Understanding Business

Question 1

Describe the main characteristics of a multi-national corporation. 4 marks

Answer 1

• Will involve operations in several different countries
• Has a distinct ‘home’ base country
• Has a global brand
• Can dominate markets across many countries
• Can have budgets that are larger than many individual countries
• Can greatly influence local economies
• Cultural variations

Question 2

Explain advantages and disadvantages of becoming a public limited company. 5 marks

Answer 2

• Shares on the Stock Exchange and larger amounts of finance can be raised quickly, therefore, preventing cash flow shortages
• Initial set up costs (legal and administration costs) are high resulting in poorer profitability in the first few financial years
• Plc’s have to adhere to heavy company legislation (Companies Act 2006) in order to avoid financial penalties or even legal action
• A plc is one of the largest types of business and, therefore, sourcing finance is easier eg banks view larger organisations as more financially stable and so, are more willing to approve a bank loan
• Plc’s have to publish annual accounts resulting in high administration and marketing costs reducing the end profit figure for the business

Question 3

Describe possible methods of growth for a public limited company. 5 marks

Answer 3

• Vertical Integration – organisations at a different stage in the same industry combine together
• Horizontal Integration – organisations at the same stage of production combine together
• Backward Vertical Integration – when a business takes over a supplier
• Forward Vertical Integration – when a business takes over a customer
• Conglomerate/Diversification – organisations in completely different industries combine together
• De-integration/demerger – organisations cut back and concentrate on only their core activities
• Divestment – sell off assets or subsidiary companies to raise finance for growth
• Organic growth – organisations increase the number of products sold or number of outlets
• Merger – appropriate description
• Takeover – appropriate description

Question 4

Explain the benefits of outsourcing for an organisation. 4 marks

Answer 4

• Specialists can be used to carry out the work resulting in higher quality of work (ie improved performance)
• Staff and machinery are only paid for when required therefore a cost-effective solution to one-off job tasks
• Organisations can concentrate on core activities (ie profit earning departments) therefore improving business efficiency
• Staffing costs are reduced in the area that has been outsourced resulting in a higher end profit
• Specialist equipment does not need to be purchased therefore saving on equipment costs

Question 5

Explain how different methods of growth can lead to increased sales or profits. 5 marks

Answer 5

• Horizontal Integration – firms producing the same products combine together therefore taking advantage of economies of scale resulting in lower unit costs and an increased end profit
 >By becoming larger they should become better known in the market resulting in brand loyalty and therefore increased sales
 >Organisations can dominate the market due to the greater size of the organisation and can therefore set prices to encourage customers to purchase from them through large promotional activities increasing sales
 >By removing competitors they will therefore increased sales and in turn end profit
• Vertical Integration – firms at different stages in the production process combine together. This can cut out middle men and therefore allow the organisation to retain all profits made in the chain themselves
• Backward Vertical Integration – when a firm combines with a supplier therefore ensuring that there is constant and consistent supplies of raw materials at appropriate prices
• Forward Vertical Integration – when a firm combines with a customer therefore ensuring that sales are constant resulting in higher end profit
• Conglomerate – when a firm combines with another firm in a completely different market resulting in profits raised from a variety of markets and therefore sales not relying on one industry
• Divestment
• Demerger
• Asset Stripping
• Internal Growth

Question 6

Discuss the effects of outsourcing on an organisation. 5 marks

Answer 6

• Specialists can be used to do the work meaning the work should be of a high standard
• Could increase costs to provide the specialisation
• However it might reduce staff costs in the area this has been outsourced as the organisation does not need to pay employees continuously
• Outsourced companies will have specialist equipment again allowing for a high degree of specialisation and a better quality product
• The service needs only to be paid for when required
• Organisations can concentrate on core activities
• Organisations can lose control over outsourced work
• Loss of confidentiality
• Cheaper/dearer to outsource the work

Question 7

Describe methods of growth. 6 marks

Answer 7

• Vertical Integration – organisations at a different stage in the same industry combine together
• Horizontal Integration – organisations at the same stage of production combine together
• Backward Vertical Integration – when a business takes over a supplier
• Forward Vertical Integration – when a business takes over a customer
• Conglomerate/Diversification – organisations in completely different industries combine together
• De-integration/demerger – organisations cut back and concentrate on only their core activities
• Divestment – sell off assets or subsidiary companies to raise finance for growth
• Organic growth – organisations increase the number of products sold or number of outlets
• Merger – appropriate description
• Takeover – appropriate description

Question 8

Other than legislation explain the effect that external factors can have on an organisation. 6 marks

Answer 8

• Political – government grants allow for a cheaper method of expansion
• Economic – factors such as inflation, recession/boom periods, interest rates will affect organisations in a number of ways
• Social – changes in trends and fashions mean that organisations must continually carry out market research to see what products will sell or if new products are desired
• Technological – as technology changes organisations must keep up-to-date and this will involve a large financial cost
• Environmental – organisations now need to attempt to be socially responsible and environmentally friendly to satisfy consumer groups
• Competitive – organisations must continually monitor their competitors’ prices and alter theirs accordingly

Question 9

Explain the effects that 3 political factors could have on an organisation. (A different effect should be explained each time.) 6 marks

Answer 9

• Legislation − any appropriate law with an appropriate effect, ie, new laws on sale of alcohol have to be complied with or face a fine from the government
• Taxation rates may change which will affect the profitability of an organisation
• Level of NHS funding may affect the number of or the prices charged by private hospitals
• Government initiatives in education have meant that private public partnerships have allowed companies to bid to build new schools
• Credit any relevant government policy with an appropriate explanation of the affect on the organisation, ie, giving loans to banks to help with credit crunch in 2009

Watch repetition – eg legislation is one factor only

Question 10

Explain internal constraints that make decision making difficult. 4 marks

Answer 10

• Finance may be restricted which might mean the organisation cannot afford to implement the decision
• Staff may be resistant to change meaning decision making is difficult
• The organisation may have policies in place that are restrictive
• The decision may be constrained by the lack of technology and mean that new technology needs to be purchased or decisions shelved.
• Managers may not have the appropriate skills or initiative to make the best decisions
• Managers may be unable to cope with complex decisions
• quality of information
• level of risk willing to take.
• Staffing levels
• Staff skills to implement

Watch for repetition of impacts

Question 11

Explain internal problems that can exist when managers try to make effective decisions. 5 marks

Answer 11

• Finance may be restricted which might mean the organisation cannot afford to implement the best decision
• Staff may not agree with the decision and resist the change making it less effective
• The organisation may have policies in place that are restrictive and the decisions may need to be altered to suit policies
• The decision may be constrained by the lack of technology and mean that new technology needs to be purchased or decisions shelved
• Managers may not have the appropriate skills or initiative to make the best decisions and may be unable to cope with complex decisions or situations resulting in a poor decision being made
 quality of information
 level of risk willing to take

Max 2 for any internal area

Question 12

Discuss methods of grouping which could be used by a multi-national organisation. 6 marks

Answer 12

Functional grouping
• Gives the organisation a clear structure
• Staff know who to turn to if they need specific expertise
• Staff can share knowledge and learn from each other in departments

Product/service grouping
• Allows for an organisation to be more responsive to changes in that market
• Expertise is developed within each specialised division
• Allows management to identify poor performing products
• There can be duplication of resources and personnel across groups
• Divisions may find themselves competing against each other

Geographical
• Allows to cater closer for the needs of different areas
• Can become familiar with local customs and cultures
• Is expensive with regards to administration and staffing costs

Technological
• Suitable for large organisations with different production processes
• Again duplication of resources occurs

Customer
• Allows for services to be tailored to each group of customers or a specific customer
• Builds up customer loyalty due to the personal service they receive
• There can be large staffing costs with this type of grouping
• Also duplication of resources in administration, finance, etc

Question 13

Describe factors that influence the formal structure of an organisation. 3 marks

Answer 13

• The size of the organisation, larger organisations tend to be more formal and smaller organisations tend to be less formal
• Technology used – the impact of modern technology can influence how organisations structure their activities ie easier to communicate over larger distances
• Staff knowledge and skills, if staff are highly skilled a less formal structure can exist
• The market
• Products they sell
• Finance available

Question 14

Describe the effects of increasing a manager’s span of control. 5 marks

Answer 14

• Results in empowerment (staff or management empowerment – 1 mark each)
• Allows for delegation to staff as they should be reasonably skilled
• Managers’ time to deal with staff problems will be at a premium
• Can place managers under stress
• Can result in workers rarely having time to meet with their line manager to discuss ideas
• Subordinates may resent having to make decisions
• Managers will have less time for planning
• Can result in poor decisions (employee or organisational decisions – 1 mark each)
• Managers are in charge of more staff
• Can be motivational to manager as can be seen as greater power

Question 15

Discuss the use of customer grouping for an organisation. 4 marks

Answer 15

• Marketing can be tailored to specific customer needs
• Customer loyalty can be easily built up
• There is a high level of customer care given
• The organisation can respond to the needs of customers quickly
• Can be expensive due to high staffing costs to meet consumer demand
• New staff are needed if there is a new customer grouping or product created
• Competition between customer groupings/departments can exist

(Do not give the definition a mark)

Question 16

Describe different types of organisational relationships that can exist within a business. 4 marks

Answer 16

• Line – the relationship that exists between a manager and their subordinates
• Lateral – this exists between staff on the same managerial level within an organisation
• Functional – this is a specialist relationship whereby an expert an expert has the responsibility to manage the function for the whole organisation
• Staff – this is an advisory relationship to staff within an organisation
• Informal – exists between a level of management or staff out with the normal working arrangements/conditions
• Cuts out a complete level of management within the organisation which will reduce the salaries paid out by the organisation
• Managers have an increased span of control which may result in increased workload for the manager
• increased stress for the manager
• staff having to wait to meet with a manager
• Communication should be improved and quicker to pass on which means the organisation will be more receptive to changes in the marketplace
• Empowers the staff which can lead to increased motivation
• Fewer promotion opportunities for staff which could lead to them leaving the organisation to gain promotion

Question 17

Describe the main characteristics of an entrepreneurial structure. 3 marks

Answer 17

• One senior member of staff makes all the important decisions. (Accept a few or core members)
• Decisions are therefore made quickly
• Staff are very rarely consulted on decision making
• Stifles staff initiative as they are not consulted
• Is mainly used in smaller organisations
• Employees know who they are accountable to
• May place over-reliance on key members of staff

Question 18

Distinguish between a centralised structure and a decentralised structure. 3 marks

Answer 18

• In a decentralised structure decision making is delegated to departments whereas in a centralised structure it is made by head office
• In a decentralised structure staff are more motivated due to empowerment whereas in a centralised structure staff can be de-motivated due to not being consulted
• In a decentralised structure senior directors have less responsibility whereas in a centralised structure senior directors carry all the burden of decision making
• Decentralised is often seen as being used in a flatter structure where as centralised tends to exist in hierarchical structure
• It is harder to promote a corporate image in a decentralised structure than in a centralised structure
• In a decentralised structure decisions can be made which only benefit one department but in a centralised structure decisions will be made to suit the whole organisation

Question 19

Compare the use of functional grouping with product grouping. 5 marks

Answer 19

• Staff with similar expertise work together in functional grouping whereas in product grouping staff are organised around a specific product or service and will have different areas of expertise
• The organisation will have functional departments which service the whole organisation whereas in product grouping each functional
area will be responsible for a specific product or service only
• In both methods departments can be more concerned with their own results than the organisation as a whole
• Also departments may compete against each other in both forms of grouping
• In product grouping it is easier to identify areas that are performing well whereas in functional grouping results tend to be for the organisation as a whole
• In product grouping each department is more responsive to change whereas in functional grouping the organisation can become very large and unresponsive
• In functional grouping staff will know exactly who to turn to but in product grouping this may not be the case
• In functional grouping the organisation will have a clear structure whereas in product grouping the structure may be less clear and line relationships less clear

Question 20

Explain the role of a manager in effective decision making. 5 marks

Answer 20

• Plan the objectives of the organisation, this can be either long term or short term in order that the organisation has a vision/direction
• Organise the staff and resources required to carry out the decision
• Control staff who the decision affects/ impacts in order to get the best work possible/meet targets
• Command – inform the staff of decisions that have been made/consult with staff to improve the decision
• Co-ordinate the activities and ensure timescales/targets met
• Delegate decision making to junior staff to give them experience/empower them
• Empowerment to make decisions will motivate staff and improve their performance
• Risk taker
• Communicate
• Leader

2 general marks available if no POCCCDM is directly linked to decision making

Question 21

Distinguish between a tactical decision and an operational decision. 3 marks

Answer 21

• A tactical decision is made by middle managers whereas an operational decision can be made by anyone in the organisation normally lower level managers.
• A tactical decision is a medium term decision whereas an operational decision is made daily or short term
• A tactical decision carries a medium amount of financial risk but an operational decision carries virtually no financial risk
• A tactical decision is made to help implement the strategic objectives whereas an operational decision is made to help the smooth running on a daily basis

Question 22

Explain the purpose of a SWOT analysis. 4 marks

Answer 22

• Analyses the internal areas of an organisation to indicate where they are performing well
• Analyses the internal areas of an organisation to indicate where they are weak and need to improve
• Examines external areas that could be used to improve performance or profitability in the future
• Examines possible threats that can exist externally which means an organisation is being proactive and ready for any eventuality
• Gives more/better information and so results in better decisions
• Saves rash decisions

Question 23

Describe the 3 main types of decision that an organisation could make. 3 marks

Answer 23

Operational
• Day-to-day decisions
• All staff including lower level managers
• Low financial risk decision

Tactical
• Medium term
• Made by middle managers
• Are taken to achieve strategic decisions

Strategic 
•	Long term decisions 
•	Shaping the objectives of an organisation 
•	Taken only by very senior managers 
•	Carry a large financial risk

Question 24

Distinguish between centralised and de-centralised decision making. 5 marks

Answer 24

• In a decentralised structure decision making is delegated to departments whereas in a centralised structure decision making lies with senior managers
• A decentralised structure relieves senior managers of a lot of the daily tasks but in a centralised structure managers carry the whole burden of decision making
• In a decentralised structure subordinates are given responsibility to make decisions which is motivational whereas in a centralised structure subordinates are less motivated as decision making is made only by senior managers
• In a decentralised structure decision making is faster than in a centralised structure as local managers do not have to consult national managers prior to making a decision
• In a centralised structure procedures tend to be standardised throughout the organisation but in a decentralised structure procedures will be decided by local managers
• In a centralised structure decisions are taken for the organisation as a whole whereas in a decentralised structure decisions take into account local arrangements/customers
• In a centralised structure a high degree of corporate identity exists whereas in a decentralised structure corporate culture is harder to impose