Understanding business

Question 1

primary sector

Answer 1

This consists of businesses that are involved in exploiting
natural resources. Examples include farming, mining and oil drilling.

Question 2

Secondary sector

Answer 2

This consists of businesses that are involved in manufacturing and construction, by taking natural resources and turning them into goods that can be sold later. Examples include electronics manufacture, car production and house building.

Question 3

tertiary sector

Answer 3

This consists of businesses and organisations that are involved in providing services rather than goods. Examples include retail outlets, banks, hotels and hospitals.

Question 4

Quaternary sector

Answer 4

This consists of businesses providing
information and knowledge-based services, such as: l ICT (information and communication technology)
l consultancy (offering advice to businesses) l R&D (research and development).

Question 5

private sector

Answer 5

This consists of businesses that aim
primarily to maximise profits and includes all profit-making businesses ranging from your local high-street bakery to huge multinational companies such as Ford and Samsung.

Question 6

public sector

Answer 6

This consists of government-owned
organisations and agencies which aim to provide a service to
society. This sector of the economy includes the NHS, police
and state education.

Question 7

third sector

Answer 7

This consists of organisations that have been set up to provide goods or services to benefit others.

Question 8

Define ltd company aims

Answer 8

Private limited companies aim to maximise profits, to grow and perhaps increase market share.

Question 9

who controls and manages ltd companies

Answer 9

board of directors control and managed by a managing director

Question 10

advantages of private ltd companies

Answer 10

Expertise and business acumen are gained from an experienced board of directors.

The business usually retains a close and tight-knit, friendly feel with a high level of customer service.

Ownership is not lost to outsiders.

Owners (shareholders) have limited liability.

Question 11

disadvantages of private ltd companies

Answer 11

Profits have to be split with many shareholders by issuing dividends.

A complicated legal process is required to set up the company.

A limited source of capital is available as shares are not sold publicly.

Financial statements have to be shared with Companies House (and are therefore made publicly available), meaning profits are not kept private.

Question 12

advantages of public limited companies

Answer 12

Shareholders have limited liability.

Large amounts of finance can be raised through the public
sale of shares.

It is easy to borrow finance due to a PLC’s size and reputation,
so less risk for banks.

PLCs can easily dominate the market.

Question 13

disadvantages of public limited companies

Answer 13

Dividends are shared with many shareholders.

Control of the business can be lost as anyone can buy shares
on the stock market.

Annual accounts have to be published.

Setting up a PLC is costly and complicated.

Question 14

describe franchise

Answer 14

A franchise is a business model that allows businesses to pay a sum
of money to own a branch of a well-known, existing business.

Question 15

advantages for franchiser

Answer 15

A low-risk form of growth as the franchisee invests the
majority of the capital.

Receives a percentage of all franchisee’s profits each year
(known as royalties).

Question 16

disadvantages for franchiser

Answer 16

The reputation of the whole franchise can be tarnished by
one poor franchisee.

Only a share of profits is received rather than all profits as it
would be if they owned each branch.

Question 17

advantages for franchisee

Answer 17

The franchise is a well-known business with an existing
customer base.

Industry knowledge and training is provided by the franchiser.

The franchisee benefits from national advertisements carried out by the franchiser.

Question 18

Disadvantages for franchisee

Answer 18

There is very little autonomy over decisions as the franchiser
decides on products, store layout, uniforms, etc.

Royalties have to be paid each year.

There are high initial start-up fees.

Question 19

define multinational

Answer 19

A multinational is a business that has operations in more than one
country.

Question 20

Advantages of multinational

Answer 20

Wages and raw material costs are lower in host countries.

Business can avoid legislation in the home country.

Grants can be issued by governments to locate in their country.

Business can avoid quotas (retraction on amount of imports/exports) and tariffs (taxes on imports/exports)
issued by their own governments.

Question 21

disadvantages of multinational

Answer 21

Language barriers can slow down communication.

Cultural differences can affect production, e.g. ‘siestas’ in Spain.

Exchange rates can affect purchasing and paying expenses in different countries.

Time differences can hinder communication between head
office and branches around the world.

Question 22

advantages of third sector

Answer 22

Charities are exempt from paying some taxes, such as VAT
and Corporation Tax.

There are low wage costs due to volunteers working for free.

Private companies are more willing to donate to and sponsor charities than ever before as it is good ‘PR’.

Question 23

disadvantages of third sector

Answer 23

It can be difficult to compete with the large marketing budgets of organisations within the private sector.

Charities rely heavily on volunteers who may leave for paid work.

Question 24

advantages of social enterprises

Answer 24

Social aims can endear a social enterprise to customers.

Good-quality employees who believe in the social ‘mission’ are attracted to the organisation.

They are likely to receive government grants due to their positive impact on society.

‘Asset lock’ means that, should the enterprise be closed down, the sale of any assets and any profits will be used to benefit their cause.

Question 25

methods to ensure good CSR

Answer 25

Ethical and environmental responsibilities for example,
avoiding the use of child labour.

Philanthropy for example, donating to charity.

Economical responsibilities, for example, using fair and competitive
marketing

Legal responsibilities, for example, abiding by laws that govern businesses.

Question 26

advantages of positive CSR

Answer 26

The business gains a good reputation for its caring nature.

Customers who agree with the aim are likely to use the business.

The business can attract high-quality staff who believe in the ethics of
the business.

Society and the environment are kept in good order, which will benefit
the business in the long run.

Question 27

describe internal/organic growth

Answer 27

This means businesses deciding to grow on their own without getting
involved with other organisations.

Question 28

methods of internal/organic growth

{describe launching new products/services}

Answer 28

Businesses can meet the needs of different market segments, especially if they diversify, i.e. launch new products into different markets from their current ones or export existing products abroad.

Question 29

methods of internal/organic growth

Opening new branches or expanding
existing branches

Answer 29

A business can reach new markets by opening up in new locations. It can also expand existing premises to cater for more products/staff and more customers, make more sales.

Question 30

methods of internal/organic growth

Introducing e-commerce

Answer 30

By selling online, a business can trade 24/7 to a global market.

Question 31

methods of internal/organic growth

hiring more staff

Answer 31

Increasing the number of staff will improve the business’s ability to make sales, make better decisions and develop more products.

Question 32

methods of internal/organic growth

Increasing production capacity

Answer 32

Businesses can invest in new technology to make more products themselves.

Question 33

describe diversification

Answer 33

This is when products are launched across different markets, for example
Samsung sell mobile phones, tablets and TVs but also refrigerators and washing machines.

Question 34

describe horizontal integration

Answer 34

Horizontal integration occurs when two businesses from the same sector
of industry become one business.

Question 35

advantages of horizontal integration

Answer 35

The new, larger business can dominate the market as
competition will be vastly reduced.

The new business can benefit from economies of scale, e.g.
buying in bulk to reduce prices.

Due to reduced competition, the new larger business can
raise prices, increasing profits.

Question 36

disadvantages of horizontal integration

Answer 36

The merger/takeover may breach EU competition rules.

Quality may suffer due to lack of competition.

Customers may have to pay higher prices for the same
goods.

Question 37

advantages of forward vertical integration

Answer 37

The business can control supply of its products and could decide to not supply to competition.

Can increase profits by ‘cutting out the middle man’ and adding value itself.

Question 38

Advantages of backward
vertical integration

Answer 38

Guaranteed and timely supply of inventory (stock).

No need to pay a supplier its marked-up prices so inventory is cheaper.

Quality of supplies can be strictly controlled.

Question 39

Disadvantages of both
backward vertical and
forward vertical integration

Answer 39

Company may be incapable of managing new activities efficiently, meaning higher costs.

Focusing on new activities can adversely affect core activities.

Monopolising markets may have legal repercussions.

Question 40

describe lateral integration

Answer 40

This is when a business acquires or merges with a business that is in the
same industry but does not provide the exact same product.

Question 41

advantages of lateral integration

Answer 41

The business can target new markets and therefore increase sales.

New products can complement existing ones, e.g. if a suit company bought a shirt maker both could then be sold as a complete outfit for a customer to wear.

Question 42

disadvantages of lateral integration

Answer 42

The lack of knowledge in a slightly different market may
affect the performance of the products.

It may adversely affect core activities.

Question 43

Conglomerate integration

Answer 43

Conglomerate integration occurs when businesses in different markets
join together;

Question 44

advantages of Conglomerate integration

Answer 44

The business can spread risk. If one market fails, the losses can be compensated for by profits in another.

It can overcome seasonal fluctuations in their markets and have more consistent year-round sales.

The business is larger and therefore more financially secure. The business may become too large and inefficient to manage.

The buyer acquires the assets of the other company.

The business gains the customers and sales of the acquired business.

Question 45

disadvantages of conglomerate integration

Answer 45

One business may take on another in a market they know
nothing about and this may cause the new business to fail.

Having too many products across different markets can cause the company to lose focus on core activities,
impacting on other products.

The business is larger and therefore more financially secure. The business may become too large and inefficient to manage.

Question 46

advantages of takeovers/mergers

Answer 46

The buying business gains the market share and resources of the taken-over business.

Risk of failure can be spread.

Economies of scale can be achieved..

Competition is reduced, which will increase sales.

Question 47

disadvantages of takeovers

Answer 47

Integration can lead to job losses in the taken-over business as the
buying business wants its own management and employees.

If the buying business moves the headquarters or production to its
home country/area, this can have a bad effect on the taken-over
business’s local economy.

Economies of scale can be achieved. Integration can be bad for customers as less competition means higher prices.

A change of name can put off loyal customers of the taken-over business.

It can be expensive to acquire another business.

Question 48

advantages of mergers

Answer 48

Market share and resources are shared, which can spread risk of failure and increase profits.

Economies of scale can be achieved.

Each business can bring different areas of expertise to the merger.

Unlike a takeover, jobs are more likely to be spared in both businesses.

Can overcome barriers to entering a market, such as strong competition.

Question 49

disadvantages of mergers

Answer 49

Customers may dislike the changes a merger may bring e.g. new logo, new name etc as the familiarity of the previous businesses are lost.

Marketing campaigns to inform customers of changes can be expensive.

Each business can bring different areas of expertise to the merger. Can be bad for customers as less competition will mean higher prices.

Question 50

positive impact of changing laws and legislations

Answer 50

The government could introduce environmental protection laws and policies such as ‘Zero Waste Scotland’ and, by complying, organisations will
be seen in good light. This is good PR and can attract potential customers.

Question 51

negative impact of changing laws and legislations

Answer 51

The government could increase the
minimum wage so that organisations have higher wage costs. This will result in a lower profit for the year.

Question 52

positive impact of changing income tax rates

Answer 52

The government could reduce taxes (money collected by the government to fund public spending), such as income tax. This will give customers a higher disposable income. This means customers will be more likely to buy products.

Question 53

negative impact of changing income tax rates

Answer 53

The government could increase income tax. This will give customers a lower disposable income. This means customers would be less likely to spend money on a business’s
products, unless it is essential. This will reduce sales overall.

Question 54

positive impact of changing vat rates

Answer 54

The government could lower VAT (value added tax). This is a tax on goods and services. Reducing the VAT rate will make products more affordable for customers, increasing sales for a business.

Question 55

negative impact of changing vat rates

Answer 55

The government could raise VAT. This will increase the selling price which could put customers off purchasing products and reduce sales.

Question 56

describe term boom

Answer 56

GDP and employment levels are very high. Demand for products is high.

Question 57

describe term Recession

Answer 57

GDP and employment levels fall.
Demand for products falls.