted. A stop in the production line will lead to a huge increase in costs – as workers will have no work to do and machinery in the factory will have to stop.

However, if suppliers can respond quickly to the factories costs can be reduced in the long term, by eliminating the need to store suppliers of parts at the factory. Ultimately, JIT is best suited to industries with a high level of technology integrated into machinery, through computer controlled manufacture and sophisticated IT systems to control orders from suppliers and customers.

Even with excellent relationships with suppliers and employees, a highly sophisticated and reliable IT infrastructure will be needed to control all the information about customer orders and suppliers. Without the technology to facilitate the intricate timing of orders, JIT is unlikely to be successful. For this reason car manufacturers like Toyota or Nissan or Dell Computers have successfully been able to implement JIT inventory management.

Finance

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