Unit 1 : Business and its Environment

Unit 1AL.1 : ENTERPRISE – No topics beyond AS level.

Unit 1AL.2 : BUSINESS STRUCTURE.

Differences between local, national and multinational businesses :
1) Local businesses are business firms that are only located at certain specific place
in a country.
a) They normally operate in a small and well-defined part of a country and do not
have expansion as a BUSINESS objective.
b) Examples are carpentry firms, interior design decorating firms and hairdressing.

2) National businesses are business firms that have BRANCHES set up all over
the country.
a) However, they do not have firms or branches operating in OTHER countries.
b) Examples are large car-retailing firms, national banking firms and
telecommunication companies like MAXIS

3) Multinational businesses are business firms that operate in more than one country.
a) Multinationals generally are large PUBLIC limited companies that have many
shareholders and a wide variety of businesses situated all over the world.
Nature and scope of international trading links :
1) All countries , to a greater or lesser extent, engage in INTERNATIONAL trade with other
countries.
2) By trading together, countries can build up improved POLITICAL and social links that
would help to resolve differences between them.
3) Huge expansion in trade between certain countries, for example China with EU, has a great
impact on their ECONOMIC development.
4) Internationally trading can also have drawbacks and has the following impact on
economic activities.
a) Domestic firms that cannot compete effectively with imported goods may experience
a drop in the LEVEL of output produced and there will also be a loss of jobs.
IMPORTANT NOTE : RESULT : Unemployment rate increases
b) Newly established businesses may find it hard to survive against competition from
existing exporting countries. This will prevent these INFANT industries from growing
domestically.
c) Exporting countries may practise DUMPING and sell at below cost price in order
to eliminate competitors from the importing countries.
d) Increasing imports may result in the decline of important STRATEGIC goods
produced such as foodstuffs .This could put the country at risk if there were a conflict
between countries.
e) If the value of imports exceeds the value of exports for several years, then this could lead
to a net outflows of FOREIGN exchange and put a strain to the country`s balance of
payments.
f) The switch to producing goods in which the country has a COMPARATIVE advantage
may take a long time. There will be also factory closures and job losses before other
production increases.
Multinationals :
1) A multinational business is one which owns and controls business operations outside the
country in which it is based.
a) They are in effect HOLDING companies with shares in many overseas subsidiaries,
each of which is subject to the company law of the country in which it is located.
b) Examples of European multinationals are Shell, Nestle and Unilever, Toyota/Hitachi.
** Holding company : A holding company is a company specially formed to take a
controlling interest on other firms. The firms that are being controlled are called
subsidiaries.
Importance of Multinationals :
1) Level of employment :
a) Multinationals are very large employers and would create a huge JOB opportunities
to the local community.
b) Thus, will have a major IMPACT on an economy when factories are opened / closed.
2) Foreign exchange :
a) The location of a new site for a multinational will require a large volume of foreign
EXCHANGE
b) Thus the funding of multinationals could result the EXCHANGE rate fluctuating in
the foreign exchange market.
3) Tariff barriers :
a) To avoid the impact of trade tariffs or quota controls, multinationals set up subsidiaries
or give FRANCHISES to other companies.
b) Another recent trend has been to set up JOINT ventures with home producers. A good
example would be joint ventures set up with car manufacturers like Honda and Rover.
4) Transfer pricing :
a) Multinationals are able to take advantage of the tax systems of the countries in which
they operate.
b) They deliberately making a small profit in countries with high TAXATION and transferring
the price of inputs so that the greater part of the profit is made in countries with low
taxation.
5) Political power :
a) Government will not want to offend companies who may choose to withdraw investment
and invest elsewhere.
b) Government often offer very attractive terms to influence multinationals in its choice
of LOCATION.

Advantages of Multinationals :
1) Closer to the main market :
a) Lower TRANSPORT costs for the finished goods
b) Easier to get market information about consumer`s needs and wants.
c) May be looked upon as a local company and as a consequence, gain customer LOYALTY
2) Lower costs of production :
a) Lower LABOUR costs in operating countries compared to developed economies.
b) Cheaper rent and site costs :- could lead to substantial increase in EXPORTS
of goods produced.
c) Government grants and tax incentives designed to encourage the INDUSTRIALISATION
of the country.
3) Access to local natural resources :
a) Some natural RESOURCES might not be available in the main operating country but
are available in the new operating countries
b) Availability of local natural resources will definitely increase the OPERATIONAL
efficiency as the supply of these resources are regular .
4) Import restrictions :
a) By producing in the local country, there will be no import DUTIES to pay.
b) Other import restrictions like quota on imports will be greatly reduced.
Drawbacks of Multinationals :
1) Communication links with headquarters may be poor :
a) Language, legal and culture differences could lead to slow DECISION-MAKING
process and poor co-ordination.
b) As a result, this could lead to MANAGEMENT inefficiency
2) Poor co-ordination may also lead to products produced may compete with each other on the
world markets or conflicting POLICIES being adopted.
3) The skill levels of the local workforce will be low and could require substantial TRAINING
programme. This will increase the costs of production.
Multinational operations : Impact on the HOST country.
Benefits to the operating ( host ) country :
1) Employment opportunities : The setting up of multinationals would create more JOBS
will be created for the local people. Increased employment level would mean a reduction in
unemployment rate and increase the general WELFARE of the people.
2) Foreign exchange : Investment in multinationals will bring in foreign EXCHANGE and if
output from the plant can be exported, further foreign exchange can be earned.
3) Expansion of local firms :
a) The existence of multinationals would also benefit the LOCAL firms which are
supplying services and components to these multinationals as this will generate
additional jobs and INCOMES.
b) Local firms will be forced to bring their quality and productivity up to INTERNATIONAL
standards in supplying services and components.
4) Tax revenue : The government will collect more CORPORATE tax from profits made by
multinationals.
5) Skills of workforce :
a) The local workforce will benefit from training programme provided by the multinationals.
b) The local workforce will be trained eventually to take over the management staff level
once they are qualified.
6) Gross Domestic product ( GDP ) : The existence of multinationals will further boost the
total OUTPUT of the economy and will increase the value of GDP thereby raising
the standard of living of the local people.
Main drawbacks of multinationals ( HOST country )
1) Exploitation of local workforce : Due to the absence of strict labour and health and safety
rules in some countries,multinationals can employ cheap LABOUR for long hours with few
benefits. Recent publicity has forced Gap and Nike clothing companies to monitor the
employment of illegal child workers in Thailand .
2) Environmental pollution : Pollution from plants might be at HIGHER levels than allowed
in other countries. This could be because of slack rules or the host country is afraid of
driving the multinationals away.
3) Incompetence of local firms : Local firms might be squeezed out of business as a result of
not being able to compete in terms of EFFICIENCY + in terms of much smaller resources.
4) Net outflow of dividend : Profits from multinationals may be sent back to the country where
the head office of the company is based. There will be a loss of
FOREIGN exchange . If the profit can be reinvested back, then it would further
generate more JOB opportunities and increase the OUTPUT produced.

5) Cultural identity : Large businesses like McDonald and Coca-Cola have been accused of
imposing `Western culture` on other societies by the power of advertising and promotion.
This could lead to a reduction of cultural IDENTITY.
Public sector enterprises ( Public corporations ) :
1) A Public corporation is a business enterprise owned and controlled by the state. ( local
or central government ) It is also known as NATIONALISED industry.
2) Advantages of public sector enterprises :
a) It is managed with social objectives and PROFIT maximization is not the main objective.
b) Loss-making public corporations like railway service might still be kept operating if the
SOCIAL benefits is great enough.
c) Finance raised mainly from the government.

3) Disadvantages of public sector enterprises :

a) Management inefficiency as a result of lack of strict profit TARGETS.
b) Subsidies from the government would encourage these public corporations to become
too dependent on the government assistance and thus not motivated to achieve
business objective of making PROFIT
c) The government may interfere in business decisions for political reasons. The setting up
of a new branch in certain locality is with the aim of gaining popularity.
PRIVATISATION :
1) It is the selling of state-owned and controlled business organisations to investors in the
PRIVATE sector.
a) The transfer of ownership of nationalised ( state-owned ) industries to the private sector
by creating PUBLIC limited companies is with the main aim to improve EFFICIENCY
b) It is argued that nationalised industries were inefficient as they lack the incentive to make
profit since their main aim is to provide SOCIAL services.
c) Examples of privatisation : British Telecom ( 1986 ), British Airways ( 1987 ) ,
Water ( 1989 ) & Electricity ( 1990 )
ARGUMENTS FOR PRIVATISATION
1) The profit motive of private sector businesses would increase the level of EFFICIENCY
compared to public sector businesses which is subsidised and supported by the state.
2) Decision making for public sector businesses can be bureaucratic and SLOW
3) The success of a private sector business lies firmly in the hands of managers and the staff
who work in the organisation. There will be strong motivation as workers have a DIRECT
involvement in the work and there is also a greater sense of EMPOWERMENT.
4) Market forces will allow to operate. Efficient firms will survive and continue to operate and
expand. It has been argued that most privatised businesses have experienced increased in
PROFITS earned following the sell-off of nationalised industries.
5) It is also argued that the government has been managing state industries for political reasons.
Decision making in the business is with the aim to gain political POPULARITY
6) Sale of nationalised industries has resulted in the increase of REVENUE for the
government. The government can make use of this revenue to further finance on other
state projects.
7) Private businesses will have access to the private capital markets and this could further lead
to an increase in investment in these industries.
8) The government had set up regulatory bodies such as Ofwat and Oftel in UK to act as
specialist `watchdog` to monitor and control the activities of public utilities. They will
ensure that FREE competition exists and there will be no CONSUMER exploitation.
ARGUMENTS AGAINST PRIVATISATION
1) The government should continue to operate essential industries in order to satisfy the needs
of SOCIETY and not just the interest of SHAREHOLDERS. Essential industries would be
allowed to continue to operate their business activities that private companies consider
UNPROFITABLE
2) A state-owned business would be made accountable to the country. It is under the
responsiblility of a Minister who is directly accountable to parliament.
3) If a `strategic` industry is operated as a `private MONOPOLY, consumers might be exploited
when the price has been raised up deliberately.
4) It is difficult to achieve a coherent and coordinated policy when PRIVATELY-run
businesses are allowed to compete openly in the market.
5) If nationalised industries are broken up into several competing units, it will reduce the
opportunities for costs savings through the ECONOMIES of scale.
5) Private Finance Initiatives ( PFI ) :
a) The Private Finance Initiative ( PFI ) was introduced in 1992 and it falls under the Public-
Private Partnership ( PPP ) umbrella.
b) Under a PFI scheme, a capital project has to be designed, built, financed and managed
by a private consortium, under CONTRACTS that typically last for 30 years.
c) The private consortium will be paid regularly from government funds according to its
performance during that time period.
d) If the consortium misses performance targets it will be paid less. One example of an area
where PFI has been used extensively by the government is in the construction of hospitals.

Advantages of PFI :
1) The government does not have to fund expensive one-off payments to build large scale
projects that may involve unpopular TAX increases.
6) The risk involved in funding large scale projects is transferred to the PRIVATE sector.
If the private consortium goes out of business before the completion of the project, the
government does not have to pay any extra costs that may accrue because they are borne by
the consortium.
3) The public borrowing by the government does not increase as the government is not funding
the project.
Disadvantages of PFI :
1) As it is a form of hire purchase, the costs of the assets over a long period of time is greater than
the capital costs.
2) The amount of risk being transferred to the private sector is questionable. It had been proven
that from government`s record that the government is actually bailing out PRIVATE
companies managing troubled public services.
3) Private firms taking over nationalised industries in providing public services may actually
providing poor quality services as they are pursuing PROFIT as their main motive.
4) The true cost of many projects using PFI scheme have been questioned by public sector
accountants. They claim that projects like schools and hospitals would be cheaper if they
use traditional methods of funding.
5) Evidence had shown that PFI may become POLITICALLY unpopular. Record had shown
that in an election, a safe Labour Party seat was defeated by an independent candidate who
stood as a protest against a new PFI hospital.
FREE TRADE AND GLOBALISATION :
1) Globalisation is the growing trend towards worldwide markets in products, capital and
labour, unrestricted by BARRIERS
2) Free trade is the freedom to trade without any RESTRICTIONS or trade barriers which may
limit or prevent trade between countries.
3) Many countries are using barriers to restrict free trade. The most common forms of trade
barriers are : a) tariffs. b) quotas c) voluntary exports restraints.
4) Tariffs are taxes imposed on imported goods .
a) Tariffs will make the imported goods more EXPENSIVE than they would otherwise be
b) The imposition of tariffs is with the aim to reduce imports and encourage purchasing of
DOMESTIC goods.
5) Quota is the limit on the physical quantity or value of certain goods that may be IMPORTED
6) Voluntary export limits : An agreement whereby an exporting country agrees to limit the
quantity of certain goods sold to one country. It is to discourage the setting of TARIFFS
or quotas by the importing country.
7) Protectionism : It is the technique using trade barriers by a country to limit free trade in
order to protect its own domestic industries or better known as import SUBSTITUTED
industries . Trade barriers include tariffs, quotas and voluntary export restrictions.

BENEFITS OF FREE TRADE :

1) As a result of free trade, consumers are generally have a much WIDER choice of goods
and services offered in the market. Without international trade, many goods produced in
other countries would not have been made available in the domestic market because of
differences in NATURAL resources.
2) With international trade, it will enable the operation of certain industries using imported
raw materials. UK steel industry depends entirely on imports of foreign iron ore.
3) Imported raw materials can allow a DEVELOPING economy to speed up its rate of
industrialization.
8) With free trade, importing products are creating competition for the domestic industries. In
order to survive, these domestic industries have to keep COSTS low and set prices
low as well as producing products which are well-designed and are of high QUALITY
5) Free trade enables countries only specialises goods which they are efficient in producing
and import goods that they are less efficient in producing. The principle of
COMPARATIVE advantage will lead to specialisation. Countries specializing in
producing goods that they are efficient will be able to reap the ECONOMIES of scale
and this will further bring costs and prices down to a lower level.
6) Total output produced will be higher and this will lead to a higher STANDARD of living
for all consumers in all countries involving in international trade based on the principle of
comparative advantage.
World Trade Organisation ( WTO ) / Free trade Blocs :
1) In recent years, there have been moves to reduce international trade restrictions.
2) These measures have been the major factors driving the globalisation process .
a) The FREE trade movement and the increasing use of the internet have reduced the
differences that once existed between national markets.
b) Globalisation has also enabled firms to trade and locate freely in many countries.
c) However, it has forced firms , which were once protected by national governments,
to become INTERNATIONALLY competitive.

3) World Trade Organisation ( WTO ) :

a) This organisation is committeed to the principle of free trade without restrictions.
b) It holds meeting regularly to discuss reductions in tariffs and quotas to facilitate free trade.
c) China has joined the WTO recently and this has caused grave concern to many countries
as China can compete freely with them in terms of low labour and other costs.

4) Free Trade Blocs :

a) They are groups of countries, often geographically grouped , that have arranged to trade
with each other without restrictions. Examples are : NAFTA, EU and ASEAN.
b) These blocs may impose trade barriers on other groups in order to gain competitive
advantage against imports from these other groups.
SUMMARY :
1) The private sector or private enterprise is the term used to describe all businesses
which
are owned by individuals or groups of individuals and run essentially for PROFIT . About
three-quarters ( ¾ ) of all trading in Britain is controlled by private sector organizations.
2) The remaining one-quarter of all businesses are owned and controlled by the government
and is known as the PUBLIC sector enterprise. They are run essentially for the benefit of
the country.
3) Private enterprise : There are 6 main forms of business ownership in the private sector of
the economy.
• a) Sole traders of which there are more than
• b) Partnerships one million.
• c) Private limited companies
• d) Public limited companies
• e) Co-operatives
• f) Franchising
4) Public enterprise : Public sector businesses can be broadly divided into 3 categories.
a) Public corporations or Nationalised industries
b) Government Departments
c) Local Authority or Municipal Undertakings
5) Public corporations are industries which are owned and controlled by the government and
therefore have no shareholders
a) When an industry which was privately owned and now taken over by the Government, it is
said to have been NATIONALISED
b) Although the names may be slightly confusing, whether they are called Boards,
Commissions, Councils, Authorities or Corporations, all nationalised industries are in
fact PUBLIC corporations.
c) Public Corporations are formed by an Act of Parliament
REASONS FOR PUBLIC OWNERSHIP :
1) Provision of social services : Private enterprise would not wish to provide these services
because they are UNPROFITABLE. As such, the government has to provide these social
services . Examples are provisions of railways and postal services to remote areas
2) Control of vital industries : It is argued that certain industries are of VITAL to the
economy and as such, it is important for the government to control and monitor their
activities. Examples are central banking and water supply.
3) Control of monopolies : Many nationalised industries are ` NATURAL monopolies`
and if allowed to operate by private enterprises, they might charge high prices to
maximise profit as they have no real competitors.
4) Capital costs : Sometimes the CAPITAL costs of setting up a new industry or
modernising an industry may be too great then it would be more appropriate for the
government to set up and manage the industry.
5) Political reasons : The government would be able to gain popularity if they can manage a
public corporation well and make a profit so as to enable the nation to share the profit.
6) Survival of unprofitable industries : The government will continue to operate certain
unprofitable industries which might otherwise be forced to close down, if operated by private
businesses , creating problems of unemployment. For example, steel industry in the 1970s
and 1980s.
7) Protection of national security : Certain industries have to be run and controlled by the
government for national security. Example : Atomic Energy.
PUBLIC-PRIVATE PARTNERSHIPS ( PPP ) :
1) Public-private partnerships ( PPP ) are government business ventures ( or services ) that are
funded and managed through a PARTNERSHIP between the government and one or more
private-sector companies.
2) There are two main types of public-private partnerships : a) Government funded.
b) Private sector funded.
3) Government funded :
a) In these ventures, the government will provide all or part of the FUNDING but the
management of the organisation will be by the private business.
b) The private sector will manage and control it as efficiently as possible.
c) A good example is the Hope Clinic Lukuli in Kampala, Uganda which receives government
funding for its malaria-prevention and HIV-testing services. It is a non-profit-making clinic
and has been managed efficiently and successfully.
4) Private-sector funded :
a) The project will financed by the private sector and the government is released of the
financial burden of finding taxpayers` money to pay for the project.
b) Once the assets have been paid for, they are then managed and controlled by a
government department.
c) A good example is a new London hospital that has been built using private-sector finance –
It is leased to the state-controlled authority that manages and controls the hospital`s
health services.
Advantages of Public Ownership :
1) It is in the interest of the PUBLIC that public enterprises are providing essential goods
and services.
2) Public enterprises are run and managed by the government to ensure the survival of
important industries
3) The existence of public enterprises is to ensure that it reduces unnecessary and wasteful
duplication of RESOURCES
4) Public enterprises are operated on a large scale. As such, it is able to benefit the economies
of scale from operating as a large unit.
5) If profits are earned, they belong to the nation and therefore it will benefit every one and not
just the SHAREHOLDERS

Disadvantages of Public Ownership

1) It is difficult to assess the efficiency of public enterprises as a result of a lack of COMPETITION.
There was a greater possibility of waste, over-manning and poor quality service.
2) Subsidies are often given and any losses will be paid for from taxation.
3) Decision making is slow and bureaucratic as there are many ` red tape` procedures to be
followed.
4) The government may intervene in the affairs of public enterprises for POLITICAL reasons.
For example controlling the prices of certain services or the location of site for a new set up
may be done to gain popularity.
** PRIVATISATION :
1) A lot of government control of industry has been taken place in periods when the Labour
Party was running the country particularly from 1946 – 1951.
2) However, the Conservative Party does not support public ownership to the same extent and
indeed in the 1980s introduced a policy of PRIVATISATION
3) Privatisation is the selling off of public corporations to the private sector as public LIMITED
companies with the aim to improve efficiency.

Main OBJECTIVES of privatisation :

1) Increase efficiency : It is hoped that greater competition will provide an incentive to reduce
COSTS and increase in efficiency.
2) Financial burden : Privatisation will lighten the BURDEN of the government because
losses and investment would no longer come from the government.
3) Customer satisfaction : Competition widens CHOICE and service provided. After
privatisation of Telecommunication, the choice of telephone products has increased.
4) Share ownership : Privatisation is seen as an opportunity to introduce the concept of
SHARE ownership to ordinary individuals. Since 1979, the number of shareholders in UK
has more than trebled to over 11 million.
Unit 5AL.9 : Investment Appraisal

Activity 33.3 / 33.4 ( Thursday 22/6/2012 )

1 a) Annual cash flow = $10 000 = $6830.13 b) $820.88 c) $ 5000
( 1 + r) n ( 1 +0.1)4
2 a) 1 year 7/10 x12 = 1 year 8.4 months
b)
Year Net cash flows Discount factor ( 10% ) Discounted cash flow
0 ( 15 000 ) 0 ( 15 000 )
1 8 000 0.91 7 280
2 10 000 0.83 8 300
3 5 000 0.75 3 750
4 5 000 0.68 3 400
Total 22 730

c) 1 year 7720 x 12 months ( 15 000 – 7280 = 7 720 ) = 1 year 11.16 months

8300
d) Net Present value ( NPV ) = Total discounted cash flow – capital cost
= 22 730 – 15 000 = $7 730.
Activity 33.4
Year Net cash flow Discount factor ( 20% ) Discounted cash flow
0 ( 35 000 ) 0 ( 35 000 )
1 15 000 0.83 12 450
2 15 000 0.69 10 350
3 10 000 0.58 5 800
4 10 000 0.48 4 800
Total 33 400
NPV = ( 1 600 )
b) NPV is negative because the total discounted cash flow is less than the capital cost.
c) The project is not viable because if the market interest rate of 20% it would make the
business making a loss of $1 600.
Year Net cash flow Discount factor ( 10% ) Discounted cash flow
0 ( 35 000 ) 0 ( 35 000 )
1 15 000 0.91 13 650
2 15 000 0.83 12 450
3 10 000 0.75 7 500
4 10 000 0.68 6 800
Total 40 400
NPV = + 5 400
d) The NPV is positive because the total discounted cash flow is greater than capital cost
The project is viable and therefore be acceptable as the business would make a
profit of $ 5 400 if the capital sum ( $35 000 ) is borrowed at an interest rate of 10%
Activity 33.5 ( Friday 28/6/2012 )
1) Location A = 3 years Location B = 2 years 1/3 x 12 = 2 years 4 months
Location B has a shorter payback period. It would mean that the capital cost can be
recovered
faster and thus has a lower opportunity cost as the money can be made available for other
purposes. A quicker payback period would reduce uncertainties for the business.

2) ARR for location A = 18.3% ARR for location B = 15%

** Need to show all calculation ( Neat working – show calculation in table form )
3) Higher return – Location A Shorter payback – Location B
Location B has a higher rate of return during the first 2 years while location A has a higher
return after the second year.
4-5) Discounted factor ( 10% ) Location A Location B
Total discounted cash flow $16 980 $16 320
NPV $ 4 980 $ 4 320
Discounted factor ( 20% )
Total discounted cash flow $13 030 $13 130
NPV $1 030 $ 1 130
6)
7) Explain 10% - Location A why ?
Explain 20% - Why If Location A is still chosen ?
8) For short term period : It is quite reliable. For longer period, it is unreliable. It is hard to
predict quite accurately over a longer period due to uncertainties in the future. These
uncertainties may be …………………………..
Unit 5AL.9 : Investment Appraisal

Case study : King and Green Ltd : 5 July 2012 ( Thursday )

1) Option 1 Option 2
Labour costs : 2 x $10 000 = $20 000 $ 7000 x 2 x 4 = $56 000

2) Year Option 1 Option 2

1 130 000 64 000
2 100 000 44 000
3 80 000 44 000
4 80 000 24 000
5 60 000 24 000
3 a) Payback period : Option 1 : 3 years 6.75 months NEED
Option 2 : 2 year 8.72 months TO
b) Discounted payback : Option 1 : Cannot be paid back/ loss of $2 100 EXPLAIN
Option 2 : 5 year 6 months EACH
c) ARR : Option 1 : 5.35% Option 2 : 8.57% OPTION
d) NPV Option 1 : Loss of $ 2 100 Option 2 : $ 18 960
** Need to explain 3 (a ) – ( d ) .
4) Option 2 : Able to payback after discounted cash flow / ARR higher / NPV is positive
5) Discuss non-quantitative factors : Future unknown ?
Unit 1AL.3 : Size of business.

Business growth :
1) The owners of many businesses who wish to remain small for the following reasons :
a) Owners want to remain in CONTROL.
b) Owners wish to avoid taking too many business RISKS
c) Owners do not wish to increase their WORKLOADS
2) However, the majority of the business owners do not want to remain small but to seek growth.

POINTS TO PONDER ?
If a business fails to grow /expand, it will ……………. ??
WHY THERE IS A NEED FOR BUSINESS GROWTH / EXPANSION ?

3) The reasons for growth and expansion of businesses are :

a) Increased profits : If the main aim is for profit maximization, then the only way is
expanding the business by having higher SALES VALUE through business growth.

b) Increased market share : In order to increase the market share, the business must
expand and grow faster than the MARKET growth. This will give the business firm
greater bargaining power with both the suppliers and retailers.

c) Reduced risk of takeover : If a business firm can grow and command a large market
SHARE for its products, then it would not be easy for other firms to take over.

d) Economies of scale : Larger firms are able to benefit from large scale production. They
will enjoy internal and external economies of scale thereby reducing the cost per unit
output. Lower PRICES will be charged for their products.

e) Power and status of owners /directors : Larger firms will enable the owners and
directors to gain STATUS and power in society when they allocate for funds for
COMMUNITY projects. Besides, these owners and directors will be given more
benefits and PERKS by the business.
FORMS OF GROWTH :
1) A business firm can either grow internally or externally
Internal growth
BUSINESS EXPANSION
External growth Mergers/

( through integration ) Takeovers

2) Internal growth : It is the expansion of a business by means of opening new branches,

shops or factories. It is also known as ORGANIC growth.
a) An example would be a retailing business opening up a new outlet in another part of
a city. This type of growth is often slow
b) However, there are many problems associated with fast growth. Growing too fast may
encounter problems like OVERTRADING.
c) Management problems might arise such as conflicts of CULTURE and business ethics.

3) External growth : It is the business expansion by means of merging with other firms or
taking over another business either from the same industry or from DIFFERENT industry.
External growth is often referred to as INTEGRATION . Integration can be horizontal ,
vertical or conglomerate.

** OVERTRADING = Business expansion far too rapid without obtaining all of the necessary
finance and as a result, the business is facing a cash-flow shortage
problem.
TYPES OF INTEGRATION :
1) Horizontal integration : It is the merging with business firms at the same STAGE of
production and in the same industry. A shoe manufacturer taking over another shoe
manufacturer.

2) Vertical integration :
a) Forward vertical integration : It is the integration with a business in the same INDUSTRY
but a customer of the existing business. Example : A shoe manufacturer takes over
all the retail outlets for shoes.
b) Backward vertical integration : It is the integration with a business in the same industry
but a SUPPLIER of the existing business. Example :- A shoe manufacturer takes over
the rubber supplier of the business.

3) Conglomerate integration : It is the integration with a business in a different industry.

Example :- A shoe manufacturer takes over a business firm manufacturing plastic bottles.

FORWARD ( A baker`s shop )

Conglomerate BAKERY HORIZONTAL

( ? ) ( ? )

BACKWARD ( ? )
Synergy and integration :
1) Merger : a) It is an agreement by shareholders and managers of two or more businesses
to amalgamate together to form a third new company. This is known as the
FRIENDLY merger.
b) The newly amalgamated business will be under a common board of
DIRECTORS with shareholders of the previous firms owning SHARES
in the newly merged business.
2) Takeover : a) It is the situation when a company buys over 50 % of the shares of
another company and gains a controlling interest in the company. It is often
referred to as ` acquisition`
b) This is possible because SHARES can be freely bought and sold on the
stock exchange.
c) A hostile take-over is where one firm has taken over and gain a
controlling interest in another without its CONSENT.

3) Synergy : It literally means that ` the whole is greater than the sum of its parts` .
It is assumed that with integration, the new, larger business will be more SUCCESSFUL
the previous separate businesses.

4) Holding company : A holding company is a company specially formed to take a

controlling interest on other firms. The firms controlled are called subsidiaries.
HORIZONTAL INTEGRATION : Merging with business firms at the same stage of production
and in the same industry.
ADVANTAGES : 1) It will help to reduce competition.
2) Business can benefit from economies of scale.
3) There will be scope for rationalising production.
4) Supplies of goods can be controlled.

** Rationalization :- Reduction of capacity by cutting overheads to increase efficiency of

operations Examples : closing a factory / office department . It will
involve redundancies.

DISADVANTAGES : 1) May lead to monopoly power if the combined business exceeds

certain market share LIMITS.
2) Rationalisation may bring bad publicity.
IMPACT on stakeholders : 1) Workers may lose jobs as a result of rationalization.
2) Consumers have limited choices of goods in the market.

VERTICAL INTEGRATION : a) FORWARD vertical integration : Merging with business firms

in the same industry but a customer of the existing firm.
b) Backward vertical integration : Merging with business firms
in the same industry but a supplier of the existing firm.
Vertical integration ( Forward ) :
ADVANTAGES :
1) The business can now be able to control the promotion and pricing of its own products.
2) The business will secure a secure outlet for its products :- may now exclude products
of rival firms
DISADVANTAGES :
1) Consumers may react negatively due to uncompetitive activity.
2) Lack of experience in RETAILING business.

IMPACT on Stakeholders :
1) There will be job security because the business has secure outlets
2) A more varied career opportunities.
3) Consumers may resent as a result of lack of competition and the withdrawal of rival
products.
Vertical integration ( Backward ) :
ADVANTAGES :
1) Greater control over quality, price, and delivery times of supplies.
2) Joint R & D can be carried out to improve QUALITY of supplies.
3) The business can now control supplies of materials to competitors
DISADVANTAGES :
1) May lack experience of managing a supplying company.
2) The supplying business may become complacent as a result of having guaranteed customer
IMPACT on Stakeholders :
1) Possibility of greater career opportunities for workers.
2) Consumers might get improved and innovative products.
3) Control of supplies might limit competition and choice for consumers.
Conglomerate integration :
It is the integration with a business in a different industry .
ADVANTAGES :
1) Diversification of business.
2) Business risk is spread and may take the business into a FASTER growing market.

DISADVANTAGES :
1) Lack of management experience in the acquired business.
2) Lack of clear focus and direction because the business is spread across more than one
industry .

IMPACT on Stakeholders :
1) There will be greater career opportunities for the workers.
2) More job security because the business risks are spread across more than one industry.
WHY a MERGER may or may NOT achieve the main business objectives.

1) When two firms are integrated, the bigger firm created in this way would become more
effective, efficient and PROFITABLE than the previous separate companies because
of the existence of SYNERGY
2) It is argued that the synergy from the integration would create the following benefits to the
new business :
a) The two companies might be able to share RESEARCH facilities that will benefit both
of the businesses if the two firms deal with the same kind of technologies.
b) The larger firm will now be able to benefit from the ECONOMIES of large scale of
production. It will reduce the costs per unit output.
c) By using the same sales outlets, the new business can save the MARKETING and
distribution costs.
d) The new business will able to increase the market share, thereby possibly would gain a
MONOPOLY position.
e) The new business will also be able to reduce risks and obtain a greater security by
extending the RANGE of products or controlling supplies of raw materials or sales
outlets.
3) In practice, many mergers and takeovers fail to gain the true synergy and very often ,
many of the integrated businesses would not be able to increase the value of the
shareholders.
4) This scenario cold be due to the following reasons :
a) There would be DISECONOMIES of scale if the integrated firm is actually too large
to manage and control effectively.
b) There may be little mutual benefit from shared research facilities or marketing and
distribution systems if the firms have PRODUCTS in different markets.
c) The business and management CULTURE may become an obstacle. For example, if
the approach each company regarding environmental issues may be so DIFFERENT
that managers and workers may find it difficult to work effectively and cooperatively
together.
 JOINT VENTURES AND STRATEGIC ALLIANCES

JOINT VENTURES :
1) When two or more firms agree to work closely together on a particular project and create
a separate business division to do so.
2) They are not considered as mergers but could lead to MERGERS if the joint ventures are
successful and their joint INTERESTS coincide.
3) REASONS for joint ventures are :
a) The joint business venture will share the risk and COSTS of the new business. These
will become the major consideration if the costs of developing a new product is rising
rapidly.
b) Joint ventures enable different companies with different strengths and experiences
to share their expertise.
c) Different firms have major MARKETS in different countries and they could exploit
these with the new product more effectively than individually.
4) RISKS associated with joint ventures :
a) The culture and the STYLES of management might be so different that the two
firms do not blend well together.
b) Errors and mistakes can be made and there is a TENDENCY of putting the blame
on the other firms.
c) The business failure of one of the partners would put the whole project at RISK.
STRATEGIC ALLIANCES :
1) Strategic alliances are AGREEMENTS between firms in which each firm agrees to
commit RESOURCES to achieve an agreed set of objectives. These alliances can be
made with certain stakeholders in order to achieve specific stated objectives.
2) The REASONS for a strategic alliance are :
a) To reduce competition : A strategic alliance is made with a rival firm in order to reduce
risks of entering a MARKET that neither firm currently operates in. The actions
were not seen as being `anti-competitive` and against the laws of the country.
b) To gain competitive advantage : A strategic alliance made with a supplier with the
aim of joining forces to design and produce materials that will be used in a new RANGE
of products. The total development time for producing and getting the product to the
markets would be greatly reduced. The alliance will enable the firm to enjoy a
competitive advantage over its rival firms.
c) Supply of trained staff : A strategic alliance with a university is to allow new specialist
training courses that will increase the supply of suitable workforce for the firm.
PROBLEMS ASSOCIATED WITH GROWTH :
1) The issues of business growth is one that most teams of managers have to face at one
time or another.
2) Managers must evaluate whether growth is a desirable objective for achieving the aim of
maximising returns ( profits ) to investors.
3) a) The cost of growth, especially external integration, can easily outweigh the benefits
gained.
b) The pace of growth, the FORM that it should take and how to deal with the
consequences of business expansion are some of the vital issues for considerations .
EFFECTS OF RAPID GROWTH :
1) FINANCE :
a) Internal business expansion can be expensive as additional fixed and WORKING
capital will be required.
b) Takeovers can also be particularly expensive.
c) Rapid expansion by internal or external could lead to NEGATIVE cash flows and
an increase in LONG-TERM borrowing.
Possible strategies :
a) Whenever possible use INTERNAL sources of finance : e.g. retained profits
b) Finance can also be raised by offering new share ISSUES
c) Takeovers : Shareholders of the target business be offered SHARES in the new business
rather than be offered cash as compensation.
2) MANAGERIAL :
a) Problems of managing / controlling of a larger new business.
b) Expanding business : Problem of CO-ORDINATION between the various divisions.
c) The original owner might find it difficult to adapt to being leader and manager.
Possible strategies :
a) A new management STRUCTURE may be required with a policy of delegation /
empowerment of staff.
b) Should practice decentralisation giving more autonomy to divisions which could provide
the motivated managers with a clear FOCUS .
c) Original owners may focus on important areas and relax control over others.
3) MARKETING :
a) Original marketing strategies might not be appropriate for a larger organization.
b) Growth from national to international markets will require existing marketing
STRATEGIES to be adapted.
Possible strategies :
a) Adopt focused marketing strategies for each specific products.

4) LOSS OF CONTROL :
a) Likely to occur if a sole trade ventures into a partnership or a private limited company
be converted into a PUBLIC limited company.
Possible strategies :
a) It is an convenient way of raising capital by changing the LEGAL structure.
b) Original owners could try to remain as DIRECTORS
 Unit 1AL.6 : EXTERNAL INFLUENCES ( on business activity )

External influences :

1) political (legal ) 2) Technological 3) Social/demographic

4) Environmental constraints 5) economic constraints

Unit 1AL.6 : EXTERNAL INFLUENCES ( on business activity )

Unit1AL.4 : Business objectives No topics beyond

Unit 1AL.5 : Stakeholders in a business AS level
-------------------------------------------------
1) All businesses depend for their survival on understanding and responding to EXTERNAL
influencing factors that are beyond their control.
2) An understanding of these external influencing factors ( political, social, technological and
economic ) are of practical importance to any business.
a) Many of these factors are `constraints` ( threats ) and would limit the nature of
decisions that business managers can take.
b) However, some of these factors can also create business OPPORTUNITIES and
enable a business to become more successful.
POLITICAL ENVIRONMENT :
1) Attitudes of the government toward business have a direct impact upon business.
In Britain , these attitudes have varied from antipathy to enthusiastic support.
2)a) During the period before 1980, there was an increasing government involvement in the
affairs of business.
b) However, after 1980, the Conservative government attempted to reverse the trend of
`creeping state socialism` by the reductions in the number of quango`s ( quasi
autonomous non-government organisations ) .
c) Even so, the `state` still affects many ASPECTS of business activity.
3) REASONS for state intervention :
a) Private industry is unable to provide certain essential goods ( public goods ) e.g defence
and law and order.
b) It is not certain that sufficient of certain goods will be provided if left to the market.
e.g. health, and education.
c) To control the level of ECONOMIC activity.
d) To ensure groups with little bargaining POWER are not exploited by organisations or
other individuals.
e) The private profit motive does not always ensure the `best allocation of RESOURCES

For example text book vs pornographic magazines.

f) To control social COSTS arising from business activities e.g. the costs of pollution are
largely caused by private industry but are borne by the public.
1AL.6 : EXTERNAL INFLUENCES ON BUSINESS ACTIVITY

4) The legal constraints that influence business activities fall into the following categories
a) employment practices
b) consumer rights
c) business competition
d) location of business ( Unit 4AS.2 : Operations planning )

A ) LEGAL CONSTRAINTS – EMPLOYMENT PRACTICES :

1) Nearly all governments pass law concerning employment practices with two main
objectives :
a) prevent EXPLOITATION of workers by powerful employers.
b) prevent loss of industrial output and national income from excessive BARGAINING
action of trade union .
2) Legal constraints regarding employment practices covers the following areas :
a) recruitment, employment contracts and termination of employment.
b) health and safety
c) minimum wages
d) trade union rights and responsibilities.
3) Recruitment, employment contract and termination :
a) After the recruitment and selection exercise, an offer will be made to the potential
employee.
b) When an offer has been accepted , then a legal agreement called a employment
contract exists between them.
c) Under the Contract of Employment Acts 1972-1982, an employee must be given a
WRITTEN statement of the main terms and conditions of employment within 13
weeks of starting a new job.
d) Sometimes not all the information is given directly to employees but instead is kept in
a ` conditions of service` booklet to which they must be to refer at any time.
e) A contract of employment will terminate NATURALLY when someone dies or retires
from a job. A contract of employment may also be LEGALLY terminated by giving
a period of notice, which usually depends on seniority and length of service.
f) Minimum periods of notice are laid down by law but can be varied by mutual agreement.
g) If an employee feels that he has been UNFAIRLY dismissed, he can appeal to an
Industrial Tribunal and if, successful, get his job back or receive compensation .
h) FAIR DISMISSAL : Under the Employment Act 1980, there are 5 reasons for
dismissal that are considered `fair`
i) Gross misconduct : Dishonesty, negligence and disobedience which represent a
breach of contract.
ii) Redundancy : Workers are surplus due to reorganization or decline in business.
iii) Incompetence : unsatisfactory work indicating an incapacity to do the job.
iv) Continued employment would break the law : Chauffeur who has his driving licence
suspended could not continue working.
v) Other substantial reason : Refusal to accept a change in duties, particularly if this
makes a worker surplus to requirements.
HEALTH AND SAFETY AT WORK :
1) In the UK and other EU countries, health and safety laws require business to :
a) equip factories and offices with safety equipment
b) provide adequate washing and toilet facilities
c) provide protection from dangerous machinery and materials.
d) give adequate breaks and maintain workplace temperatures.
2) The UK Health and Safety at Work Act 1974 provides a comprehensive inspection system on
business premises and legal proceedings against firms that fail to meet minimum standards.

IMPACT of legal constraints on employment and health and safety :

Negative effects : The legal constraints will increase the production costs :
a) Costs will increase if the MINIMUM wage is higher than the wage level being paid before .
b) There will also be a supervisory costs involved in the recruitment, selection and promotion
exercise.
c) The costs will also be higher from giving paid holidays, pension contributions and paid
leave for sickness and maternity.
d) Cost increase from employment of extra staff to avoid overlong hours of working .
e) Expenses incurred for providing protective clothing and equipment to meet health and
safety laws.
There are real benefits to be gained if a business can meet or even exceed the minimum
standards laid down by the law.

Positive effects : The benefits to a business from meeting or even exceeding the minimum
legal requirements are :
a) A fair and clear employment contract will make the employees feel more SECURE and
highly valued. These employees will become more satisfied and motivated and will likely
to work hard to help the business achieve its goals ( objectives ).
b) A safe working environment will reduce RISKS of accidents and time off work for ill health
or injury.
c) A policy of providing a healthy working environment :
i) will act as a high profile campaign to attract the best employees.
ii) will receive good publicity that will have marketing benefits for the business.
d) The CULTURE of the business will looked upon as one that treats workers as partners
in the business, equal in status and as importance to managers and shareholders.
B) LEGAL CONSTRAINTS – CONSUMER RIGHTS ( Exam )
1) Trading at the beginning of the century in the UK was best summarised by the legal
maxim caveat emptor ( `let the buyer beware` )
2) The manufacturer or retailer was in much stronger position to resist consumer
complaints and possessed greater financial resources to fight any legal action
brought by individual consumers.
3) Today the consumer is in a much stronger position through the actions of PRESSURE
groups which have persuaded the government to enact legislation to redress the
balance of POWER in the market.
4) REASONS for the government to take legal action to protect consumers from unfair or
unscrupulous activities.
a) Individually, a consumer is relatively weak and powerless. It is not easy for
consumers to make good decisions when large firms allocating large marketing
and promotion budgets to influence consumers` decision-making.
b) Products are becoming more scientific and technological. Consumers find It
difficult to assess the ACCURACY of the `claims` in the products.
c) The techniques of selling are becoming more pressurised and are increasing
difficult for consumers to resist such as cheap loans and consumer CREDIT. If not
studied carefully, it can commit consumers to paying off debts for many years at
high interest rates.
e) Globalisation has led to an increase in imports. Consumers need to be protected as
imported goods may be of different QUALITY and safety standards when
compared with domestic produced goods.
f) The increasing competitive nature of most markets has lead to firms trying to
advantage of consumers by offering a better deal in terms of LOWER prices but
a reduction in other areas like product quality, service and guaranteed periods.
Consumer protection legislation :
1) In the UK, consumer protection has been developed over time by the passing of certain
significant laws.
2) The consumer is now protected in a series of ways, ranging from the initial advertising
of the product, its description, the quality of the item and its purchase on credit.
3) The major areas of protection and the appropriate legislation are :
a) Consumer Protection Act 1987 :
i) It ensures that firms are liable for any damage which their defective goods might
cause to consumers.
ii) It is illegal to quote misleading prices : If a statement claimed that the price is $5
less than the manufacturer`s recommended price when it is not, then the
business has broken the law.
b) Trade Descriptions Acts 1968 and 1972 / Prices Act 1974-75 :
i) It is a criminal offence for a trader to give false or misleading description of the
goods or services on offer.
ii) This includes claims about composition and performance of goods as well as the
manner and timing of services.
iii) The Prices Act 1974-75 govern the display of prices, ensuring there are no HIDDEN
costs or misleading claims, particularly about price reductions.
c) Sale of Goods Act 1979/1982 :
i) This Act protects the consumer by insisting that the products are safe and have
no defects which make them unsafe if they are used in the ways intended.
ii) The products are suitable for the purpose for which they are bought.
iii) The products can perform in the way described.
d) Other laws that have been passed to protect consumers from their activities include :
i) Consumer Credit Act 1974 ii) Weights and Measures Act 1985
iii) Consumer safety Act 1978 iv) Food Safety Act 1990
4) IMPACT of legal constraints : Consumer rights.
a) If managers can put consumer interests at the forefront of company policy,
it can bring substantial rewards to the firm.
b) The success of a business would be greatly enhanced if it becomes well
known and widely published that it has not only met the minimum
standards of protection laid down by law but also offering consumers a
genuine deal in terms of quality product, accuracy of promotional offers
and excellent after-sale service.
c) Business costs might have to rise to meet the requirements of consumer
protection legislation.
i) It can be costly and expensive to REDESIGN products to meet health
and safety laws or redesign promotional activities to give a clear and
accurate information.
ii) The accuracy of weights and measures in food preparation and
improving quality control standards will in fact help to reduce the
danger of LEGAL action.
iii) If a business can respond to complaints quickly and treat consumers
fairly, it will go a long way to reduce the risk of court action
d) Above all else, consumer protection legislation may require a change of
strategy and culture in the organisation.
 C ) LEGAL CONSTRAINTS – BUSINESS COMPETITION.

1) During the last 50 years, several pieces of legislation have been enacted by the government
in an attempt to keep the market competitive and to prevent price FIXING or anti-competitive
practices.
2) It is argued that free and fair competition would bring many BENEFITS to consumers :-
a) There is a wider CHOICE of goods and services for the consumers to choose from.
b) Prices charged for the products will be kept low if firms want to remain COMPETITIVE
c) Fair competition among rival firms would lead to better QUALITY and better
performance products being produced.
d) Competition among firms will raise overall EFFICIENCY and this would enable firms to
compete effectively with foreign firms.
3) In order to encourage and promote competition between firms, the government would
pass laws which :-
a) investigate and control monopolies and make it possible to prevent mergers.
b) limit or outlaw uncompetitive practices between firms .
4) Monopoly : a) Monopoly is a market structure in which the firm is the sole seller of a
particular product for which there is no close substitute.
***b) A much more flexible and realistic definition is needed for government
policy and in UK monopoly is that one firm which has controlled at least
25% of the market.

5) Competition Act 1998 :

a) This Act provides the setting up of a Competition Commission to protect consumers
and ensure that businesses do not break consumer legislation.
b) The Competition Commission will undertake studies of proposed mergers and takeovers
and of alleged abuse of market power by monopoly firms.
c) The Competition Commission will then make recommendations to the Office of Fair
Trading ( OFT ) to take action.
d) The OFT can prevent a merger or takeover from taking place or can insist that unfair
monopoly practices such as full-line forcing and predatory pricing are stopped.
e) The PFT has the power to investigate any proposed merger which would result in
control of at least 25% of the market or involving a combined turnover of 70 million
( 2004 ) .
f) In USA , the courts have the legal right to break up a monopoly or to prevent a merger
whether or not there is evidence of existing negative public interest.
EMERGENCE OF MONOPOLIES ( How do monopolies develop ? )
1) Merger / takeover : A firm will gain monopoly power by merging or taking over other firms
in the industry thereby increasing its market share of the product.
2) Legal protection : A firm can also gain monopoly power by legal protection. A government
may choose to protect its country`s postal service by giving it a LEGAL monopoly for the
delivery of letters.
3) Patent rights : When a firm successfully invented a new product / products , then the firm is
legally patented to be the SOLE producer of the product. It will then assume the power
of a monopoly.
4) Barriers to entry : When a firm is able to restrict the entry of competitors into an
industry, the firm is said to have gain monopoly power. These barriers to entry into the
industry could be due to HUGE costs of setting up a new business. Other barriers to entry
include advanced TECHNICAL knowledge and the need to advertise extensively to get
the product of the firm established.
MONOPOLY POWER : CONSUMER INTERESTS
1) From a business`s point of view, monopoly has certain advantages and problems.
2) Potential benefits :
a) If large-scale production has enabled the monopoly firm to benefit from the economics
of scale, then the prices charged would be LOWER as the costs of production has
reduced.
b) The monopolist would be prepared to invest more in research and development ( R & D )
to produce new and better quality products. This would further improve the technical
know-how and protect the monopoly position.
3) Drawbacks :
a) It is expected that the prices charged would be HIGHER under a monopolist as there
is little competition and consumers have no option but to buy the product from the
monopolist.
b) There would be a LIMITED choice of products in the market for the consumers to
choose from.
c) There will also be no incentive for the monopolist to invest in new products or to
improve its products as a result of complacency and little or no COMPETITION.
d) The monopoly firm will not make an effort to reduce or lower the costs of production
and improve its EFFICIENCY .
RESTRICTIVE ( UNCOMPETITIVE ) PRACTICES
1) When firms are acting or colluding together, they can operate as if they are one monopoly.
2) Collusion is an agreement between businesses designed to restrict competition. Firms
forming collusion will fix prices and limit the supply of a product.
3) Identifying and acting against these restrictive practices is an important part of the
government`s competition policy.
4) Restrictive practices of monopoly firms include :
a) Full-line forcing : It is the directive imposed to stock up the whole RANGE of products
produced by the manufacturer. If there is any refusal, then the supplier will not supply
any good to the retailer including the popular items.
b) Market sharing and price fixing agreement : This form of collusion involving the firms
to form a CARTEL between them. They will then fix the price and divide the market
between them. They do not to compete in new business but will agree to share any new
business as competition will drive the prices down. Cartels are agreements between
firms to regulate prices and output, thereby effectively creating a monopoly.
c) Setting high price : The price of a product is fixed HIGH as it is an essential part of
product branding as it would help to pay for expenses such as extensive product
advertising and product development.
d) Predatory pricing : If a monopoly wants to block the ENTRY of new firms into an
industry, it will deliberately set the price far below the cost of production. The new firms
will find it very difficult to survive this extreme form of competition. If the new firms fail,
the monopoly firm will raise and set a NEW price for the product.
5) Today, many of these monopoly practices are investigated by the Competition Commissioner
under the Competition Act 1998.
TECHNOLOGICAL ENVIRONMENT :
1) One of the most significant factors affecting how business have operated in the 20th century
has been the impact of new technology.
2) The introduction of information technology ( IT ) has changed drastically how and the way
a business operates and its impact on the business can be assessed by the changes
brought about by it.
a) Technology is defined as a creative process which uses human, material and
scientific resources to solve problems and improve efficiency.
b) Information technology is the use of electronic technology to gather, store,
process and communicate information.
3) Technological change is affecting all business and all departments within business.
4) In addition to the uses of technology, advances in technical knowledge are opening up
new products markets such as hydrogen-powered cars .
5) The table below explains some of the most common business applications of IT, the
departments likely to benefit from them and the potential advantages to be gained.
5AL.7/5Al.8 : Published accounts
Exercise : Ratio Analysis Page 585

1) a) Managers of a company : i) Profitability ratio : GPM /NPM / RoCE

ii) Liquididy ratio : Current/ Acid-test / Inventory
turnover
b) Workforce of a company : i) Profitability ratio : GPM /NPM / RoCE
ii) Days` sales in receivables ratio
iii) Gearing ratio
c) Shareholders : i) Investment ( shareholder ) ratio : Dividend per yield /
Dividend cover ratio / price-earning ratio
ii) Profitability ratio : Roce
d) Banks : i) Gearing ratio
ii) Interest cover ratio
iii) Days` sales in receivables ratio.
2) Company A Company B
a) GPM 27.5% 25%
b) NPM 18.75% 8.33
c) RoCE 25% 12.5%
d) Current ratio 0.857 1.00
e) Acid-test ratio 0.57 0.50
f) Debtors collection period 800 x 365 = 73 days 42.58 days
4 000
g) Inventory turnover ratio 2900/ 4000 = 7.25 6.43

** Current Assets : 1200

Inventories 400
Accounts receivables
Cash ---

** Cost of sales = opening stocks + purchases – closing stock

Sales turnover – cost of sales = gross profit
Gross profit – overhead = Net profit ( before tax / interest )
Information technology system :
1) Word processing : Advantages a) speed
b) accuracy
c) ease of amending documents
d) fewer secretarial staff needed
e) links with use of email for quick internal /external
communications.
2) Pagemaker / publishing programs :
Advantages : a) may reduce the need for professional publishing firms.
b) documents can be amended quickly
c) professional appearance.

3) Database : Advantages a) replaces vast quantities of paper records

b) rapid retrieval of information
c) linking two sets of data.
d) stock control in retail stores
e) credit control.

4) Spreadsheet programs : Advantages : a) flexibility and speed

b) scenario in budgeting and sales forecasting.
Example : What happen to forecast profit if
sales rose by 10% following a 5% cut in price
5) Computer-aided manufacturing ( CAM ) : Robotic equipment being used in production.
Advantages : a) labour cost reduced.
b) productivity increased
c) accuracy improved
d) flexibility increased.

6) Computer-aided design ( CAD )

Advantages : a) cut costs on designer
b) flexibility of design
c) can be linked to other programs to obtain product costings.

7) Internet/ intranet : Advantages :

a) cost savings
b) access to much larger potential market .
c) online ordering
d) B2B communications can obtain supplies at lower costs.
e) internal communications is quicker.
Potential limitations – Applying technology to business :
1) Business costs :
a) The use of high level of technology will increase the CAPITAL costs. Installation and
maintenance costs can be substantial
b) Labour costs will also increase as training will be necessary and this will recur regularly
with further TECHNOLOGICAL change and development.
c) REDUNDANCY costs will be incurred if any existing staff are being replaced by the
technology.
2) Labour relations :
a) If the technological change is not explained and presented to workers in a positive way
with fully justified reasons, it may damage LABOUR relations.
b) Trade unions may resist the introduction of new technology because of the threat of
the loss of many JOBS
c) Workers may feel job insecurity and this could damage their MOTIVATION levels.
3) Reliability :
a) Breakdowns may occur in an automated production or in the stock-handling
systems and it would lead to the WHOLE production process being halted.
b) There may be many teething problems with the new systems and the expected gains
in efficiency may take longer than forecast.
4) Data protection :
a) The rapid development in the use of IT has led to LEGISLATION about the
collection, storage, processing and distribution of data.
b) Legislations such as the Data Protection Act 1998 and Computer Misuse Act 1990
have identified certain offences relating to the use of computers.
c) The business must keep up-to-date with these LEGALconstraints on its use of IT.
5) Management
a) Some managers might fear change especially if they are not computer literate due to the rapid
pace of technology change.
b) The change to IT and managing the IT change would require a great deal of management
skill.
IT :- Business decision making
1) Management information systems is the provision of huge amounts of data to management through the
use of IT
2) Modern technology has the power to totally transform the STRUCTURE of the business
organisation and the management process.
3) Today, computers can provide more data concerning the business operations to managers than was
previously thought possible.
4) BENEFITS of new technology :
a) Overall control : Data and information can be obtained quickly from all departments as well as
regional divisions of the business. The data and information would enable the managers to review
and control the operations effectively. The introduction of IT has aided the OVERALL control
of the business.
b) Decision making : Decision making is also faster as computers can be used to analyse
and process the data rapidly . Managers can interpret the data almost simultaneously
and take immediate DECISIONS on the basis of them.
c) Improvement in communications : Today, the speed of communications has drastically improved
with the latest technological KNOW-HOW such as e-mail and downloading. The management
information systems would accelerate the process of COMMUNICATIONS decisions .
5) DRAWBACKS of new technology :
a) Information overload : The ease of transferring data electronically can lead to too many
messages and communications that would result in the `overload` of information. This
could make decision making difficult as managers may not be able to identify the most
important INFORMATION for decision making or unable to identify the AREAS
of the business that need immediate action.
b) Minor transformation of management process : The introduction of management
information systems may lead to a reduction in the authority and EMPOWERMENT
extended to middle managers and work teams.
Management information systems used for central control could reduce job enrichment
and motivation levels.

USE OF TECHNOLOGY EFFECTIVELY :

1) The best managers would apply the detailed information provided by the modern electronic
IT systems to improve and speed up their decision making.
2) They should not allow it to change their style of leadership to either a centralized or
AUTHORITARIAN one based on using data to control all aspects of the organization.
3) However, there are a few stages a business should consider when introducing or updating
technology if it wishes to minimise costs and reduce the LIMITATIONS of new technology.
4) STAGES of introducing or updating technology :
a) Analyse : The potential use of IT must be analysed and it should focus on the approach
which can make the business more effective and COMPETITIVE .
b) Involve : Assess the potential benefits and pitfalls of introducing IT into the business by
managers and technical staff using the IT.
c) Evaluate : A proper evaluation of the different systems and programs available by
comparing the COST and the expected efficiency and expected gains .
d) Plan : A detailed plan for the introduction of the new system including the RETRAINING
of staff.
e) Monitor : The new system needs to be monitored to see its effectiveness in terms of
the benefit gains like the level of PRODUCTIVITY, sales revenues and profits made.
BUSINESS ACTIVITIES : SOCIAL / DEMOGRAPHIC
Changing social / demographic trends :
1) The structure of society is constantly evolving.
a) There is an AGEING population with reduced birth rates in many countries due to
advances in medicine.
b) The role of WOMEN has changed and many are seeking employment and holding
posts of responsibility in industry.
c) The WORKFORCE is becoming more skillful and highly adaptable as a result of the
provision of better education facilities.
d) Rising DIVORCE rates in some countries have created many single-person
households
e) The process of GLOBALISATION has created job insecurity and is forcing many
employees to accept temporary and part-time jobs.
f) Early RETIREMENT in many high-income countries has led to more leisure time
for a growing number of wealthy pensioners.
2) The average age of the population is rising and is often associated with :
a) Change in population STRUCTURE : A large proportion over age of retirement .
A smaller proportion in lower age ranges ( e.g. 0-16 years old )
b) A smaller number of workers in the economy but a larger number of dependents that
is below working age or retired. This has put a higher TAX burden on the working
population.
3) The change in the population structure in a country has an impact on the business :
a) The DEMAND pattern will change because elderly consumers demand different
types of goods compared to teenagers. The PORTFOLIO of products of a
business will change as a consequence of an ageing population. As such , the
businesses
will need to conduct a market research taking these into consideration.
b) The age structure of the WORKFORCE has changed with a reduced numbers of
youthful employees available. Therefore there is a need for workforce PLANNING
to include provision for employing elderly people and keeping existing workers up to
or beyond retiring age.
EMPLOYMENT PATTERNS :
1) The changing patterns of employment in modern business are one of the SOCIAL
constraints on the activities of the business.
2) Labour is still the crucial factor of production and the COSTS of labour is probably the
greatest contributor to the total expenditure of the business.

3) The main FEATURES of the changing patterns of employment in most countries are :-
a) In many countries, the application of IT in production has resulted labour is being
replaced by CAPITAL . It has raised the efficiency level and output level but has
resulted a drop in LABOUR employment.
b) There will be a transfer of LABOUR from the traditional secondary industries to
hi-tech secondary industries such as computer-games design.
c) The number of women workers has increased in employment and in the RANGE of
occupations
d) Women workers are tending to stay in full-time employment as families are smaller and
many plan to have children later in life. Many women return to work after their
MATERNITY leave.
e) Student employment on a part-time basis are on the increase especially in fast-food
shops and supermarkets as many of them are supplementing their INCOME
 f) There is an increase in part-time jobs due to availability of single part-time jobs and JOB
sharing.
g) Temporary and flexible employment are increasing becoming popular. Employing and
adopting this method would help to reduce FIXED costs of full-time staff and to allow
flexibility in times of seasonal demand or uncertainties caused by increasing globalization.
h) An ageing population would mean there is increasing burdens on the health services,
pensions and care industries.
i) Many countries are increasingly MULTICULTURAL and this will affect women employment.
j) In the UK , 75% of women seek full-time employment. Almost half of all British male
employees work more than 48 hours a week whilst for women the percentage is only 7%.

4) EFFECTS of changing patterns of employment on a business :

a) Part-time and flexible workers can offer a business firm much greater FLEXIBILITY
by being available at peak times and help to keep OVERHEAD expenses low.
b) Part-time and temporary staff can be difficult to mould into a TEAM and may not
contribute much to the business in terms of output, both quality and QUANTITY .
c) By employing more women workers and removing barriers to their progress and
promotion, firms can benefit from a wider CHOICE of staff.
d) There will be disruption to work when they take maternity leave and COSTS will
increase for providing staff to cover during their absence.
e) Higher-quality and better-qualified workers would be more efficient but COSTS of
employing them is high as they demand for higher pay and better working
conditions.
f) In conclusion, the most successful firms will be those that can adapt to changes very
quickly and turn them to their own COMPETITIVE advantage .
ENVIRONMENTAL CONSTRAINTS ON BUSINESS ACTIVITY :
1) The environment in which we all live can be greatly affected by business activity.
2) There are many environmental issues that are of increasing concern to people and
governments all over the world.
a) Air and noise pollution from manufacturing processes.
b) Road congestion caused by heavy trucks.
c) Emission of gases that can lead to GLOBAL warming.
d) The use of scarce non-renewable NATURAL resources .
3) Profit maximization should not be the over-riding objective.
a) There is a general agreement that business firms should adopt a wider perspective
when setting their business objectives and not just those of profits and business
EXPANSION .
b) Groups like consumers, government and local community have make demands upon
business firms to have genuine concern for SOCIETY and the environment.
4) Corporate social responsibility :
a) It is the acceptance that business should consider the INTERESTS of society in its
activities and decisions, beyond the legal obligations that it has.
b) Hence, when a business firm accepts its legal and MORAL obligations to stakeholders
and other investors, it is said to be accepting `corporate social responsibility`
5) A business firm`s attitude towards its social responsibility can be measured by the way
in which it deals with environmental issues.

ADOPTION OF A ENVIRONMENTALLY SAFE OR `GREEN` POLICY :

1) REASONS for adopting a environmental friendly policy are :
a) Consumers are becoming increasingly aware of environmental ISSUES and would
support businesses that adopt `green` policies.
i) If a business firm can reduce pollution by using the latest `green` equipment or use
recycle materials, then it can have a real marketing and PROMOTIONAL advantage.
ii) Businesses must ensure that their environmental policies are genuine. If they are
found out to be just a cover up ( sometimes called `greenwash` ) for
environmental damaging practices, then the bad publicity could backfire on the
firm.
b) Adopting environmental friendly strategies would definitely reduce the chances of
breaking existing LAWS designed to protect the environment and thus be able to
avoid bad publicity from heavy court fines.
c) It is generally agreed that higher-quality and better QUALIFIED employees would like to
work for firms that they can have pride in and firms which adopt policies that reflect their
own personal views and standards.
d) Environmental friendly strategies could bring long-term benefits to a business.
i) The use of renewable or recycled resources may be COST SAVINGS in the long
term as prices of scarce natural resources would rise due to world shortages of these
resources.
ii) The government may impose additional fines on pollution that has exceeded the
permissible LEVEL allowed. Local residents also have the RIGHT to sue firms
for health risks arising from business production. Pollution of air and water from
manufacturing process has damaging health effects and these are the EXTERNAL
costs which are borned by society and not by business firms.

2) Arguments AGAINST adopting environmental friendly policy :

a) If a business can keep prices as low as possible, there will be a MARKETING
advantage because lower prices would increase sales and consumers will also
benefit from many low-priced goods available in the market.
b) There will be a drastic drop in the level of PROFIT made if the business is
forced to use expensive low-pollution equipment. The firm may become less
competitive and could affect FUTURE investments.
c) It is argued that ECONOMIC development is more important protecting the environment.
i) Increased business activities would generate more JOB opportunities for the
general population.
ii) The standard of living of local community would be raised by the increased level of
OUTPUT produced due to an increase in national output ( GDP ).
iii) The higher TAX revenue collected by the government can be channeled to provide
essential services
d) A business would continue to use low-cost anti-pollution equipments if the LEGAL
protection of the environment is weak and the monitoring and inspection systems is
inadequate. As a result, there will be little RISK of legal action and heavy fines.
 ENVIRONMENT / SOCIAL AUDIT

1) An ENVIRONMENT audit is an assessment of the IMPACT of a business`s activities on

the environment.
2) An environment audit would check the pollution levels, wastage levels, energy use, transport
use and recycling rates of the business and compare them with previous years, pre-set
targets and other SIMILIAR businesses.
3) Firms that have a good environment record would like to publish them because :-
a) Favourable consumer reaction would lead to increased SALES
b) Positive media coverage will give free PUBLICITY .
c) The common aim of reducing harm to the environment could help to bring workers and
managers together as a TEAM . Business firms with a good reputation and a fine
team spirit would be able to attract better qualified workers.
4) A SOCIAL audit is a report ( assessment ) of the impact a business has on society.
a) It can also include an environment audit because it also covers environmental issues
like pollution levels.
b) A social audit would give details of other impacts on society such as :-
i) health and safety record – e.g. number of accidents and fatalities
ii) contributions to local COMMUNITY events and charities.
iii) proportion of supplies that come from ethical sources.
iv) employee benefit schemes
v) feedback on the ethical nature of the business`s activities.
5 a) Social audits should be independently verified as this could help to improve a firm`s
public image.
b) If detailed positive social audits are published, it could increase consumer LOYALTY
and give the business a clear direction for future improvements in its social
responsibility aims.
6) An EVALUATION : Environmental / Social audit.
a) Social audits can be undertaken to identify those elements of the firm activities which
can harm the environment and those that are of BENEFITS to the environment.
b) It is difficult to measure social responsibility in the way that we measure costs, revenue
and profits.
c) Even if a firm accepts social responsibility as an objective, it may still be criticised. This
is because different groups in society will judge a firm`s actions in different ways.
For example, a firm in a high unemployment area may be polluting a river badly, but the
COSTS of altering the production process to avoid pollution might make production
uneconomic.
d) Until there is a GENERAL agreement about what they should include and how the
contents
will be verified, it would be difficult to make a proper and accurate evaluation .
7) Most organisations, would accept that they have a social responsibility to the community.
Unfortunately, it is often not translated into action as fully as it should be. Some of the
8) BARRIERS to social responsibility are :
a) There is often a conflict between social responsibility and profitability. If too much
money is spent on socially responsible activities, it might limit the profits available for
dividend payment and future investments.
b) Both firms and managers are evaluated strictly upon economic performance.
Shareholders are more likely to invest in the firm with the higher profits, despite the fact
that it is less socially responsible. It is also argued that managers who keeps
costs down most successfully are the ones who will be rewarded and promoted.
c) Many managers find that being socially responsible makes their jobs far more
difficult. Instead of just having to consider the needs of the shareholders, they are
now required to assess the impact of their actions on other interest groups. Often,
they feel they will be criticised whatever they do.
 ROLE OF PRESSURE GROUPS :
1) Pressure groups are groups of people or organisations created by people with a COMMON
interest or aim and they would exert pressure on business and governments to change
POLICIES so as to achieve a stated objective.
2) Over the last few decades, there has been a huge increase in the number of pressure groups
and in the scale of their activities.
3) Pressure groups would like to see changes in three main areas :
a) The government to amend or pass LAWS supporting the aim of the pressure group
b) The business firms to change policies in favour of a ENVIRONMENTAL friendly
business strategy.
c) Consumers to change their purchasing habits if the business does not adopt `
appropriate` policy in business.

4) WAYS to achieve these goals

a) Lobbying of government : It is not surprising that many pressure groups devote
resources to lobbying politicians because these politicians can, through Parliament,
pass laws which can REGULATE the activities of business.
b) Influencing consumer behaviour : Pressure groups often seek to influence the
behaviour of members of the public about a particular product, business or industry. If
the pressure group is so successful that consumers stop buying a certain product for a
period long enough to cause substantial LOSS in sales, then the business will be
forced to change its policy.
c) Publicity through media coverage : Frequent press releases giving details of
undesirable company activity and coverage of actions taken like demonstrations and
consumer boycotts, will help to get public SYMPATHY.
The more bad publicity created for the company, then the greater the chance the
pressure groups will succeed in getting the company change its CORPORATE policy.
EXAMPLES OF THE BEST-KNOWN INTERNATIONAL PRESSURE GROUPS :
1) Greenpeace : It is a campaign for greater environmental protection both by businesses and
by the government. It was argued that pressure from Greenpeace contributed to Shell`s
decision not to dump the Brent Spar oil platform in the North Sea in 1995.
2) Fairtrade Foundation : The aim is to achieve a better deal for agricultural producers in low-
income countries.
3) WWF : Its aims is to improve animal welfare, especially protecting and conserving the
habitat of wild animals.
4) Amnesty International : It rigorously opposes anti-human rights policies of governments.
5) Jubilee 2000 : It is the campaign for Western governments to reduce or eliminate the debt
burden on developing countries.
SUMMARY :
IMPORTANT OF BUSINESS ETHICS ON BUSINESS ACTIVITY :
1) Ethics are values and BELIEFS of what is right and wrong and of the MORALITY
of choices .
2) Business ethics is the application of MORAL standards to business situations .
a) It is about making decisions that affects others – other individuals and organisations.
b) Hence, unethical behaviour can result in loss of businesses , fines and even
imprisonments.
3) Social responsibility refers to an organisation`s response to social needs.
a) When a firm does accept its legal and moral obligations to all stakeholders, then it is
said to be accepting `corporate social responsibility`.
b) Clearly, ETHICS and social responsibility are decisions faced by all managers in all
organizations.
c) One key to success is to decide in advance how to respond to the issues that underlie
all questions of ethical and social responsibility.
4) A business firm that practises good business ethics is one that accepts SOCIAL
responsibility as an objective.
5) When defining its sense of social responsibility, a firm typically confronts 4 areas :
responsibilities towards the environment, its customers, its employees and its investors.
a) Towards the environment : It requires a firm to minimise POLLUTION of air, water
and land.
b) Towards the customers : It requires a firm to provide products of acceptable quality
and are fairly PRICED and to respect customer`s rights.
c) Towards the employees : It requires the firm to respect workers both as RESOURCES
and as people who are more productive when their needs are met
d) Towards the investors : It requires firms to manage their RESOURCES efficiency and
to present their financial honestly and the same time to try to maximize PROFITS
6) An organisation`s sense of social responsibility is influenced by many factors .
a) To a large extent, social responsibility reflects the ETHICS of individuals employed by
the firm especially its top management.
b) But social responsibility can also be influenced and even enforced from outside whether
by government AGENCIES , or by consumers.
c) A firm`s behaviour is also shaped by the demands of the INVESTORS and by
behaviour of other firms in the same industry and in the same country.
ECONOMIC CONSTRAINTS : BUSINESS ACTIVITY.

1) The STATE of a country `s economy can contribute directly to the success or failure of
businesses.
2) In order to achieve its objectives, the government will introduce POLICIES to influence the
economy.
a) Competent managers should be able to take advantage of POSITIVE policy
changes and have to ability to spot and exploit a GAP in a fast-growing economy
which could help the business to earn higher profits.
b) It is therefore misleading to think just of `economic constraints` on business activity
because a business firm can easily take advantage of the many new opportunities
created by the ECONOMIC performance.
c) In times of NEGATIVE economic growth, businesses tend to suffer with declining
sales and many firms will go out of business. It is therefore important for managers to
plan and protect the businesses during a long period of RECESSION
MACRO-ECONOMIC OBJECTIVES :
3) The government will set targets for the whole country and these targets are referred to as
`macro-economic` objectives.
a) Economic growth : It is the annual percentage change in gross domestic
product ( GDP ) and is a measure of the rate at which the real output of the
country is growing over time. Positive economic growth is an indication of an increase
in the actual volume of goods and services produced by the economy.
A growth rate of 3- 4 % per year may be considered good in Western economies.
b) High level of employment : Full employment is achieved when those who want to work
have been given jobs at a given wage rate. The low level of unemployment in
an economy can be seen as an indicator of the success in implementing the
`macro-economic` policies.
c) Low level of inflation : Inflation is an increase in the general level of prices.
Many governments usually set target rates at which they want to control inflation.
Inflation rate of below 5 % is generally considered to be acceptable in many
countries. The UK government in the early 21st century had set target inflation rates
mainly around 2 % per annum and this reflected the relatively low inflation in UK
during that period.
d) Balance of payments : The government would attempt to achieve equilibrium or a
surplus on the current account of the balance of payments. This would mean the
value of exports is either the same or greater than the value of imports.
 e) Exchange rate stability : The government will try to stabilise external value of
the currency of the country by stablilising the exchange rate. An exchange rate is the price
of one country `s currency in terms of currency of another country. When there is a fall in the
exchange rate of the currency, then the external value of that currency has depreciated .
f) Reduction of income inequality : The government will attempt to reduce inequalities of
personal income and wealth, usually by using the tax system.

IMPACT of economic growth :

1) Economic growth in an economy occurs when the real value of GDP rises as a result of
an increase in the physical output of goods and services produced.
2) Every economy is striving to achieve economic growth because positive economic
growth would indicate favourable trading conditions for businesses.
3) Negative economic growth is an indication of recession in the economy with declining
sales and many firms going out of business.
a) From 2000-2007, USA registered a real GDP growth of 2.5% per annum but an overall
fall in GDP occurred in 2008.
b) China`s GDP growth rose by an average of 9% during the period 2000-2007 and
exceeded 11% in 2007.
c) In 2007 Zimbabwe` s GDP growth fell by 4%.
4) Economic growth is important to a country because :
a) A higher level of GDP would mean more goods and services made available for
consumers and this raises the standard of living of the people.
b) A higher level of GDP would indicate the economy has created more job
opportunities and raised the income level of consumers.
c) A high economic growth would generate a higher level GDP resulting in a greater tax
revenue collected by the government. The burden and cost of providing social
services and subsidies by the government would be very much lightened. More
resources can be devoted to social services such as health and education without
reducing resources in other sectors.
d) The low level of unemployment and the high level of income generated would mean
business firms now experiencing rising demand for their products. The demand
for their products would depend on the income elasticity of demand.
e) If the economic growth is substantial enough and the benefits are sufficiently widely
spread, then absolute poverty can be reduced or even eliminate
FACTORS DETERMINING ECONOMIC GROWTH :
1) Technological changes :
a) This form of growth can be achieved by encouraging business investment and
innovation in new industries and products.
b) It would not lead to inflation as there are no demand-pull pressures.
2) Economic resources :
a) Positive economic growth can be achieved when more resources are made
available and this would result in an increase the total output produced.
b) The resources of a country can be increased by a higher working people or by a
discovery of new resources such as gas and oil.
3) Higher productivity :
a) If the existing productivity level of resources can be raised, then the total output
will increase.
b) Higher productivity level like labour productivity can be achieved with a higher-skilled
and better- qualified workforce.
THE BUSINESS CYCLE :
1) Business cycle : It is the regular swings ( fluctuations ) in the level of economic
activity. It is unusual for economic growth to be achieved at a steady, constant rate
but will grow at different rates over time.
It is argued that all economies go through the 4 stages ( phases) of the business cycle
i.e boom, recession, slump & recovery.

2) Boom : a) A period of very fast economic growth with rising incomes and profits.
b) Many businesses will experience high levels of consumer demand
with increasing incomes.
c) Business profits will be high and wages would also be rising. This could lead
to inflation rate is rising rapidly due to very high demand for goods
and services.
d) High inflation might make market uncompetitive and business confidence falls
as profits are hit by higher costs.
e) To reduce inflationary pressure, the central bank will take steps to increase the
market interest rate and thereby further increase business costs. A
downturn often results from this.
3) Recession : a) It is the economic slowdown ( downturn ) where incomes and output start
to fall.
b) Businesses might experience a fall in consumer demand for goods
and services and a decline in profits.
c) Real GDP growth slows down and some business firms might
go out of business.
4) Slump : a) A slump is also called a depression and occurs at the bottom of the business
cycle
b) It is due to the prolong downturn and the government fails to take
corrective economic action.
c) The level of unemployment is very high. The level of business investment
and profit is very low due to low consumer spending and loss public
confidence.
5) Recovery : a) A recovery is also called a upswing and is said to occur when the real
GDP starts to increase again.
b) Very often, it is due to the corrective government action taking effect or
the rate of inflation is so low that the country`s products become
competitive once more.
c) Business expansion is beginning to take place as consumer spending
and confidence is increasing.
DECISION ON TYPES OF GOODS PRODUCED :
1) A period of 6 months or more of declining real GDP is considered to be a recession.
a) Total output produced is falling and this will lead to an increase in unemployment.
b) As income falls , this would lead to a further decline in demand.
c) Tax revenues of the government will also fall as sales are dropping.
d) The demand for normal and luxury goods will fall and there will be spare capacity
for the business.
2) However, there will also be opportunities for well-managed firms that can take advantage of
this situation.
a) During recession, capital assets like land and property are relatively cheap. Business
firms may buy these assets in anticipation of an economic recovery.
b) The risk of job losses and retrenchment may actually encourage and improve
employee-employer relations and this could lead to increased efficiency.
c) Demand for basic necessities and inferior goods may be increasing.
d) Hard decisions taken such as closure of factory and retrenchment could make the
business `leaner and fitter` and in better position to take advantage of economic
recovery.
Business strategy : periods of growth and slump

Producers of LUXURY goods e.g. cars)

Economic growth : 1) The range of goods produced be increased.
2) Prices be raised to increase profit margins.
3) Extensive promotion to increase the exclusiveness of goods.
4) Output be increased due DD increase.
RECESSION : 1) Credit terms be extended to improve affordability.
2) Price not reduced for fear of damaging long-term image.
3) Widen the product range with lower -priced models.
4) Offer promotions
Producers of NORMALgoods e.g. tinned foods
ECONOMIC GROWTH :1) Add extra value to product : e.g. better ingredients
/improved packaging.
2) Brand image may attract exclusive tag.
RECESSION 1) Lower prices to increase sales.
2) Promotions
3) Do nothing : sales not much affected anyway

Producers of INFERIOR goods e.g. very cheap clothing

ECONOMIC growth 1) Attempt to move product upmarket.
2) Add value to the product :- higher quality.
3) Extend the product range to include more exclusive or better
designed products.
RECESSION : 1) Promote good value / low price
2) Free consumer test
3) Range of distribution outlets be increased.
CHANGES IN THE VALUE OF MONEY :
1) Inflation is an increase in the general level of prices.
a) An increase in the average price level of goods would lead to a fall in the value of
money.
b) A fall in the value of money would mean a fall in the purchasing power of the
money.
c) The general price level and the value of money is inversely related. A general
increase in price level of 25% would result a fall in the value of money by 20%.
d) The real wage ( income ) is given by :
Monetary wage ( income ) x 100
Current consumer price index

e) If the general price level is increasing at a faster rate than the monetary income
( wage ) , then the value of the income ( wage ) or purchasing power of the income
has fallen.
2) Deflation is a fall in the general level of prices.
a) A fall in the general price level would result in an increase in the value of money or its
purchasing power.
b) A fall in the general price level by 20% would increase the value of money by 25%.
3) Brief newspaper headlines published during 2008 :
a) China`s inflation hits fresh high : China`s rate of inflation rate hit 8.7% last month, the
highest in over 11 years . Soaring food prices were up by 23% compared to 12 months
previously and these were driving average inflation higher. Bad weather had led to
serious food shortages. The government in Beijing is planning another rise in interest
rates to try to bring inflation under control.
CAUSES of inflation :
1) Essentially, it is accepted that the increase in level of prices is due to :
a) businesses are forced to increase the price level as their business costs has increased.
b) businesses take advantage of the high consumer demand to make extra profits by
raising prices.
2) These two causes has been regarded as :
a) cost-push inflation
b) demand-pull inflation.
3) COST-PUSH INFLATION :
a) This type of inflation is attributed to higher costs of production which force
business firms to push up the prices of goods and services.
b) The rising costs could be due to :
i) prices of imported raw materials have increased as a result of a fall in the value
of the exchange rate.
ii) world demand for raw materials that causes the prices to go up.
iii) increases in wages and salaries as trade unions demand for higher wages in line
with previous inflation
iv) push by firms to increase profits as a result of pressure from shareholders
can cause production costs to go up.
c) When businesses face with higher costs of production, they have no choice but to raise
the prices and this increase in prices is termed cost-push inflation.
4) DEMAND-PULL INFLATION :
a) This type of inflation is caused by the excess demand when the economy is booming
which pull up the prices.
b) The increase in demand could be due to :-
i) a rise in consumer spending
ii) net injections of capital investment.
iii) increase in government expenditure.
iv) more exports being sold to abroad.
c) The excessive spending leads to excess demand which cannot be matched by the level
of supply .
d) The supply shortages in the economy leading to excessive demand would pull up the
price level of goods and services and is termed demand-pull inflation.
Unit 5AL.6 Budgets : Revision Case study 2 ( Friday - 20/7//2012 )

Variance analysis : Kinibali Timber Ltd

Question 1 and 2

Financial variable Budget Actual Variance Favourable/ Adverse

Sales revenue 66 000 70 000 + 4 000 Favourable : Profit increased
Direct labour 15 000 18 000 – 3 000 Adverse : Profit reduced
Direct material 12 000 17 000 – 5 000 Adverse : Profit reduced
Fixed cost 6 000 5 000 + 1000 Favourable : Profit increased
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Profit 33 000 30 000 – 3 000
---------------------------------------------------------------------------------------------------------

Q3 : a) changes in the price of raw materials ( especially imported )

b) changes in the wages of labour ( especially skilled )
c) changes in the business / economic environment : competitors / business cycle
would affect the sales revenue.
INCOME ELASTICITY OF DEMAND

Acitvity 7.5 : 26/7/2012 ( Thursday )

1) Product A – Luxury good Product B – Inferior good Product C – Normal good
2) If income were to rise by 10% ;
a) product A would increase by 20% % Qd
b) product B would decrease by 10% % income
c) product C would increase by 2%
3) Normal goods :- white sliced bread / aspirin tablets
Luxury good :- personal comuters

Activity 7.6 : 26/7/2012 ( Thursday )

1) Income elasticity of demand : Standard model = + 2.5 Superior model = + 10
2) The income elasticity of demand for superior model was greater because it is a luxury
good. Hence, the demand for luxury good will rise by a greater proportion when income
are rising. The income elasticity of demand will be positive and greater than 1. These
luxury goods cannot be afforded when the incomes are low. On the contrary, the demand
for normal goods will rise by a smaller proportion when income are rising because basically
they are essential goods. As such, the quantity will not change much when income changes.
3) Interest rates are falling : An increase in disposable income. The demand for luxury goods
will be greater compared to normal goods. As such, the product mix strategy should change
and include a variety of goods like cars, holidays and houses. Other aspects of 4Ps should
also be looked into.
INFLATION :- BENEFITS / DRAWBACKS TO BUSINESSES .
1) If the inflation is quite low ( 2-3% ) , it can be of beneficial to businesses :-
a) Cost increase : Any increase in costs can easily passed on to the consumers by
increasing the PRICE .
b) Lower debt value : During inflation, the real value of debts will fall. This means that
when a debt is repaid, the debt has a VALUE less than the original amount. Thus,
highly geared companies would see a fall in the real value of their liabilities.
c) Appreciation in asset value : During inflation, assets held by the business would
experience an APPRECIATION in value. In the balance sheet, it is reflected as an
increase in VALUE and would indicate the business is in a financial sound position.
d) Value of stocks : Stocks that are bought earlier and then sold later, would indicate an
increase in the PROFIT margin.
 DRAWBACKS : INFLATION

2) If the inflation rate is relatively high ( 5-6% ) , it can have serious drawbacks for businesses :-
a) Trade unions will be lobbying for higher wages because monetary income has fallen in
REAL value due to rising prices. If not properly deal with it could lead to disputes.
b) Consumers are becoming more PRICE sensitive and will look for bargains rather than
big brand names.
c) Consumers may stockpile certain essential goods and cut back on non-essential items of
spending.
d) During inflation, the market INTEREST rate will tend to rise. This will make it very difficult
for highly geared companies to find cash to make interest payments.
e) Cash-flow problems may occur for all businesses as they struggle to find more money to
pay the higher COSTS of materials and other costs.
f) Inflation adds to uncertainty about the future if :-
i) the government to take corrective action to suppress inflation which may reduce
business profitability.
ii) the rate of inflation is pushing upwards which will affect business confidence.
These uncertainties will make SALES forecasts and investment appraisal less reliable
as investment appraisal requires fairly accurate future cash flows.
g) Credit terms given on goods sold may not be extended as repayments by debtors will be
with money that is losing its VALUE rapidly.
h) If inflation is too high, then the business will lose its competitiveness in overseas markets.
3) During a period of rapid inflation, business strategy should focus on :-
a) cutting down investment spending
b) cutting down profit margins by limiting own price increase in order to stay competitive.
c) reducing borrowing to a level at which the interest payments are manageable.
d) reducing the credit terms given to customers.
e) reducing labour costs.

DEFLATION : DRAWBACKS

1) In a period of falling prices, most businesses will encounter some problems in their business
dealings :-
a) Consumers may postpone some important purchases with the hope that the PRICE
would fall further. Thus falling prices may be accompanied by falling in demand .
b) The low demand would mean the future PROFITABILITY of new projects appear
doubtful. This may discourage business firms to further make investments.
c) Businesses with long-term liabilities would find that repayments of debt with money that
had gained in value. This might discourage borrowings to invest.
d) The VALUE of stocks will fall and businesses may hold less stocks. Orders from
suppliers will be reduced .Ultimately, this might push the economy into recession
because total output of businesses will decline.
2) There is a general consensus that most economies would tolerate a LOW level of inflation.
In the UK it is accepted that the target for CPI to rise by 2% per annum.
UNEMPLOYMENT :

1) Unemployment is the number of the WORKING population who are willing to work but
unable to find a job. It is a situation where people are actively seeking to find work but are
unable to obtain it .
2) Working population is the total number of the working population AGE who are willing and
able to work.
3) Since the depression of the 1930s and the work of Keynes, maintaining HIGH and stable
levels of employment has been an important government objective.

CAUSES of unemployment :
1) Cyclical unemployment :
a) This type of unemployment is associated with the BUSINESS cycle. The ups and
downs in economic activity over a number of years is known as the business ( trade )
cycle.
b) The demand deficiency during the recession stage of the business cycle will cause a
FALL in the firm`s output.
c) During the period of recession or slump, business activity is therefore SLOW and hence
less labour is needed resulting to rising level s of unemployment.
d) In the early 1900s, the UK suffered badly from cyclical unemployment. In 2008, the
recession in USA has led to a substantial increase in cyclical unemployment.
2) Structural unemployment :
a) This type of unemployment is associated with the mismatch between the skills of the
WORKFORCE and the jobs available in the labour market.
b) It is caused by changes in the STRUCTURE of a country`s economy which affects
particular industries and occupations.
c) In 2009, many workers from the collapsed of the mining and shipbuilding industries in UK
could not find alternative jobs due to structural changes which radically change the
demand for labour.
d) This type of unemployment only occurs in certain types of workers who are unable to find
work and there industries which are expanding and may encounter shortage of labour.

3) Frictional unemployment :
a) This type of unemployment occurs when people are searching for new jobs.
i) It is a situation when workers are willing leaving their jobs and taking a substantial
period of time to find ALTERNATIVE employment.
ii) It could also be a situation when a new workforce is entering the labour market and
looking for jobs. e.g. new graduates from IHL are entering the labour market.
b) When these workers are looking for new jobs , they are said to be frictionally unemployed.
c) If the labour TURNOVER rate is increasing in the economy, then the level of
frictional unemployment will increase.
d) A small amount of frictional unemployment is a permanent FEATURE of any
economy. An economy is considered to have achieve full employment if there is a
frictional unemployment of around 2 – 3 % .
WAYS TO REDUCE UNEMPLOYMENT

1) Cyclical unemployment :
a) Management of the economy by the government via its FISCAL and Monetary policies
to avoid substantial SWINGS in the business cycle which could lead eventually to
recession.
b) Use of anti-inflationary measures to curb rising inflation because if high inflation cannot
be controlled effectively,it might lead to recession and cyclical unemployment.
c) Foreign exchange rate be kept at STABLE level so that prices of the country`s exports
will remain competitive and demand for home-produced goods does not fall leading to
cyclical unemployment.
2) Structural unemployment :
a) Structural change would bring along ECONOMIC changes and progress. To reduce
structural unemployment, the government will provide education and training programmes
for workers who do not have the required skills.
b) Since 1998, the UK government`s `New Deal` programme has offered training courses
to all LONG-TERM unemployment.

3) Frictional unemployment :
a) The main cause is slow labour MOBILITY . Job information to be made assessable
to the unemployed and this could help to reduce the level of unemployment.
b) Job centres and employment agencies be set up to assist the unemployed to find jobs.
c) It is argued that if unemployment BENEFITS in UK be reduced or abolished, then the
unemployed would be more willing to look for jobs or at least keen to take up job offers
more quickly.
 EFFECTS of unemployment :

Unemployment is a waste of HUMAN resources and its costs are significant to the economy.
1) Productivity level of the economy has fallen leading to less goods and services are being
produced for consumption.
2) The costs of supporting the unemployed workers and their families are substantial and will
be a BURDEN to the government as more tax collection will be required.
3) There will be loss of income and lower STANDARD of living
4) Serious unemployment may lead to SOCIAL problems such as crime which is a cost to
society.
5) The longer the period of unemployment, the more difficult it is to find work, as skills become
increasingly out of date.
BALANCE OF PAYMENTS
: 1) Balance of payments is the financial record of trade and CAPITAL flows between one
country and the rest of the world over a period of time , usually a year.
a) A balance of payments SURPLUS occurs when inflows of money are greater than
outflows of money .
A surplus in the balance payments is effectively an injection of money into the
economy. At low levels of economy activity, it leads to an increase in economic activity
and EMPLOYMENT.
b) A balance of payments DEFICIT is a withdrawal of money from the economy. It
leads to a reduction in economic activity and employment and also the weakening of
the CURRENCY .
2) The current account of the balance of payments records the value of exports and imports
between one country and the rest of the world.
a) A deficit in the current account would mean the value of imports EXCEED the value
of exports.
b) A surplus in the current account occurs when the value of exports is greater than
the value of IMPORTS
3) If a country`s economy has a large and persistent deficit on its balance of payments, then :
a) A decline in the country`s gold reserves and FOREIGN currency reserves.
b) A FALL or depreciation in the value of its currency in terms of other currencies
as the exchange rate of the country`s currency has fallen.
c) Foreign investment might be affected as foreign investors are unwilling to invest in the
country.
EXCHANGE RATES :
1) The exchange rate is the price of one country`s currency in terms of another currency.
An exchange rate of US1.00 = $2.00 would mean one US dollar is worth $2.00.
2) Exchange rates are determined by the forces of demand for and supply of a currency on
the foreign exchange market.
DEMAND for the currency :
1) Exports of goods and services.
2) Tourism industry : Foreign tourists spending MONEY in the country.
3) Foreign investment : Foreign investors Investing in the country.
SUPPLY of the currency
1) Imports of goods and services into the country.
2) Tourism industry : Domestic population travelling ABROAD .
3) Foreign investment : Domestic investors investing abroad.

3) Exchange rate depreciation : A fall in the exchange rate against other currencies would
result DEPRECIATION in the value of that currency d. A fall in the exchange rate from
US$1 = $5 to US$1 = $4 would mean there is a depreciation in value of the US$.
4) Exchange rate appreciation : It is when a rise in the exchange rate of the currency
against other currencies. If US$1 rise from $2 to $3, then the value of US$ has
APPRECIATED .
 AN APPRECIATION OF THE CURRENCY :
1) DOMESTIC IMPORTERS :
a) Appreciation of US$ when exchange rate raised from US1 = $4 to US$1 = $5.
b) Domestic firms that are importing raw materials and components would find
that the cost of these imports are falling and hence the COSTS of production
have been lowered. This would increase the competitiveness of the goods
produced in the market.
c) Domestic firms that are importing manufactured goods also benefited because
the imported goods are cheaper in DOMESTIC currency. In 2008,
European importers of US-produced cars taking advantage of the
appreciation of the Euros against the US$ and hence be able to make higher
profits.

2) DOMESTIC EXPORTERS : Us$ 1 = RM4 US$1 = RM5

a) Domestic firms that are producing export-orientated goods would find that the
prices of their exports are HIGHER in terms of foreign currency. Hence,
these firms may experience a FALL in demand for their goods.
b) Domestic firms that are selling in the domestic markets may also find that their
goods are less competitiveness compared with imported substituted goods.
Consumers will be prepared to switch to imported goods because of the cost
advantages over home-produced goods.
A DEPRECIATION OF THE CURRENCY :
1) Gain for businesses :
a) Home-based exporters will find that the prices of their exports are relatively cheaper in
terms of foreign currency. This should increase the VALUE of their exports and lead to
an expansion of the business.
US$1 = RM4 US$1 = RM5 US$ has appreciated ( RM depreciated )
Exporters in Malaysia will find that for every RM5 of exports , US citizens will only
have to pay US$1.00 ( US$1.25 earlier )
b) Business firms that sell in the domestic markets will find that their prices are also
relatively cheaper when compared with substituted imported goods. The demand for
domestically produced goods are likely to increase.

2) Loss for business :

a) Business firms that manufacture goods using imported raw materials would find that the
prices of raw materials are HIGHER in terms of foreign currency. The increased in costs
would reduce their competitiveness.
b) Imported goods are higher and if there are many CLOSE domestic substitutes, then
retailers that sell imported goods would face difficulties in selling these goods.
INTERNATIONAL COMPETITIVENESS – NON-PRICE FACTORS :
1) Price is only one of the factors when consumers are making choices between competing
goods and services in the market.
2) German and Japanese businesses became worldwide success in the 1970s and 1980s even
though their exchange rates has risen making their exports relatively higher abroad.
3) Apart from price, other factors that determine international success of a business are :-
a) Product design and innovation : An innovative product such as the Blu-ray DVD is still
sellable if priced higher in the market.
b) Quality of construction and reliability : If a product is of high quality and reliable, then
it might attract customer interest even though it is not the CHEAPEST product.
Japanese cars have been declared the most reliable cars in the US market and be
able to encourage customers to buy.
c) Effective promotion and extensive distribution : The use of the types of promotion
and distribution outlets are the factors that determine the success of a business. The
universal success of McDonald`s restaurants is mainly due to its effective promotion and
EXTENSIVE distribution.
d) After-sales service : After goods are sold, technical staff are sent at regular intervals in
a year to monitor on the performance of the goods. Guarantee periods may be extended
on case to case BASIS
e) Modern technology and skilled trained staff : The use of modern technology which
allows greater FLEXIBILITY of production has enabled many businesses to meet the
changing demand and tastes of consumers. The highly skilled staff with higher
productivity has been able to overcome any costs increase of other resources.
EXCHANGE RATE POLICY – FLOATING EXCHANGE RATE :
1) DRAWBACKS of floating exchange rate :
a) Fluctuating prices of imported raw materials and components would mean the
calculation of production COSTS difficult and inaccurate.
b) Fluctuations of export prices would lead to unstable LEVELS of demand
c) Uncertainty of profits made from trading or investing abroad because the VALUE
of goods and assets varies with currency fluctuation

2) It is argued that a COMMON currency would encourage trade and investment between
particularly countries because business costing can be accurately estimated.

3) Fluctuating exchange rates would increase the business costs and cause uncertainties.
a) Dealing with currency contracts hedging can be expensive as charges have to be
paid to specialist institutions.
b) Globalisation has becoming more popular and it would be easier to invest OVERSEAS
if a common currency is used as there will be reduced risk arising from fluctuating
costs.
c) Business strategy may have to adapt in overseas locations using a different currency.
4) ADVANTAGES of floating rates :
a) The central bank of a country wants to keep its STATUS as the interest-setting authority.
The argument is that interest rate set in one country may be in the best interest of that
country but not to other countries.
b) By using a common currency it would lead to a common tax policies. The
INDEPENDENCE of each country to control its own tax rates would be very much
reduced.
c) The floating exchange rates will automatically find its own level and do not need
economic POLICIES to keep it at one level. The government can manipulate and
adjust the market interest rates to achieve other economic objectives.
OTHER ECONOMIC ISSUES :

MARKET FAILURE :
1) Market failure : It is a situation where markets fail to achieve the most efficient
ALLOCATION of resources and there is either under-production or over-production of
certain goods and services.
2) Market failure may be due to any of these three situations :-
a) External costs :
i) A business firm manufactures a product using RESOURCES like land, labour ,
capital and entrepreneur and the costs paid to these resources are called
PRIVATE costs of production.
ii) The side effects of the production process are the pollution of the air , water and
land. These are the EXTERNAL costs which are not borne by the business but
by the rest of the SOCIETY.
iii) The government ( or local authority ) has to raise taxes to clean up the environment
caused by pollution.
iv) Thus, the market has failed to reflect the true cost or total cost of production
when the PRICE of the product is set.
v) As the price does not include external costs, too much of the good has been
produced and demanded and hence external costs is a form of market FAILURE
b) Labour training :
i) Most firms are not willing to provide STAFF training to improve their skills and
efficiency for fear that, once qualified, they would be `pinched` or snatched by other
businesses.
ii) As a consequence, the country may have a shortage of skilled and professional
staff and hence would hinder ECONOMIC growth.
iii) This under-provision of skill training is another form of market failure.

c) Monopoly producers
i) A monopoly firm is a single supplier of a particular good with no CLOSE substitutes.
ii) To maximise profit, a monopoly firm will raise the price of the product by RESTRICTING
output.
iii) This strategy will lead to under-provision of goods and services as too little is being
produced and hence monopoly POWER is another form of market failure.
MARKET FAILURE : EXAMPLES

Examples : Market failure Stakeholders most affected Corrective policy action

_____________________________________________________________________________
External costs : 1) Consumers : They may be forced 1) Business firms may be
Pollution of air, water buy the good if there are no forced to take corrective
and land from SUBSTITUTE goods action if bad publicity
manufacturing processes. 2) Government : They may be leads to decline in SALES
forced to take action by voters 2) Government may take
and PRESSURE groups legal action and impose
3) Workers : They are concerned fines or impose strict
about JOB security as bad limits on pollution LEVELS
publicity would lead to decline
in sales.
Market failure Stakeholders most affected Corrective policy action
Labour training: 1) Customers : Lack of sufficient 1) Government would
Inadequate provision skilled staff may reduce customer encourage more
for training skilled staff service or may cause prices to be training courses at
raised due restricted OUTPUT colleges funded from
2) Government : Lack of skilled staff general TAXATION.
can limit international competiveness 2) Skill training by industry
of UK industries. wide organisations
3) Shareholders : Dividend payment will such as Engineering
be reduced as profit maximization Employees Federation
cannot be achieved because of to increase the SUPPLY

restricted output. of trained skiled staff.

Market Failures STAKEHOLDERS most affected Corrective policy action
Monopoly producers : 1) Consumers : Limited SUPPLIES 1 ) The use of Competition
Output levels be of goods in the market and POLICIES by the government
restricted to keep prices are HIGH due restricted can help to act against
prices high. supplies. Reluctance by monopoly monopoly practices.
firms to develop and improve goods Privitisation has led to the
due limited COMPETITION break-up of many state-run
2) Government : High prices and monopolies.
lack of competiveness of important 2) Increasing use of Internet
industries. would allow the consumers
to choose from a wider
range of SUPPLIES and
this could break down some
monopoly power.
INCOME ELASTICITY OF DEMAND

INCOME Elasticity of Demand :

1) During periods of economic growth, there will be greater opportunities for
increased sales, profits and EXPANSION .
2) Some businesses will experience substantial increases in demand for their
goods while
others will experience only a limited rise. In certain cases, demand may
actually fall for
certain particular goods called INFERIOR goods
3) INCOME elasticity of demand
a) It measures the responsiveness of demand for a product to a
change in levels
consumer income.

Income elasticity = % change in demand

of demand % change in income

b) The value of income elasticity can be positive, negative or zero.

4) SIGNIFICANCE of income elasticity of demand :
a) NORMAL GOODS : The income elasticity of demand for normal goods is positive
and between 0 and 1.
i) The demand for these normal goods will increase when income increases but by a
SMALLER proportion.
ii) These normal goods are basically essential goods and the quantity bought will
not change much when income changes. These goods include basic foods and
pharmaceutical goods.
iii) Thus during economic growth and incomes are rising, there will not be a sharp
INCREASE in demand for normal goods.
b) LUXURY GOODS : The income elasticity of demand for luxury goods is positive but will
be greater than 1 .
i) The demand for these luxury goods will rise by a greater proportion when INCOME
are rising
ii) Luxury goods include luxury cars and leisure activities like holidays which cannot
be afforded when incomes are low.
c) INFERIOR GOODS : The income elasticity for these goods is negative .
i) The demand for these inferior goods will fall during economic growth when income
are rising because consumers now can afford to buy better QUALITY goods.
ii) Examples of inferior goods are sweet potatoes and tapioca.
iii) However, during recession period, the demand for these inferior goods actually will
increase as REAL incomes have fallen due to fall in total output and increase
in the level of unemployment.
iv) Hence, in the period of recession, consumers prefer substitute goods of the more
EXPENSIVE items like second-hand goods such as cars, poorer cuts of meat
and weekend breaks in own country and not long holidays abroad.
MACRO-ECONOMIC POLICIES :
1) These policies are designed to influence the level of aggregate demand ( AD ) which will
determine the value of national OUTPUT and the level of employment.
2) In doing so, the government is seeking to level out FLUCTUATIONS in economic activity.
a) during period of boom, it will dampen down the economy and
b) it will STIMULATE the economy in periods of recessions.
3) The main objectives of macro-economic policy are economic growth, full employment, low
inflation, balance of payments stability and exchange rate stability.
4) To achieve these objectives, the government uses the fiscal policy and monetary policy.
a) FISCAL POLICY : A policy designed to manage the level of aggregate demand by
changing the government spending or taxation. These will operate largely through
the government`s annual budget decisions.
b) MONETARY POLICY : A policy designed to control the supply of money in the economy
and as a consequence, the market rate of INTEREST .
W

national Output
5) Types of government budget : FISCAL POLICY
a) Budget deficit : It is the annual budget where the value of government spending
exceeds revenue from taxation.
b) Budget surplus : It is the annual budget where taxation revenue exceeds the value
of government spending.

i) Raise government i) Reduce government

spending ( G ) spending ( G )

RECESSION Increases Reductions

in AD BOOM in AD

ii) Lower tax rates ii) Raise tax rates

Increases in output Reduce output,

and employment employment + inflation

EXPANSIONARY FISCAL CONTRACTIONARY FISCAL

POLICY POLICY
FISCAL POLICY

FISCAL POLICY : A policy designed to manage the level of aggregate demand ( AD ) by

changing the government spending or taxation. These will operate largely
through the government`s annual budget decisions.
** DELIBERATE CHANGES in T and G to influence the level of AD which will have an
impact on the level of output, employment and prices.
6) Expansionary fiscal policy :
The government will adopt the EXPANSIONARY fiscal policy during periods of recession
and high level of unemployment.
a) government spending will be increased :- construction of schools, hospitals and
highways.
b) taxes will be reduced : corporate tax and individual tax will be reduced . The higher
business profit will business expansion and the higher disposable income of individuals
will encourage more spending.
c) These two strategies will increase the AGGREGATE demand and will lead to a higher
level of output and employment.
7) Contractionary fiscal policy :
The government will adopt the CONTRACTIONARY fiscal policy during periods of boom
and the economy is overheating.
a) During periods of boom, the excess aggregate demand will lead to both a higher
inflation rate and a larger deficit in the CURRENT account of the balance of
payments.
b) Taxes will be raised and government spending will be reduced and these two strategies
will result in a fall of spending power due to a FALL in aggregate demand.
Monetary policy
8) Contractionary monetary policy :
a) When the inflation rate is HIGH and the economy is reaching the overheating stage of
the growth phase of the business cycle, the central bank will raise its base rate to curb
inflation.
b) Raising the BASE ( lending ) rate would automatically raise the market interest rate
making it COSTLY to spend or invest. This will dampen business activity thereby leading
to a fall in aggregate demand.
c) Higher interest rates will have the following impact on businesses :
i) Businesses that have very high debts will experience a drop in profit margin due
to high interest COSTS .
ii) High costs of borrowing and high prices will reduce consumer spending and would
lead to a fall in demand.
iii) High domestic interest rate would tend to lead to an appreciation of the country`s
exchange RATE .

9) Expansionary monetary policy :

a) If inflation is low and economic growth is slowing down, then there is a danger that
unemployment might rise.
b) The central bank will take steps to increase the money supply thereby lowering the
INTEREST rate.
c) This will have an expansionary effect on the economy because the interest costs is
lower and the spending power of consumers has increased.
ECONOMIC BOOM : HOW TO RESPONSE ? Page 30 ( Notes )

FISCAL POLICY : 1) Raise taxes ( T ) : Direct / indirect taxes The combined effect
2) Reduce government expenditure ( G ) will reduce AD
Likely IMPACT on business :
1) Direct taxes : a) Disposable incomes of consumers will fall : DD for goods will fall.
The precise impact will depend on income elasticity of demand.
b) Corporate tax will reduce the retained profits of companies.
Less funds made available for business investment.
2) Indirect taxes : a) The retail prices of goods and services will go up. The impact of their
demand will depend on price elasticities.
3) Government a) A reduction in DD for businesses that supply goods to the government
expenditure Defence supplies and construction companies could be hit.

MONETARY POLICY 1) Reduce money supply : - raise the market interest rate.
Likely IMPACT on business :
1) Highly geared companies : may encounter cash flows problems due higher
interest rate.
2) Business investment may fall if the cost of loans exceed the expected returns
3) Consumers are affected in two ways :
a) Purchase on credit more expensive : May affect the DD for the more
expensive goods like cars and household items.
b) DD for houses will fall as mortgages will carry a higher repayment.
4) Inflow of overseas capital would lead to an appreciation of the currency : might
reduce the COMPETITIVENESS of the business.
 INCOME Elasticity of Demand :
1) During periods of economic growth, there will be greater opportunities for increased sales,
profits and EXPANSION .
2) Some businesses will experience substantial increases in demand for their goods while
others will experience only a limited rise. In certain cases, demand may actually fall for
certain particular goods called INFERIOR goods
3) INCOME elasticity of demand
a) It measures the responsiveness of demand for a product to a change in levels
consumer income.

Income elasticity = % change in demand

of demand % change in income

b) The value of income elasticity can be positive, negative or zero.

4) SIGNIFICANCE of income elasticity of demand :
a) NORMAL GOODS : The income elasticity of demand for normal goods is positive
and between 0 and 1.
i) The demand for these normal goods will increase when income increases but by a
SMALLER proportion.
ii) These normal goods are basically essential goods and the quantity bought will
not change much when income changes. These goods include basic foods and
pharmaceutical goods.
iii) Thus during economic growth and incomes are rising, there will not be a sharp
INCREASE in demand for normal goods.
b) LUXURY GOODS : The income elasticity of demand for luxury goods is positive but will
be greater than 1 .
i) The demand for these luxury goods will rise by a greater proportion when INCOME
are rising
ii) Luxury goods include luxury cars and leisure activities like holidays which cannot
be afforded when incomes are low.
c) INFERIOR GOODS : The income elasticity for these goods is negative .
i) The demand for these inferior goods will fall during economic growth when income
are rising because consumers now can afford to buy better QUALITY goods.
ii) Examples of inferior goods are sweet potatoes and tapioca.
iii) However, during recession period, the demand for these inferior goods actually will
increase as REAL incomes have fallen due to fall in total output and increase
in the level of unemployment.
iv) Hence, in the period of recession, consumers prefer substitute goods of the more
EXPENSIVE items like second-hand goods such as cars, poorer cuts of meat
and weekend breaks in own country and not long holidays abroad.
Unit 1AL.2 : Business structure. ( slide
Activity 2.2 : Footie Ltd to stay private after ruling out float ( page 24 ) – SLIDE 124
Activity 2.3 : Shah`s garage (page 25)
Activity 2.4 : Harry goes it alone (page 28)
Activity 2.5 : Ford teams up with Chinese auto maker (page 29)
Activity 2.7 : Not yet
Revision case study 1 : Multinational to produce in Malaysia (page 38 )
Revision case study 2 : Joe to expand his business ( page 38-39)
Revision case study 3 : Waste –a good cause for privatisation? ( page 39) SLIDE 142
Unit1AL.2 : Business Structure

Activity 2.2 : Footie Ltd to stay private after ruling out float ( Page 24 )
1) Private limited company : i) Capital is limited as it is contributed by a small number
of shareholders.
ii) Shares are only sold to friends and family members.
As such, they can only be transferred with the consent of
other shareholders.
iii) Shareholders in control of business.
Public limited company i) Huge amount of capital can be raised by the issue of shares.
ii) Shares are freely sold in the stock exchange As such they
are easily transferred.
iii) Risk of being take over as shares are easily bought. The
company can be taken over if more than 50% of the shares
are bought by another company.
2) Footie Ltd is a private limited company because
a) Footie Ltd is a shoemaker and retailer.
b) At first, It was planning to ballot the owning family on a possible public floatation
but finally decide to stay private. It has since grown into one of the world`s largest
private limited company.

3) Secondary sector : Footie Ltd is the shoemaker and five years ago, 75% of its shoes
were manufactured in Footie`s European factories.
Tertiary sector : Footie Ltd is now more of a retailer and wholesaler than manufacturer,
owning or franchising 650 shops and importing shoes from abroad.
Unit1AL.2 : Business Structure

Activity 2.2 : Footie Ltd to stay private after ruling out float ( Page 24 )
4) Decision to keep Footie Ltd as a private limited company :
a) Operational expenses : No need of further capital to fund further expansion.
b) Footie Ltd was formed 100 years ago and has grown into one of the largest private
limited company. Balloting for public floatation would be effectively waste of time.
c) It is performing very well and making profits during the last 3 years.
In April, annual profit up from £ 42.7million to £ 50.8million .
5) Main benefits of Footie Ltd to the business / existing shareholders
a) Increased dividend payment to shareholders.
b) Board of Directors – increase in remuneration and perks.
c) Job continuity and job security to the workforce.
d) Business growth :- Workforce feel motivated for further job performance / increase
wages and fringe benefits.
6) Reasons for recent growth :
a) External growth : Business expansion rapidly in nearly all markets due to the benefits of
moving to lower-cost countries and becoming multinationals
b) Business expansion through investment in own brands and retailing operations and
strategy of reducing its reliance on own manufacture.
c) Internal growth : Diversifaction – Footie Ltd is now more of a retailer and whoesaler than
a manufacturer. Business expansion by franchising 650 shops and importing shoes from
abroad.
Unit 1AL.2 : Business structure

Activity 2.3 : Shah`s garage

1) The option suitable would be a grocery shop.
a) Local shops have been closing because of competition from supermarkets.
The market can be tapped with proper implementation of the 4Ps
b) Expansion of business is the only way to support Salman and his children who
were married .
c) Expansion through conglomerate integration would be a safer option than vertical
integration ( backward/ forward ). Business risk is spread through diversification.
d) His daughter, Stella would be keen to manage the shop.
2) The capital involved would not be much.
a) The grocery shop would only be a small extension to the petrol-station shop and
this would not cost much.
b) Sundry goods and other basic household goods can be purchased on credit and
initial capital outlay would be very much reduced.
3) There are several sources of finance available for Salman.
Since it was a family business, the capital required would likely to come from
internal sources .
a) Capital funds can be raised from friends and close family members as it was a sole
trader business.
b) the business could make use of use retained profits for expansion.
c) funds can also be raised through leasing i.e. from sale of fixed assets and lease back
from the leasing firms.
d) Overdraft facilities . The business has been in operation for many years and as such
it would be easier to obtain overdraft facilities
e) Bank loans : Due to its many years of business operation, it can also obtain bank loans
if suitable collateral is available.
Unit 1AL.2 : Business Structure

Activity 2.3 : Shah`s garage. Week 6 – 19/2/2014 ( Wednesday )

4) Private limited company :
a) Limited liability : Should the business fail, the people who have invested money in it,
would not lose any of their personal possessions. Their liabilities are limited to the
amount invested.
b) Continuity : The company exists even though the owners may change.
c) Ownership continues through the inheritance of the shares and as such the owners
are in complete control of the business. ( Text : Salman wants to keep control of the
business / to pass on as a profitable firm ).
d) Legal personality : Salman`s business would have a separate legal identity from the
owners. A corporate company can be taken to court but not its shareholders/ owners.
Hence, business risk is spread through this separate legal identity.
e) The main drawbacks are :
i) limited expansion as additional capital cannot only be raised through the sale of
share to the general public.
ii) The transfer of shares need the consent of the other shareholders.
iii) There will be less secrecy over financial matters as annual reports need to be
sent for inspection.
Unit 1AL.2 Business Structure :

Activity 2.4 : Harry goes it alone

1) Potential benefits of opening a franchised Pizza Delight restaurant :

a) Pizza Delight claimed that their brand and products are so well known that
`success was guaranteed`
b) Bored with his job as second chef in a top-of-the market hotel.
c) He never liked taking orders and had always hoped to use his talents preparing
food for customers in his own restaurant. In short, he wanted to run the business
the ways he wanted it.

2) Potential drawbacks :
He cannot run the business in an innovative way although he has full control of it
a) the fitting out the restaurant in exactly the way the franchiser wanted.
b) buying materials only from Pizza Delight.
c) making an annual payment to Pizza Delight of a percentage of total revenue.

3) If he decided to open his own restaurant, the risk of failure would be greater than for a
Pizza Delight franchise .
a) Lack of business experience
b) May face initial problems of promoting his small firm.
c) capital
d) Other 4Ps : - namely product, price and place would be critical for the success
of his small firm.
Unit 1AL.2 Business Structure

Activity 2.4 : Harry goes it alone ( 14/2/2014 Friday )

4) It is advisable for Harry to take out a franchise with Pizza Delight.
a) The brand and product is so well known that `success was guaranteed`
b) Pizza Delight would pay for national advertising campaigns.
c) Although Harry would have to find and pay for suitable premises and recruit and
motivate staff, Pizza Delight would provide all ingredients, marketing support
and help with staff training.
d) No other Pizza delight restaurant could open within five kilometers of one already
operating.
e) Harry was convinced that the franchise business was suitable for him but the one-off
payment of $100, 000 is a pre-requisite for the franchise . However, he had inherited
the money from a relative.
Unit 1AL.2 Business Structure :

Activity 2.5 : Ford teams up with Chinese auto maker ( Page29 )

1) Main reasons for the joint venture between Ford and Chang`an.
a) share expertise : share risk and costs.
b) Different strengths and experience :-
• synergy from the joint venture.
• gaps in the markets due to the fast-developing auto market in China.

2) Which business, in your opinion, seems to gain most from this joint venture ?
Explain in your answer. [5]
From point of view :
1) Ford – business expansion overseas
– can use points from setting up multinationals in China
2) Chang`an - benefits of multinationals to the host country.
 JOINT VENTURE
1) Fast developing auto market in China
2) Chang`an Automobile Group –ranked first
in mini-cars production in China.

Chang`An : Ford.
Joint venture set up in China : Joint venture set up in China.
a) job creation a) Potentially market in China.
b) economic growth – GDP Investment – profitable /viable.
higher standard of living Auto market fast developing
c) tax revenue – Able to fulfil the objective
d) technology transfer of maximising returns to
investors.
b) Potential market ??
To the HOST countries. Strategic choice – Ansoff`s matrix
 JOINT VENTURE
1) Fast developing auto market in China
2) Chang`an Automobile Group –ranked first
in mini-cars production in China.

Chang`An : Ford.
Joint venture set up in China : Joint venture set up in China.
a) job creation a) Potentially profitable and
b) economic growth – GDP viable investment – China`s
higher standard of living Auto market fast developing
c) tax revenue – Able to fulfil the objective
d) technology transfer of maximising returns to
investors.
b) Ford designed cars are entering
Benefits of Multinationals into China huge market.
To the HOST countries. A market penetration and
product development by Ford.
2) Ford would likely to gain most from the joint venture.
a) Potential for profit making : Ford`s investment is firmly secured due to
the huge potential market for cars in China
• The auto market is fast developing in China and expected to reach 6
million cars . Ford would further help to exploit the potential market in
China.
• This would enable Ford to meet the objective of maximizing returns to
its shareholders.
b) Market penetration /product development strategy :
Ford is an established auto giant manufacturer. Ford would be able to penetrate
into the huge market in China and consolidate its position in China in the
automobile industry.
• It is the market penetration / product development strategy by Ford.
• Presently, Chang`an ranked first in China`s mini car production
• Ford-designed cars will be the new product development
• Producing and selling Ford designed cars in China is market penetration.

Chang`an`s view point :

• Technology transfer
• Job creation – expanding automobile market.
• Economic growth – higher standard of living
• Tax revenue ( from corporate tax )
3) Problems of dealing with each other :
a) Culture and styles of management might be so different that the firms
do not blend well together.
b) Tendency of blaming each other when errors and mistakes are made.
c) The business failure of one of the partners might put the whole project
at risk.
Activity 2.5 : Ford teams up with Chinese auto maker

4) Advantages of joint venture :- Nestle and Fronterra .

a) The joint venture would gain from Nestle`s marketing expertise and Fronterra `s
production and processing facilities due to the synergy created.
• Both have different markets and different customer base .
• By further exploiting these opportunities ( gaps ) , the joint venture would benefit
both companies in terms of market share and profitability.
b) Joint venture has enabled both to implement the strategy of market penetration and
market development. ( Unit 6AL – Strategic choice ).
• There is an opportunity for both companies to strengthen their positions in the
Caribbean market.
• In Trinidad and Tobago, both benefitted due to Nestle`s marketing expertise and
Fronterra`s production and processing facilities.
c) Joint venture would eliminate unnecessary competition and wastage of resources.
• There will be a substantial reduction in the overall costs.
• Joint venture would initiate R & D into diary products – Better quality and affordable
prices made available to consumers. This would enable the business to gain an
competitive advantage over its rivals.
Evaluation :
a) Managers must evaluate whether business growth by joint venture is desirable for
achieving the aim of maximizing returns to shareholder. The problem of overtrading
might arise if the growth is too fast. The cost of rapid growth may easily outweigh
the benefits gained.
b) Without careful planning, rapid growth by joint venture may not be able to gain the
true synergy.
Unit 1AL2 Business Structure

Revision case study 2 : Joe to expand his business ( page 38-39)

1) Joe is currently operating in secondary industries – processing coffee beans and tea leaves.
2)Joe planned to venture into cafes and tea shops. Joe will be operating in the tertiary ( service ) sector
as this business is providing services to the general public.
3)Joe is planning to set up this type of business because :
a) the changing tastes of the customers.
b) a rise in the disposable income has resulted more people prefer to eat and drink in hotels and
restaurants.
c) competition from large processors and this has affected his processed coffee beans and
tea leaves business.
4)Switching from making tea and coffee products to setting up café and tea shops would encounter
several problems :
a) Management skills : Setting up café and tea shops is a totally different type of business.
Hence, this would require a different type of management skills.
b) Capital funds : Joe has to consider the sources of finance – internal and external.
c) Redundancy problems : Compensation payment to staff that were made redundant. There will
also be staff retraining.
d) Market research : – tastes/income of customers.
– trends in current café and tea shop businesses.
Unit 1AL2 Business Structure

Joe to expand his business ( page 38-39)

5)The most suitable form of business is to form a private limited company.
The main reasons for forming a private limited company :
a) The owner will still in control of the business if he can control 51%
or more of the shares. It would be easier as transfer of shares have
to be agreed by all existing shareholders.
b) There will be limited liabilities for the business unlike sole trader where
all the owners` assets are potentially at risk should the business fail.
c) There will be greater injection of capital into the business by inviting
friends and potential venture capitalists .
d) The main drawback is that there will be less secrecy over financial affairs
as the accounts have to be sent for public inspection.
Unit 1AL2 Business Structure
Revision case study 3 : WASTE – a good case for privatisation ( page 39 )
1) Analyze the likely reasons why the city government decided to privatize
this organisation. [ 10 ]
• Efficiency : Privatization would increase the level of efficiency.
It is to save costs by a substantialjob cuts . The organization was well
known for being greatly overstaffed.
( Over staff - Under-performance staff / low productivity )
• Costs and choice : The increased efficiency would lower the overall cost
as the waste services was heavily subsidized due to inefficiency.
Customers have a better choice as other businesses could be set to
compete with the newly privatized business.
• Tax revenue : privatization would reduce the burden of the government as
the waste services was heavily subsidized. The tax revenue collected
could be used by the government to finance the social-economic projects
like schools and hospitals for the benefit of the people.
Two reasons why city government decided to privatize this organization :
a) to increase the level of efficiency . It is to save costs by a substantial
job cuts . The organization was well known for being greatly overstaffed.
( Over staff - Under-performance staff / low productivity )
b) to reduce the burden of the government. The waste services was heavily
subsidized to keep charges down.
c) to increase the tax revenue – This could be used by the government to
finance the social-economic projects like schools and hospitals.
2) Evaluate the likely impact of this organisation, in the short run and the
long run, on : • customers
• shareholders
• workers [ 12 ]
a) Customers :
Short run :
• Collection reduced to once a week due to job cuts.
• Initially, there will be a slight disruption to service
Long run :
• Improved efficiency – the city government announced that other
businesses could se up in competition if they wished to do so.
• Costs - Lower costs resulting from intense competition and hence
lower prices will be charged.
• Greater choice : There will be a greater choice for both homes and
businesses as more than one firms will be providing waste disposal.
b) Shareholders :
Short run :
• Opportunity to invest
• Low or zero dividends due to the intense competition and falling profits
• Loss of share value – due to falling profits
Long run :
• More dividend payments – when profits are increasing.
• Board of management – The biggest shareholders demanded to be
on the of directors
• Risk of management buy out – shares are freely bought and sold in
the open market.
b) Workers :
Short run :
• Loss of jobs : Privitization has created redundancy problems. Job cuts
to reduce costs and improve efficiency
• Productivity : Expectation to improve productivity as workers have to be
more committed and motivated
• Fear of change – change would mean more responsibility and tasks
Long run :
• Rewards : More pay and bonuses as the privatised firms will practised
performance –related pay
• Learn new skills to use new equipment
• Motivation : There will also be strong motivation as workers have a
direct involvement in the work and there is a greater sense of
empowerment.
2) Evaluate the likely impact of this organisation, in the short run and the
long run, on : • customers
• shareholders
• workers

Short run Long run

Customers Disruption to service Greater choice
Collection reduced to once Improved efficiency
a week Lower costs
Shareholders Opportunity to invest Dividend payments
Low or zero dividends, poss Dissatisfaction with leadership
Loss of share value Move onto board of directors
Risk of management buy out
Workers Loss of jobs Learn new skills to use new
Expectation to improve equipment
productivity
Fear of change
3) Assess the importance of changing the long-term objectives of a business that
has been privatised.
• When it was in the public sector, the waste disposal is managed with a
social objective and profit maximization is not the main objective.
• Loss-making public corporations will still be kept operating if the social
benefits is great enough.
• On the other hand, private sector would aim for profit maximization
by increasing the level of efficiency in terms of costing and quality of
the goods produced.
• Needs of other stakeholders :
* A need to satisfy the shareholders in terms dividend payments and
shares price of the privatised firms.
* As the privatised busines is no longer subsidised, objective will change
from being provision of service ( social objective) to society to a more
profit-focused.
4) Recommend to the chief executive whether he should maintain the business
as a public limited company ( plc ) or not . Justify your answer. [ 12 ]
Arguments for :
• Business risk :
• Prestige – perks
• Opportunity for further investment, e.g. rights issue, shared ownership.
Arguments against :
• Risk of takeover,
• Shareholders` value : Fluctuations in stock markets beyond the control
of the business,
• Conflict objectives amongst staeholders.
• Secrecy of business e.g. disclosure of accounts.
Evaluation : CEO’s experience and expertise, external environment.
Revision case study 3 : WASTE – a good case for privatisation ( page 39 )

2) Two reasons why city government decided to privatize this organization :

a) to increase the level of efficiency . It is to save costs by a substantial
job cuts . The organization was well known for being greatly overstaffed.
( Over staff - Under-performance staff / low productivity )
b) to reduce the burden of the government. The waste services was heavily
subsidized to keep charges down.
c) to increase the tax revenue – This could be used by the government to
finance the social-economic projects like schools and hospitals.

3) Impact of privatization :
a) Customers : Price was raised and the waste collection was reduced to
once a week. However, in the long run, competition would help to keep
the price low with better services.
b) Shareholders : Dividend payment after profit were made. The Board of
Directors were asked to leave when profits fell due to intense competition.
In the long run, when the business is doing well and able to able to
satisfy customers` needs profitably, shareholders` value would increase.
in terms of higher dividends and higher share price.
 Week 7 28/2/2013 Friday : Waste – a good case for privatisation

c) Workers : Initially there will be problem of redundancy and loss of jobs

when job cuts were made after privatization. However, there will be job
security and continuity after privatization when the business is making
profits. There will also be strong motivation as workers have a direct
involvement in the work and there is a greater sense of empowerment.

4) When it was in the public sector, the waste disposal is managed with a social
objective and profit maximization is not the main objective. Loss-making
public corporations will still be kept operating if the social benefits is great
enough. On the other hand, private sector would aim for profit maximization
by increasing the level of efficiency in terms of costing and quality of the
goods produced.
Revision case study 3 : WASTE – a good case for privatisation ( page 39 )

5) The business should be maintained as a public limited company because :

a) the chief executive will still be in control of the business as there is a
separate legal identity between the ownership and control
b) additional capital can still be raised by issuing more shares to the
general public.
c) Limited liability : the liability is only limited to the amount invested in the
business. No body can make any further claim against the shareholders
should the business fail.
Evaluation :
a) The business would need to publish information about the company`s
annual accounts.
b) However, there is very little or no information about the company`s future
plans or future expansion strategies.
Unit 1AL2 Business Structure

Revision case study 1 : Multinational to produce in Malaysia ( page 38 )

1) Explain why ETG could be described as a multinational m business. [3]
ETG is considered as a multinational because it has owned and controlled many business
operations outside the country. They are, in fact, holding companies with shares in
many overseas subsidiaries, each of which is subject to the company in which it is located.
** Holding company : A holding company is a company specially formed to take a
controlling interest on other firms. The firms that are being controlled are called subsidiaries.
2) Disadvantages to Malaysia from the operation of the new ETG factory . [8]
a) Exploitation of the local labour force :
• Low wages paid – Wage level is the same as those paid to foreign workers
in other ETGs ( from case given )
• The use of child labour in production operations and in advertisement.
b) Environment pollution : Health hazard – ETG has a bad record and this has
been voiced out by a local resident .
c) Incompetence of the local firms – local firms might be squeezed out of business
as a result of not being able to compete in terms of efficiency and much smaller
resources.
Unit 1AL2 Business Structure

d) Net outflow of dividend – There will be a loss of foreign exchange when dividend
flow back to the `parent` company.
( ** If the profit can be reinvested back into the business, it would further generate
more job opportunities and more output will be produced )
e) Cultural identity – There will be a reduction or even loss of cultural identity when
when `western culture` is imposed on local community.
3) Reasons why ETG is expanding its production facilities outside Europe. [12]
a) Access to local natural resources : Malaysia is one of the leading produces
of natural rubber and setting up of ETG in Malaysia would enable ETG to have
access its natural resources. Availability of local natural resources has greatly
increased the operational efficiency of the multinationals.
b) Import restrictions : Multinationals could avoid paying import duties. Other
restrictions like quota will be greatly reduced. These would greatly reduce the
overall costs of operating in overseas. The substantial cost savings could help
the business to increase its overall profitability.
c) Lower cost of production :
• The overall cost of operation of multinationals in low wage countries has been
greatly reduced .
• Prices charged will be lower due to import tax not paid.
• The closure of the Mexican factory and shifting its operation to low wage countries
like Malaysia has enhance the profitability of ETG. It has announced record profits
from its operations in 12 countries and dividends paid has increased by 50%.
d) Closer to the main market :
• Lower transport costs for finished products.
• Easier to conduct market research about customer`s needs and wants.
• Multinationals would be looked upon a local company and could gain
customer loyalty.
4) Discuss the extent to which a government should control the operations of
multinational companies within its own country. . [10]
Benefits :
• Job opportunities
• Foreign exchange
• Tax revenue
• GDP – economic growth
Drawbacks :
• Exploitation of the local labour force
• Incompetence local firms –squeezed out of business
• Negative impact – Environmental Pollution
• Net outflow of dividends.
• Cultural identity

HOW TO RECONCILE ???? NEXT SLIDE

4) Discuss the extent to which a government should control the operations of
multinational companies within its own country. . [10]
a) Exploitation of the local labour force :
• Low wages paid – Wage level is the same as those paid to foreign workers
( Notes ) in other ETGs due to the absence of strict labour and health and safety rules.
• It is common for Multinationals to use of child labour in production operations
and in advertisement.
• To avoid labour exploitation, there should be strict and well written labour laws
governing the use of labour in multinationals. The setting of a wage minimum
in Malaysia recently has helped to prevent labour exploitation. The ban of child
in all forms of promotion is another way of preventing labour exploitation.
b) Incompetence of the local firms – local firms might be squeezed out of business
as a result of not being able to compete in terms of efficiency and much smaller
resources.
• However, the setting up of multinationals has created more job opportunities
for the local people. Increased employment would increase the general welfare
of the people.
• Newly established firms may find it hard to survive as they do not have the
same cost advantages. ( from case study )
• To survive, these infant industries should be given some form of protection.
# Multinationals should not be allowed to produce goods which are substitutes
of these infant industries.
# Government aid in the form grants and subsidies given to these infants to enable
them to continue to operate until they are able to compete openly with foreign firms.
# Imported goods : In the mean time tariffs and quotas will be used to curb imported
goods which are substitutes to the infant industries.
# The growth of import-substitution local industries would force consumers to
switch to home-produced substitute goods. This would lead to greater job
opportunities for the local people.
c) Environment pollution : Health hazard – ETG has a bad record and this has
been voiced out by a local resident .
• Social responsibility is the domain of the government and it is the government
( through legislation ) which set the parameters within which businesses operate.
• A business firm is answerable and accountable to the government if production
process does not conform with the legal requirement causing environment pollution.
Pollution of the air and water has damaging effects and these are the external costs
which are borne by society and not by the business firms.
• There is a need for the government to tighten existing laws governing all
manufacturing process. In many countries, the Environment Quality Act has been
enforced to monitor all activities .
• Apart from that, an environmental and social audit would be conducted to assess
the impact of a business`s activities on the environment.
• Business firms can no longer avoid legal responsibility for production process that
are causing environmental pollution or producing goods that are hazarduous to health.
Activity 7.1( New text Page 72) : Starbucks confirms rapid-growth strategy.

1 Why would you describe Starbucks’s growth strategy as being an example

of ‘internal growth’ ? [3]
Internal growth is defined as expansion of a business by means of opening
new branches, shops or factories. Organic growth
• Starbucks plans to open 10,000 new cafés over the next four years focusing
on the Chinese market.
• It is internal growth because this growth is not through merger with or takeover.
2 Suggest two reasons why Starbucks has adopted a rapid-expansion strategy. [6]
This relates to the likely objectives of Starbucks. Possible reasons include:
a) Business growth :
• The aim to double the size of the business over a five-year period.
• The opening 10,000 new cafés would substantially contribute
to fulfilling that aim ( objective ).
b) Market opportunities.
• Starbucks will benefit from `first mover` advantage in the market or
being the `first` in the market. This will aid the longer-term expansion
plans of Starbucks..
• Starbucks wanted to take advantage of the market opportunity to establish
its brand in China before other competitors entering the market. The
chairman of Starbucks has said `No market potentially has the
opportunities for us as China hopefully will`
• To increase profit : Expansion will enable Starbucks to take advantage
of economies of scale, such as purchasing economies. The lower unit
costs will make coffee more price competitive and/or enable it to
increase profit margins.
3 Analyse the possible advantages of focusing on growth in China. [8]
There three reasons identified (case-study ) for focusing on the Chinese market:
a) Rapid economic growth :
• The fast growing Chinese economy with higher GDP per capita has raised
the standard of living of the people.
• The rising disposable income would mean more people can afford to visit
cafés. Hence, there will be a potential high sales growth for Starbucks in
China.
b) Lack of strong local competitors :
• The lack of strong local competitors would mean there are no established
local brands. It would be easier and cheaper for Starbucks to develop its
brand in China.
• If there is already established local competitors it would act as a significant
barrier to entry into a market.
c) Size of population :
• The Chinese population is huge ( at over 1 billionpeople ) would indicate
the market is huge. The market is potentially the biggest single market
in the world.
• If Starbucks can capture a small proportion of its population, this will still
represent a high level of sales turnover growth.
4 Explain why Starbucks is planning to reduce its reliance on just selling coffee. [5]
• The business risk will be high if Starbucks is too dependent on coffee.
• Diversification would be a good strategy as it will help to spread business risk.
• Starbucks has expanded its product portfolio to include audio books and music.
• If there is a decline in the coffee market, Starbucks’s sales will be more
resilient due to its interest in the music market.
5 Do you think Starbucks is right to plan to expand so rapidly ? Explain your answer. [ 9 ]
The main reasons for Starbucks to expand so rapidly in China are :
• Profit motive : There will be potential profit maximization through the
economies of scale.
• Consolidation The economics of scale would enable Starbucks to gain a
foothold in the Chinese market and act as a barrier to entry by rival firms.
• Market leader : To become a market leader by capturing a high market share
so as not be easily taken over by its rivals.
Disadvantages :
• Overtrading : Overtrading can be costly and put a strain on Starbucks’s cash
flow or working capital. If overtrading occurs, this can lead to liquidity problems
and even bankruptcy.
• Management and coordination : There may be difficulties in controlling the
expansion. There will be coordination and management problems For example,
the chairman has criticised the ‘time-saving policy of designing stores uniformly’.
This may affect Starbucks’s brand image negatively as store designs may not
meet local needs effectively.
• Product quality :There has also been a problem with product quality;
Consumer Reports magazine has ranked McDonald’s coffee ahead of Starbucks.
Evaluation :
1) There is a need to balance the advantages against the disadvantages and
assess whether the expansion is too quick.
2) The availability of finance and cost of finance would a crucial factor for
expansion as overtrading will be problematic.
• Ten thousand new cafés represents nearly seven cafés being opened
every day for the next four years.
• Managing such rapid expansion will be difficult.
# • But the long-term gains, if successful, could be great given the potential
of the Chinese market.
 Activity 8.5 : Vacuum clear Dyson victorious in bag-less machine court case
1) A patent in effect creates a monopoly for the inventor. Outline the possible
impact on Dyson and similar firms of this legal monopoly. [4]
A patent : the exclusive right given ( by the government ) to invent or produce
new products or processes. A patent would make the firm the monopoly
for the product.
Impact :
• Price / Profit : A higher price can be charged for Dyson vacuum cleaner.
Dyson appliances has a legal monopoly for vacuum cleaner. The higher
price would enable Dyson to earn higher profits as it has no close
substitutes and hence price inelastic.
• Market leader : The higher sales would enable Dyson to increase its
market share and becoming a market leader for vacuum cleaner.
• R & D : Abnormal ( super-normal ) profit earned would allow Dyson to
re-invest some funds to R & D .This would develop new products or
new innovations to protect the firm`s dominant position in the market.
Activity 6.5 : Vacuum clear Dyson victorious in bag-less machine court case.

2) Analyse the benefits to consumers of competition between firms in the

vacuum cleaner market. [8]
• Price : Competition would drive down the prices for vacuum cleaner as firms
compete to win sales and market share.
• Quality : If the competition is healthy, it would lead to improvement in the
quality of the products produced.
• Consumer choice : Three will be a wider choice for vacuum cleaner due to the
numerous competing firms in the market. Consumers would have a wide choice
of competing brands, each offering a different price, design and quality features.
• Innovation : Economic resources are scarce and competition would encourage
innovation to create new products with a unique selling point ( USP ).
Dyson has spent 20 years in perfecting this new technology in order to break
into the market. Dyson has succeeded in becoming one of the biggest selling
vacuum cleaner in Europe and have captured about 20% of the market share.
This will provide an incentive for other firms to research into new product
developments ( NPD ) . Hoover, has brought out its own bag-less technology.
The MD of Candy`s UK subsidiary claimed that `we are bringing out a new
generation of bag-less cleaner, which will be an improvement of the current one`
Activity 6.5 : Vacuum clear Dyson victorious in bag-less machine court case.

3) If Dyson`s product continues to gain market share, should this, in your opinion,
be of concern to the Competition Commission authorities in the UK and in the
EU ? Explain your answer. [10]
Should be a concern :
In the UK, a company will be subject to investigation if the market share
has reached 25%. It is because the company is considered to be a
monopoly.
• There could be abuse of monopoly power as it can exploit consumers by
charging higher prices due to lack of competition.
• It could also use anticompetitive practices to stifle competition. It is a
common practice to use destroyer pricing to drive out smaller competitors.
• The existence of monopoly would reduce consumers` choice as limited
range of goods are produced.
Not a concern :
Dyson`s market share is only 20% and has not reached the stage where it will
be subject to investigation.
• Market share : Increasing market share would enable Dyson to reap the
economies of scale. Consumers will benefit due to lower unit costs.
• R & D : Higher profit would allow Dyson to allocate more funds for R & D.
Again, this would benefit consumers as innovative products of better quality
lower prices would be offered.
Evaluation :
• As the situation is highly competitive as no single firm has acquired more
than 25% of the market share.
• It is healthy because competition encourages innovation.
• The desire to increase market share and a higher level of profits would provide
great incentive for competing firms to develop new and better products.
Unit 1AL.6 : External influences.

Activity 6.10 : Tibet protesters target BP over PetroChina stake

1) The Tibetan pressure group is attempting to pressure the Oil giant BP Amoco to
withdraw from PetrolChina, the state-run Chinese oil company. It has called BP to
dispose of its stake PetrolChina stake on the grounds that it contravenes the
company`s ethical policy on human rights and environment.
2) Ethical policy is the business policy concerning the values and beliefs of what is
right and wrong and of the morality of choice. Business ethics is the application of
moral standards to business situations. Hence it is about making decisions that
affect other individuals and organizations.
Unethical behaviour can result in loss of business, fines and even imprisonments.
3) BP and PetrolChina would face a public relations disaster if the resolution is
passed calling on BP to dispose of its stake in PetrolChina.
a) The likely impact would be a loss of BP business in the oil industry.
b) It would also affect the economic growth in China with a drop in national
output
and a loss of jobs . Many people in China may become unemployed unless
a more
ethical way of doing business is found and implemented.
c) A drop in GDP will lower the standard of living of the people as income per
capital would be falling
d) The oil industry will also affect many related industries in Tibet and China such
as
engineering and automobile industries.
 Week 8 Wednesday 5/3/2014 Activity 6.10 Tibet protestors target BP over PetroChina stake

4) The success of the pressure group`s campaign will depend very much on a
number
of factors ( Notes Page 21 )
a) Lobbying of the government : The pressure groups will lobby the
governmentto pass laws to regulate the activities of PetrolChina.
Human rights groups viewthe pipeline project as a main policy of
Beijing`s economic colonization of the Tibetan people.
b) Consumer behaviour : The pressure groups can influence the behaviour
of members of the public regarding certain industries or product.
The pressure group may call for a consumer boycott of BP petrol stations.
c) Publicity through media coverage : Press releases be made to get
public sympathy. The more bad publicity created, the greater the chance
the pressure groups will succeed in getting PetrolChina to withdraw its
project in Tibet.
d) Demand of investors/ workforce : Business objectives should not be
solely on profit maximization and high dividend payment to shareholders.
A business firm that practises good business ethics is one that accepts
social responsibility as an objective.
When a firm accepts its legal and moral obligations to all stakeholders,
then it is said to be accepting `corporate social responsibility`
Unit 1AL.6 : External influences.
Activity 6.9 : Corporate social responsibility ( Page103 )
** Corporate social responsibility : Summary Page 21
When defining its sense of social responsibility, a firm typically confronts 4 areas :
Its responsibilities towards the environment, its customers, its employees and its
investors.
a) Towards the ENVIRONMENT : It requires a firm to minimise
POLLUTION of air, water and land.
b) Towards the CUSTOMERS : It requires a firm to provide products of
acceptable quality and are fairly priced and to respect customer`s
rights.
c) Towards the EMPLOYEES : It requires the firm to respect workers
both as resources and as people who are more productive when
their needs are met
d) Towards the INVESTORS : It requires firms to manage their resources
efficiency and to present their financial honestly and the same time
to try to maximize profits
Hints to questions no. 2 : Extracts from the case .
1) He combines this environmental commitment with an equally strong desire
to ensureFord`s continued profitability. Any color as long as it`s green.
2) Disagreement ( Forum ) with the idea that the interests of shareholders
and those of other stakeholders ( employees, community, customers )
must always conflict. How to RECONCILE ?
The campaign seeks to weld these two seemingly opposite forces so that
doing good and doing good business become one and the same thing.
3) One of the findings ( Business Leader Forum ) – is a focus on employees
and their views of the companies they work for. Importance of employee
has been highlighted by the so-called ` war for talent`
** If deemed not a ethical employer, the cost of recruiting and training would
be much higher ( due to high labour turnover from frequent resignation )
Unit 1AL.6 : External influences.

Activity 6.9 : Corporate social responsibility .( page 103)

1 a) Socially responsible business :
It refers to an organisation`s response to social needs. When a firm
does accepts its legal and moral obligations to all stakeholders, then
it is said to be accepting `corporate social responsibility`
b) Ethics are the values and beliefs of what is right and wrong and of
the morality of choices. Business ethics is the application of moral
standards to business situations.
Unethical behaviour can result in loss of businesses, fines and even
imprisonments.
2) The article given had stressed the need to adopt an ethical and environmentally
aware strategy.
Social and environmental responsibility has moved from a `nice to do`
to a `need to do`
a) Bill Ford had said at the recent Greenpeace conference in London
he would like to see the end of the internal combustion engine.
He emphasised that `Any colour as long as it`s green`
However, he combined this environmental commitment with an
equally strong desire to ensure
Ford`s continued profitability. Such a combination of environmental
responsibility, ethics and profits is one that is attracting increasing
attention.
2) b) The Business Leaders Forum`s Human Capitalism campaign did not agree
that the interests of shareholders and those of other stakeholders
( employees, community, customers ) must always conflict. In fact, the
campaign had sought to weld these two seemingly opposite forces so that
doing good and doing good business become one and the same thing.
One of the findings of the Business Leaders Forum is a focus in employees
and their views of the companies they work for. The importance of the
employee has been highlighted by the so-called ` war for talent`
The cost of recruiting and retaining staff is likely to be higher if you
are deemed not to be an ethical employer and organisation.

3) The chairman of Ford express an equally strong desire to ensure Ford`s

continued profitability because it is accountable to the investors in
managing the business i.e. to manage the resources efficiently and
present the financial position honestly and at the same time to try to
maximize profits.
 Week 7 Thursday 27/2/2014 Activity 6.9 : Corporate Social responsibility

++ Q4 Benefits / drawbacks of adopting a environmental friendly policy ( Page 19 )

4) The reason for Shell`s conversion to sustainability is commercial.
`We won`t achieve our business goals unless we are listening to
– and learning from – the full range of our stakeholders in society.
** The benefits of Shell being seen as the leading multinational in economic,
environmental and social responsibility.
• Consumers are becoming aware of the environmental issues and would
support businesses that adopt `green` policies. Business firms that
use the latest `green` equipment or use recycle materials would
have a real marketing and promotional advantage.
• A company reputation also has significant implications for its financial
performance. A company may have a higher stock market valuation
if it has good social and environmental reputation.
• Adopting environmental friendly strategies would definitely reduce the
chances of breaking existing laws and thus be able to avoid bad publicity
from heavily court fines.
• It is generally that higher qualified employees would like to work
for firms that they could have pride in and firms which adopt policies
that reflect their own personal views / standards.
The likely costs or drawbacks ( to the business ) would be :
• Increasing COSTS as a result of protecting the environment using
expensive low-pollution equipment. The increase in costs would
reduce the profit margin and the firm may become less competitive.
This could affect FUTURE investment ( Less retained profits )
• Heavy fines would bring bad publicity to the firm and would affect
the sales revenue.
• Local residents have the right to sue firms for health reasons arising
from business production.
• Resignation /retraining : Additional costs incurred. ( OCS )
++ Q4 Benefits / drawbacks of adopting a environmental friendly policy ( Page 19 )
Unit1AL.6 : External influences

Revision case study 3 : More chips, please ? ( page 108 )

1) Information technology : The use of electronic technology to gather, store, process and
communicate information. The introduction of IT has drastically changed how and the way
a business operates.
2) Two of the IT systems that would benefit customers :
a) check-out scanners b) automatic product re-ordering systems Explain any two
c) automated stock-control programs d) internet shopping e) loyalty cards
3) Supermarkets using RFID to trace and collect data :
a) labour cost savings d) stock control :- proper record of stocks in and out.
b) quick delivery of goods e) goods are tracked at each stage of the SS chain.
c) smooth operation of the business
4) Effective introduction of the new RFID technology :
a) avoid cultural shock : awareness campaign of RFID introduction
b) staff training for the eventual change
c) restructuring of the organisation : from ordering to the sale of the goods
d) professional support /maintenance staff.
EXCHANGE RATES: REVISION.
A$
US $

S D

0 Q quantity
1) The exchange rate is the price of one country`s currency in terms of another
currency.
An exchange rate of US1.00 = $2.00 would mean one US dollar is worth $2.00.
2) Exchange rates are determined by the forces of demand for and supply of
a currency on the foreign exchange market.
DEMAND for the currency :
1) Exports of goods and services.
a) Tourism industry : Foreign tourists spending MONEY in the country.
b) Exports of Proton and Perodua cars overseas
2) Foreign investment : Foreign investors Investing in the country.
3) Speculative reasons
SUPPLY of the currency
1) Imports of goods and services into the country.
a) Tourism industry : Domestic tourists spending MONEY in foreign country.
b) Imports of fruits ( citrus fruits )
2) Foreign investment : Domestic investors investing abroad.
3) Speculative reasons
EXCHANGE RATES: REVISION.
3) Currency depreciation : A fall in the exchange rate against other
currencies would result DEPRECIATION in the value of that currency
a) A fall in the exchange rate from US$1 = $5 to US$1 = $4 would mean
there is a depreciation in value of the US$.
A$
US $

5
4

Impact
4) Exchange rate appreciation : It is when a rise in the exchange rate of the
currency
against other currencies. If US$1 rise from $2 to $3, then the value of US$ has
APPRECIATED .
Unit 1AL.6 : Externa Influences

Activity 7.4 : BMW – strategies to deal with economic changes ( Page 129).
1) Explain why BMW is badly affected by the depreciation of the US$ . [4]

a) €1 = US$1 €1 = US$1.20
US$ has depreciated ( The € currency has appreciated )
b) From the point of view of US :
Exports would be cheaper ( in US$ – in its own currency )
Imports would be expensive ( in foreign currency – € )
c) The exports of BMW cars to US market would be affected because
the price of BMW would be higher in US$ as a result of the US$ depreciation.
d) The drop in sale of BMW would be substantial as US market is the SECOND
largest buyer of BMW cars after EU.
** The expected profit margin would be affected.
2) What advantages does BMW gain from selling many cars to EU countries
that use the euro as their common currency. [6]
Advantages of the sale of BMW to EU countries : [6]
a) Common currency : The price would be stable and this would increase
the profit margin.
b) EU markets : The market for BMW is huge :- EU is the largest buyer of
BMW cars.
c) Free Trade Blocs : No trade barriers imposed – on German cars.
d) Free trade : economies of scale reaped. Prices charged would be lower
due lower costs of production.
Unit 1AL.6 : Externa Influences

Activity 7.4 : BMW – Strategies to deal with economic changes ( Page 129 )
3) Evaluate the long-term impact on BMW`s profits of any three of the
strategic decisions that the company has made. [12]
The long-term impact on BMW profits :
a) The cut back on the more expensive German workforce would help
to reduce labour costs ( variable costs ) and hence the overall cost of
production.
** Site relocation – a good move. Redeployment of resources by
increasing production by 60% in US. These strategies would help to
increase the profit margin.
Main drawback – local unemployment rate may increase.
b) Buying supplies from US suppliers would help to lower the COST
of production as the imported supplies are cheaper ( in terms of € ) .
BMW cars are becoming more competitive in the car industry market.
Michael Porter – The two main factors that can lead to a significant
competitive advantage are cost efficiency or differentiated products
that have USP.
Are US supplies compatible ? It must be compatible and yet without
compromising qualty.
c) Expanding the market to non-US and non-EU markets like China would
mean BMW is adopting a market development strategy.
With free trade, and cheaper supplies from US, BMW is able to reap the
economies of scale. Expanding market development and market
penetration would enable BMW earning more profits in the long term
d) Increase production by 60% in US factory : Good move and feasible given the
current situation ( US $ depreciating ). Labour costs would be cheap and
the production of BMWs can be channeled to overseas markets like EU and
China.
 INCOME ELASTICITY OF DEMAND : Week 6 21/2/2014 Friday

Acitivity 7.5 : Week 6 21/2/2014 ( Friday )

1) Product A – Luxury good Product B – Inferior good Product C – Normal good
2) If income were to rise by 10% ;
a) product A would increase by 20% % Qd
b) product B would decrease by 10% % income
c) product C would increase by 2%
3) Normal goods :- white sliced bread / aspirin tablets
Luxury good :- personal computers

Activity 7.6 : Week 6 – 21/2/2014 ( Thursday )

1) Income elasticity of demand : Standard model = + 2.5 Superior model = + 10
2) The income elasticity of demand for superior model was greater because it is a luxury
good. Hence, the demand for luxury good will rise by a greater proportion when income
are rising. The income elasticity of demand will be positive and greater than 1. These
luxury goods cannot be afforded when the incomes are low. On the contrary, the demand
for normal goods will rise by a smaller proportion when income are rising because basically
they are essential goods. As such, the quantity will not change much when income changes.
3) Interest rates are falling : An increase in disposable income. The demand for luxury goods
will be greater compared to normal goods. As such, the product mix strategy should change
and include a variety of goods like cars, holidays and houses. Other aspects of 4Ps should
also be looked into.
Activity 9.2 ( Page 106 ) China to take action against inflation.

1) State two reasons for the reported increase in inflation in China. [2]
• The cost of production has been increasing
due to the higher oil and petrol prices.
• The Rising demand from wealthier population
and supply problems has resulted in excessive demand.

2) Are these causes of inflation `cost--push` or demand-pull pressures ?

Explain your answer. [4]
• Cost-push inflation – The higher oil and petrol prices has pushed up the
costs of production.
• Demand-pull inflation – The excess demand causing the price of pork
and vegetables to increase is termed as the demand-pull inflation.
3) If the Chinese government increased interest rates again, explain what
impact this could have on :
a. consumer spending on luxury goods
b. spending on new investment projects by Chinese businesses
c. the value of the Chinese currency exchange rate [9]

• Buy on credit : Consumer spending on luxury goods will likely to fall as

buying on credit will be expensive due to higher interest charges. Consumers
may stockpile certain essential goods and cut back on luxury good items.
• Investment projects : Spending on new investment projects will also likely
to fall as the cost of financing projects has increased. The higher interest
rates would mean highly geared firms may face cash flow problems .
• Exchange rate : The exchange rate of the Chinese currency is likely to
appreciate. This is because the higher domestic interest rate will attract
the inflow of overseas capital funds into the country. The appreciation of
the Chinese currency might have implications on the competiveness of
businesses.
# overseas capital funds – `hot money` due to higher returns
– foreign investment due to ?????
Next slide
3) If the Chinese government increased interest rates again, explain what
impact this could have on :
a. consumer spending on luxury goods
b. spending on new investment projects by Chinese businesses
c. the value of the Chinese currency exchange rate [9]

• Buy on credit : Consumer spending on luxury goods will likely to fall as

buying on credit will be expensive due to higher interest charges. Consumers
may stockpile certain essential goods and cut back on luxury good items.
• Investment projects : Spending on new investment projects will also likely
to fall as the cost of financing projects has increased. The higher interest
rates would mean highly geared firms may face cash flow problems .
• Exchange rate : The exchange rate of the Chinese currency is likely to
appreciate. This is because the higher domestic interest rate will attract
the inflow of overseas capital funds into the country. The appreciation of
the Chinese currency might have implications on the competiveness of
businesses.
# overseas capital funds – `hot money` due to higher returns
– foreign investment due to excessive domestic
demand ( higher purchasing power )
4) Examine the long-term problems for Chinese businesses if inflation is not
brought under control. [ 10 ]
There will be serious implications for Chinese businesses if inflation is not
brought under control.
• Demand for higher wages – Trade unions will be lobbying for higher wages
because monetary income has fallen in real value due to the rising prices.
• Economic uncertainty : If inflation is not properly controlled, it might lead
to a wage-price spiral . The resulting inflationary pressure could cause
economic uncertainty.
• Pessimistic business environment : The government may have to increase
the interest rate to supress inflation and this will reduce the business
profitability. Hence inflation will add to uncertainty about the future.
• Industrial unrest : If the demand for higher wages is not met, it would lead
to industrial dispute and may result in production being halted.
• External balance : Inflation would reduce the international competiveness
as exports are becoming more expensive ( in terms of foreign currency )
and imports are cheaper ( in terms of the country`s currency ).
This would worsen the balance of payments and likely to cause a
depreciation of the currency.
5) China has experienced rapid economic growth in recent years. Discuss
the likely effects of this on Chinese manufacturing businesses. [ 10 ]
Positive impact :
• Higher profits – The Chinese GDP increased by 7.8% in 2013. The recent
rapid economic growth has increased the profit margins of many businesses
and reduced pressure on businesses to be price competitive.
• Technological innovation : The higher profits and investment could lead
to technological innovation and would enable the Chinese industry to be
more competitive on the world markets.
Negative impact :
• Factor prices : The rapid economic growth would push up the factor prices
as businesses will be competing for the scarce resources.
• Cost of production : The shortage of skilled labour could lead to a higher
wage costs. Prices may have to be raised to cover the higher costs of
production and could create a wage-price spiral. The inflation rate may be
pushed further up.
Unit 1AL.6 : EXTERNAL INFLUENCES :
Revision case study 3 : Prospects for the Malaysian economy ( Page 136 )
1) The Malaysian economy was in recession in 2001 because :
a) GDP had contracted by 2.8% in the first quarter
b) it shrank further by 6.8% in the second quarter.
c) the worst economic crisis since the 1960s.
Mark scheme : Explanation of the numerical data indicating the occurrence of
recession. ( 3m )

2) A recession might lead to the bankruptcy of many Malaysian businesses because :

a) the symptons of recession are falling output and incomes with unemployment
rate rising.
b) the fall in AD would result in a fall in consumer demand for goods and services.
c) as a consequence, there would be a decline in profits and stocks would be
accumulating.
d) there will be a cut in production and the chain effect will start and many
business firms ( with high gearing ratio ) would be facing high operating costs due
to high interest payments.
e) These firms might be forced to wind up if the prolong recession period is long enough.
Mark scheme : Explanation of how :
• a fall in AD would lead to recession.
• profit margin would fall
• high gearing ratio business firms would not be able to hold on
and forced to wind up if the prolong recession is long enough.
• many firm would declare bankruptcy. ( 6m )
Unit 1AL.6 : EXTERNAL INFLUENCES

Revision case study 3 : Prospects for the Malaysian economy ( Page 136 )
3) The three decisions taken in 2001 will help to achieve economic growth.
a) The INTEREST RATE was cut with the aim to lower cost of borrowing . This would
encourage
• investment by business firms as low interest will not endanger their cash flows
• consumer spending on consumer goods will increase especially buying on
credit.
• mortgage loans will rise as there will be an increase in luxury goods like
properties such as houses.
b) Deficit budget would be implemented ( G > T ) to stimulate the economy.
• Government spending on projects like hospitals, schools and highways will be
increased. This will result in an increase in demand for businesses that supply
goods to the government.
• Taxes were cut to encourage more spending.
A cut individual tax will increase the disposable income leading to an
DIRECT increase in demand for goods and services. However, the impact will demand
TAX very much on the income elasticity of demand.
A cut in corporate tax will result in more retained profits made available
for further investment.
A cut in indirect tax like excise tax will lower the retail prices of goods and
services. The likely impact will depend on the price elasticity of demand.
c) The expected depreciated Ringgit against all major currencies would mean export
prices will be cheaper and prices of imports will be higher. This will lead to an
increase for exports and a decline in imports .The resulting in AD would boost
the economic growth.
Unit 1AL.6 : EXTERNAL INFLUENCES

Revision case study 3 : Prospects for the Malaysian economy ( Page 136 )
4) The impact of the 2008 ringgit appreciation.
RM1 = US0.20 ( US$1 = RM5 ) RM1 = US0.25 ( US$1 = RM4 )
The value of RM has appreciated while the US$ has depreciated.
a) Malaysian manufacturers of electronic goods will find that these goods will be
higher in terms of foreign currency . The price will now be US0.25 for every
RM of goods produced
Impact : • A fall in the demand for Malaysian exports to overseas.
• A fall in the domestic market for these goods as they are less
competitive compared with imported substituted goods.
b) Foreign goods ( Imports ) will be cheaper in terms of country`s own currency as
RM1 can now worth US0.25 of foreign goods.
• Importers of foreign goods will find that imported goods are cheaper
( in terms of RM ) and there might be a switching to the imported goods.
• Local firms will experience lower production costs if they use imported
raw materials.
Unit 1AL.6 : EXTERNAL INFLUENCES

Revision case study 3 : Prospects for the Malaysian economy ( Page 136
5) A recession in US will lead to fall in demand for Malaysian goods. The
depreciated
US$ will result US exports cheaper and US imports will become more
expensive.
The demand for Malaysian goods likely to fall and increasing exports (USA ) to
Malaysia would likely to worsen the balance of payments.
Notes Page 28 Unit1AL.6 : External influences
Price is only one of the factors that determine the success of a business.
a) Other aspects of 4Ps : Product design / innovation
b) Other aspects of 4Ps : Effective promotion / extensive distribution.
c) Quality of manufacture / reliability
d) Modern technology and skilled trained staff
e) After-sales service
Unit 1AL.6 : EXTERNAL INFLUENCES

Revision case study 4 : Coaching Inns plc ( Page 136-137)

1) The likely reasons for the company`s increasing difficulty in recruiting new staff :
a) Low unemployment rate as a result of the economy has expanded in recent years.
b) Coaching Inns does not have an extensive training scheme and always prefers
to recruit qualified staff with some experience from other hotels.
2) The business may encounter some obstacles when planning strategy for the future
business expansion.
a) supply of qualified and trained staff are limited
b) lack of capital for financing future expansion.
3) Ways to overcome the problems faced .
a) Staff training – Effective workforce planning.
b) Capital intensive – the directors have supported a policy of heavy borrowing in order
to purchase more suitable properties.
b) proposal to open the first hotel overseas – cheap labour supply
4) Higher interest rates can have an impact on the future prospects of Coaching Inns plc.
a) the higher interest rate could mean the higher cost of borrowings : This might affect cash flow.
b) business with a higher gearing ratio will experience higher interest payment. High interest
payment may endanger the cash flow.
c) the higher interest rate would mean reduced consumer spending a s buying on credit will
be associated a higher repayment.
d) Mortgage loans like buying land and houses would also be expensive
Unit 1AL.6 : EXTERNAL INFLUENCES

Revision case study 4 : Coaching Inns plc ( Page 136-137)

5) Rising interest rates might force the management to take alternative strategies .
a) cutting down on investment spending due high interest rate.
b) business expansion to overseas market which are relatively lower labour costs.
c) limiting prices in order to remain competitive even though it could reduce profit margin.
d) reducing credit terms given to customers
e) reducing labour costs
Unit 1AL.6 : External influences Revision case study 1;( Page 134 )
Pakistan economy: a mixture of hope and future problems
1) Explain what is meant by the terms : • an expansionary fiscal policy [4]
• growth in real GDP [4]
• the balance of payments current
account deficit. [4]
Expansionary fiscal policy relates to government spending and taxation.
If the policy is expansionary, then it will involve a reduction in tax rates and/or
an increase in government spending. This will lead to an increase in aggregate
demand in the economy, that is an increase in spending.
Growth in real GDP is an increase in the value of the output of an economy,
after taking into account any change in the average price level. It thus represents
a real increase in economic activity. The Pakistan economy is expected to increase
its value of output by 6% in 2009.
The balance of payments current account deficit The current account records
the value of trade in goods and services between one country and the rest of
the world. Pakistan is importing a higher value of goods and services than it is
exporting.
2 Discuss the importance to agricultural producers in Pakistan of government
macroeconomic policies. [10]
Macro-economic policies have an impact on the level of economic activity in the
economy and will, therefore, affect agricultural producers in Pakistan. You may
refer to some of the following issues to highlight the benefits of current
government policy in Pakistan:
• Government spending has led to an improvement in the transport infrastructure.
Road building or other transport improvements enable farmers to sell their
products in Pakistan and abroad, thus increasing their incomes. Without
investment in infrastructure, it will be costly or impossible for farmers to get
their products to market.
• Attempts to increase productivity in the agricultural sector may have included
fiscal incentives; for example, allowing investment in capital equipment to be
written off against profits, thus reducing tax paid and encouraging investment
. This will make farmers more competitive.
• The government may have provided subsidies to the agricultural sector to
improve productivity. Policies that raise productivity will help farmers become
more competitive in international markets, and increased production with a
given quantity of factor inputs will increase profits.
• A fiscal stimulus to the economy can help raise demand for agricultural
products. Increasing wealth of consumers would allow farmers to benefit
from higher prices and/or switch production from staple crops to more
profitable products. Macro-economic policies will have a significant impact
on the agricultural sector, but there are many other influences that are
important. The state of the world economy and government policies on
imports will affect the agricultural sector. The policies of foreign governments
will also be significant, for example whether there is access to European
markets for agricultural products from Pakistan.
 
3 Evaluate whether businesses in Pakistan should be more concerned about
the risk of rising inflation or the risk of lower economic growth. [10]
Risks of rising inflation
• impact on international competitiveness
• reaction of government – tightening of monetary policy to control inflation,
that is increased interest rates
• difficulty of predicting future prices – uncertainty will undermine investment
• increased price sensitivity of consumers
• higher wage demands from workers.
Risk of lower economic growth :
• lower growth of consumer demand, therefore increased competitive pressures
when setting prices
• rising unemployment − even with economic growth, unemployment may rise
due to productivity improvements
• higher unemployment will dampen consumer spending, but will make it
easier and cheaperto recruit labour
• threat of recession as confidence is undermined – a real fall in economic
activity will reduce demand.
Evaluation :
The degree of inflation will be significant in determining business activities.
Equally, the extent the slowdown in economic growth will determine the level
of business concern. Businesses in different sectors of the economy may be
affected to differing degrees :
• Construction industry typically suffers significantly during an economic
downturn.
• Firms producing luxury goods will be affected more than those producing
necessities if economic growth slows due to higher income elasticity of
demand.
• High rates of inflation will have more impact on the producers of luxury goods.
Week 8 Thursday 6/3/2014 Activity 36.4 /36.5 Decision tree
1)
Node 1 : Node 2 :
Recession = 0.3 x $60 000 = $18 000 Recession = 0.3 x $80 000 = $ 24 000
Expansion = 0.7 x $120 000 = $84 000 Expansion = 0.7 x $200 000 = $140 000
Total = $102 000 Total = $164 000

2) Node 1 : Node 2 :
Economic return = $102 000 – $50 000 Economic return = $164 000 – $75 000
= $52 000 = $89 000
Town B is more desirable because it has a higher value of economic return that is
$89 000 compared to $52 000 for Town A .

3) The economic return is obtained by subtracting the expected annual cost from the
forecast return. When estimating the economic return, it must take into account the
probabilities of the economic situation during the year. The 30% of recession and
70 % of economic expansion may be just a forecast or expected occurrence based
on past records or an analysis of the current situation. It is assuming that the outcomes
would occur again in the future.
Other non- numerical factors would have to be taken into account .
a) The impact of the environment could have a negative effect on sales if there are
numerous industries in the surrounding environment.
b) The attitude of the workforce may also affect the success of the business. Working
in an entirely new environment with no promise of job security and career
advancement may not raise the motivation level of the workforce.
c) The approach to risk by managers would also affect the operation of the business.
Week 8 Thursday 6/3/2014 Activity 36.4 /36.5 Decision tree

1) 0.2 Low demand $400 000

Petrol forecourt
0.8 High demand $500 000

0.2 Low demand $200 000

Car showroom
0.8 High demand $800 000

2) Node 1 : ($400 000 x 0.2 ) + ( $500 x 0.8 ) = $480 000

Expected return = $480 000 – $100 000
= $380 000
Node 2 : ( $200 000 x 0.2 ) + ( $800 000 x 0.8 ) = $680 000
Expected return = $680 000 – $ 150 000
= $530 000

3) The three factors that might have to be considered are :

a) market interest rate if the fund for two suggested projects are borrowed from banks
b) changing environment such as pressure groups might force decision to be reversed.
c) the expected occurrence of business or trade cycle
d) the expected changing government policy.
Unit 1AL : Business and its environment.

TUTORIAL CLASS :
Unit 1.1 : Enterprise – No topic beyond AS level.
Unit 1AL.2 : Business structure .
1) Explain 3 differences between a sole trader and a private limited company. [6]
2) Why might an entrepreneur decide NOT to take out a franchise agreement
but to establish an independent business ? [3]
3) Explain four possible advantages that might arise from privatization [8]
4) Explain three disadvantages that might result from the privatisation of a
country`s postal services . [6]
5) Explain two reasons for the growing importance of international trade. [4]
6 a) Explain what is meant by protectionism in international trade ? [3]
b) Why protectionism is practised ? [4]
7) Explain two possible advantages to your country`s economy from the
existence of multinationals. [4]
8) Explain three advantages of multinational companies. [6]
Unit 1AL.3 : Size of business.
1)A producer of fruit drinks in your country has asked you to explain the difference
between vertical forward and backward integration. Give examples of each
that would be relevant for this business. ( Notes page 7 ) [4]
2 a) What is conglomerate merger ? [2]
b) Identify a well-known business in your country with operations in more
than one industry. Would you advise this business to engage in further
conglomerate integration ? [6]
3)Two large banks in your country plan to merge. Examine the advantages and
disadvantages to the business that could result from this integration.( Pg 8 ) [8]
4)Examine 3 reasons why the owner of a small business might decide NOT
to expand his business. [6]
5)A computer manufacturer is planning to expand. Explain to its management
the difference between internal and external growth. [6]

 
 Unit 1AL.4 : Business objectives No topics beyond
Unit 1AL.5 : Stakeholders in a business AS level

Unit 1AL.6 : External influences on business activities :

1 a) What do you understand by the term `technological change` [2]
b) Explain why it is not necessarily true to say that new technology causes
unemployment. [4]
Answer : How to make the DD for labour keep rising ?
2) Outline two reasons why the workforce of a business might be opposed to
the introduction of technically advanced production equipment. [6]
( Notes Page 17 Drawbacks IT )
3a) Explain one way in which the adoption of new technology by a business
might reduce the cost of making the product. [2]
b) How might management deal with the problems that you have suggested
in Question 2 [6]
4)Explain two ways in which a fast food restaurant might be affected by
an ageing population. [4]
5) Give three examples of `unfair` competition. (Page 14 ) [6]
6) a) What do you understand by `corporate social responsibility` [3]
b) Explain why good environment practices and ethical standards in decision
making may be to the advantage of a business. ( page 19 ) [6] 
7) a) What is meant by trade cycle ? [4]
b) What are the characteristics of recession ( page 23 -26 ) [4]
8) Explain three macro-economic objectives ( page 22 ) [6]
9)a) Explain why is meant by economic growth ?
Why it is considered desirable ? ( page 22 ) [6]
b) What are the characteristics of economic boom` [4]
10) Explain how some businesses would benefit when there is economic growth. [6]
11) How some businesses likely to be negatively affected by rapid rates
of inflation ? ( page 25 ) [4]
12) Outline the possible effects to the following businesses of a substantial
increase in interest rates .
a) builder of expensive houses [2]
b) a chemist shop ( pharmacy ) [2]
c) an exporter of computer software [2]
13) Explain the negative effects on businesses that can result from significant
fluctuations in the exchange rate of a currency. [4]
14)a) Using examples, distinguish between a currency appreciation and
a currency depreciation. [6]
b) How might a depreciation of a country`s currency lead to benefits for its
industries. [6]
15) Explain the significance of the distinction between an inferior good and
a luxury good during a period of economic growth. [4]

 
 
INFLATION : DRAWBACKS ( Notes Page 25 ) Tutorial question no. 12

Q12 How some businesses likely to be negatively affected by rapid rates of inflation?
1) Business firms :
a) During inflation, the market INTEREST rate will tend to rise. Highly geared companies
will find it very difficult find cash to make interest payments. ( Why ? )
b) Cash-flow problems may occur for all businesses as they struggle to find more money to
pay the higher COSTS of materials and other costs.
2) Workers : Trade unions will be lobbying for higher wages because monetary income has
fallen in REAL value due to rising prices. If not properly deal with it could lead to disputes.
3) Consumers :
a) Consumers are becoming more PRICE sensitive and will look for bargains rather
than big brand names.
b) Hoarding : Consumers may stockpile certain essential goods and cut back on
non-essential items of spending.
4) Uncertainty about the future :
a) The government will take corrective action to suppress inflation. The fall in AD would
reduce business profitability ( due to drop in sales ).
b) The increasing rate of inflation will definitely affect the business confidence.
c) These uncertainties will make SALES forecasts and investment appraisal less
reliable as investment appraisal requires fairly accurate future cash flows.
d) Credit terms given on goods sold may not be extended as repayments by debtors will
be with money that is losing its VALUE rapidly ( also cash-flow problems )
e) If inflation is too high, then the business will lose its competitiveness in overseas
markets.
TUTORIAL CLASS – Business ( A2 – Part 1 ) Intake : Jan 2016/March 2016.
Group 1 : Group 2 Group 3 Group 4
1) Nasriyah 1) Ng Zi Zheng 1) Lousie Chan Yuen Yue 1) Oon Jo Zhen
2) Tan Wei Jun 2) Yasmine Yeoh 2) Tan Wei Sheng 2) Vanessa Choo
3) Teh Wei Yan 3) Oi Jan Ling 3) Ng Shu Yi 3) Lim Ke Ying
4) Kam Shien Yi 4) Michelle Teoh 4) Kam Kai Jie 4) Daniel Lee Xian Jie
5) Ng Chun Jean 5) Tan Jun Yi 5) Reuben Choong 5) Yvonne Chan
6) Lim Jia En