AQA A-Level Business

Section 7 / Analysing the strategic position of a business

WORKBOOK ANSWERS

AQA A-level Business

Topics 1.7–1.8

This Answers document provides suggestions for some of the possible answers that might be given for the questions asked in the workbook. They are not exhaustive and other answers may be acceptable, but they are intended as a guide to give teachers and students feedback.

Section 7Analysing the strategic position of a business

7.1 Mission, corporate objectives and strategy

1Possible points might include:

the objectives of the leaders to achieve personal goals such as to work within a FTSE 100 business
the values of employees, e.g. to work for a business with high ethical standards

2Possible points might include:

the objectives of shareholders which might be to maximise their value in the short term
the degree of power held by customers, e.g. to select which business to buy from in a competitive environment

3AO1 Knowledge= 2 marks

AO2 Application = 2 marks

Corporate objectives are the targets that a business wants to achieve within a given period of time, normally medium- to long-term.

Possible benefits to a chain of fast food restaurants of setting corporate objectives include:

to provide a clear focus for all restaurants within the chain to help achieve a consistent brand message
to provide a common sense of direction to a large number of employees, many of whomare likely to be unskilled

4AO1 Knowledge = 5 marks

AO2 Application = 4 marks

AO3 Analysis = 6 marks

AO4 Evaluation = 10 marks

Corporate objectives are the targets that a business wants to achieve within a given period of time, normally medium- to long-term.

Business ownership is the legal status of a business in terms of whether it is unincorporated, i.e. a sole trader, or incorporated, i.e. a company.

Possible reasons why business ownership is the biggest influence on a pharmaceuticalbusiness when setting corporate objectives include:

it is likely to be a large plc and therefore there is pressure from shareholders to maximise returns
shareholders will have a voting right and can therefore influence the setting of objectives
pharmaceuticals require heavy investment in R&D and therefore objectives will need to be attractive to potential investors

Possible reasons why business ownership is not the biggest influence on a pharmaceuticalbusiness when setting corporate objectives include:

a pharmaceutical business may attract large amounts of media attention and will want to portray a positive image
objectives may be based around innovation to bring out new cures first
ethics and safety will be important considerations

Overall:

business ownership will influence the business objectives as it is likely to have to keep shareholders happy. However, in the long run profits will be hit if other factors are ignored, e.g. if the business does not also have an objective of innovation
it depends upon the attitude of shareholders re short-termism versus long-term investment

5Possible points might include:

strategies are medium- to long-term whereas tactics are short-term
strategies require a heavy investment of resources whereas tactics can be implemented without a high level of investment
tactical decisions may be delegated to junior employees while strategic decisions will be made at the top of the hierarchy
tactical decisions, unlike strategic decisions, can be easily reversed

6D, Offer free copies with a voucher every Saturday for a month

7Possible points might include:

identify a business’s mission statement, e.g. JLR mission statement is based around the three qualities of innovation, trust and pioneering
identify a business’s objectives, e.g. one ofJLR’s objectives is to create cars
identify a business’s strategies, e.g. new product development
explain the link, e.g. JLR mission of innovation is translated into an objective of creating new cars. In order to achieve this they invest heavily in new product development, bringing out new makes and models of cars

Answers will vary based upon the business selected by individual students.

8AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

A mission statement is the business’s overall purpose. It outlines the core values. It will be influenced by both internal and external factors.

A mission statement might influence functional decision-making:

finance when setting budgets to ensure ingredients being used can be nutritious
marketing department setting budgets that are family friendly and a product that is nutritious
operations management R&D to ensure new products meet requirements and that production meets health and safety standards

Analysis requires a chain of argument to explain cause and effect.

The mission statement claims that the products will be friendly to the family budget. Therefore the product that has to be nutritious also has to be produced at a low enough cost to ensure price can be seen as reasonable. When deciding on the core ingredients the R&D function will therefore have to weigh up these two key considerations. This will be imperative when deciding on what products to produce. This will also influence marketing, who will have to decide what price to charge, based upon the cost of production.

9Strength: widely recognised brand

Weakness: reputation for exploiting small suppliers

Opportunity: increase number of smaller convenience stores

Threat: increasing competition from discount retailers such as Aldi and Lidl

10AO1 Knowledge = 2 marks

AO2 Application = 3 marks

A product portfolio is the range of products and brands one business is responsible for.

Possible ways in which an understanding of its business strengths may help inform a multi-product business on its product portfolio include:

understanding which products sell well will help inform decisions on future product lines
investment may be made to introduce extension strategies for products that have a strong brand loyalty
strengths can be replicated in less popular products to try and maintain a balanced portfolio

11AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Strategiesare the medium- to long-term actions taken by a business in order to achieve its corporate objectives.

Possible answers include:

new product development to bring out a new luxury range of highly differentiated products to maintain brand loyalty
new product development (towards diversification) to bring out a complementary range of products such as scarves and gloves or shoes
new market development to enter a new market such as China where there is increasing demand for UK-made luxury items
market penetration to bring out a cheaper range to give the business a price advantage with a brand traditionally associated with luxury

Analysis requires a chain of argument to explain cause and effect.

If a new competitor enters the market the business will be concerned over a loss of market share. It might therefore look to launch a new range of products based on the original logo to enforce the brand offering. This could include a new range of bags inspired by a designer such as Vivienne Westwood. This would help keep the business in the media and maintain its market position despite the new entrant. This would happen as the established business is reinforcing its brand image, making it harder for the new business to establish its brand.

7.2 Analysing the existing internal position of a business to assess strengths and weaknesses: financial ratio analysis

12Possible points might include:

current assets will change value on a regular basis, e.g. stock value will change each time a sale is made
non-current assets will stay in the business more than a year, e.g. the machinery used to produce goods

13Possible points might include:

current liabilities will be paid within a year, e.g. money owed to a trade creditor may have to be paid within 30 days
non-current liabilities will be paid over a long period of time, e.g. a bank loan may be paid over a 10-year period

142 marks for the definition below, or similar:

The money available to a business to meet day-to-day expenses and meet short-term debts.

or stating the formula:

Current assets – current liabilities

15Possible points might include:

Net assets are non-current assets + current assets – current liabilities – non-current liabilities.
Total equity is share capital + reserves and retained earnings.
Net assets shows the net value of the business.This will have been financed by the total equity and therefore the two figures must be equal.

Gross profitx 100

Sales revenue

17It shows the overall efficiency of a business in terms of how efficiently capital tied up in the business is being used to generate operating profit.

It is a key indicator to shareholders and potential investors of the attractiveness of an investment.

18For every £1.50 a business owns in current assets it has £1.00 in current liabilities that it owes.

19Possible points might include:

It is an indication of the business’s short-term survival, and therefore a supplier will look at this to see if they are confident that the customer will be able to pay for goods purchased.
It is used to inform decisions about how creditworthy the business is, helping the supplier to decide, with confidence, on the credit terms to offer.

20Bank loan; mortgage; debenture

21Possible points might include:

A high percentage of capital is financed from interest bearing sources, e.g. long-term loans.
As interest rates rise so do the costs to the business as it has a high percentage of capital from debt compared to equity.
Rising costs are likely to lead to lower profit margins.

22Possible points might include:

Payables is the amount of money a business owes to suppliers, whereas receivables is the amount of money owed to a business from customers.
Payables will flow out of a business whereas receivables will flow into the business.
A business may look to increase payables days while reducing receivables days in order to improve cash flow.

23Possible points might include:

Increasing payables days would slow down the speed at which money flows out of the business, hence improving cash flow as it stays in the business longer.
A business that pays its suppliers slowly may lose discounts received for early payment, hence increasing the costs of the supplies to the business. Therefore profits will be reduced.

24Possible points might include:

Inventory turnover measures the rate at which a business is able to turn inventory into sales, i.e. how many times in a year it replaces its stock.
A business that sells perishable goods such as fruit and vegetables will need to turnover inventory frequently, even every couple of days, to reduce waste.
A business in the fashion industry will be influenced by season and therefore may look to replace inventory in relation to each season.
A business with a large and expensive item, maybe in a B2B industry, e.g. manufacturing aeroplanes, may turnover inventory only a couple of times a year.

25A, 16.5%

26D, Current ratio

27AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Receivables days measures the average amount of days it takes customers to pay a business:

Receivables x 365

Sales revenue

Possible answers could include:

Buying a kitchen is a big expense for a lot of customers who may look to be able to pay for it on credit, hence a high receivables days will attract customers.
Could attract customers away from competitors as they can order a kitchen now but not pay until after it is completed.
Could use similar promotional techniques to other businesses selling home improvements or household goods such as a large sofa − businesses which advertise ‘buy now pay later’ deals.

Analysis requires a chain of argument to explain cause and effect.

A kitchen manufacturer could use the longer payment terms offered to customers as a form of promotion. As many customers would want to delay payment of such a large expense this would attract customers, giving the kitchen retailer a competitive advantage.

28AO1 Knowledge = 2 marks

AO2 Application = 2 marks

‘Highly geared’ means a business has a high percentage of capital raised from debt that is compulsory interest bearing.

Possible answers include:

A small business may have small profit margins which can be quickly reduced if interest rates rise.
Repayments have to be made each month regardless of whether the business has made a profit.This may affect the small business’s ability to survive.

29Over time:

Possible points might include:

to identify trends over time, for example has profitability been increasing and if so at what rate?
to compare the current year’s performance with the previous year’s performance

Within a business:

Possible points might include:

to compare the performance of different stores or branches, e.g. is one branch better at turning over inventory than another?
to compare performance across product lines to see, for example, which products have the highest rate of profitability

With industry average figures:

Possible points might include:

to consider the degree of risk taken by competitors in terms of gearing, e.g. is the business being overly cautious?
to help inform credit terms offered to customers to gain an advantage over competitors
benchmark performance indicators

30AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Financial statements are the formal documents that summarise the activities and worth of a business over a period of time.

Possible answers include:

A new business may forecast financial statements as part of the business plan to help raise finance.
They are a legal requirement for the calculation of tax liabilities.
They help the business identify from early on where the business is operating efficiently and where improvements can be made.
They show the net worth and liquidity of a business, which will be important when negotiating trade credit with suppliers prior to a longer-term relationship being established.

Analysis requires a chain of argument to explain cause and effect.

A new business may find it difficult to negotiate trade credit with suppliers. The ability to do this will be important to its cash flow. Therefore, having both forecast and interim financial documents will help show the ability of the business to survive. This will give the supplier greater confidence, encouraging them to offer trade credit.

7.3 Analysing the existing internal position of a business to assess strengths and weaknesses: overall performance

Operations / Human resources / Marketing
Capacity utilisation / Labour turnover / Market share
Cost per unit / Labour productivity / Market growth
Number of defects / Absenteeism / Price elasticity of demand

32AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Core competencies arise as a result of the combined knowledge, expertise and experience of the founders and leaders within a business.

Possible answers include:

They help a business maintain brand loyalty, with many customers wanting a new Apple product as soon as it is released onto the market.
USP allowing a business such as Apple to charge a premium price.
They create barriers to entry, making it difficult for new competitors to enter or gain loyalty in a market, e.g. Apple as a market leader in tablet PCs.

Analysis requires a chain of argument to explain cause and effect.

Core competencies allow Apple to maintain its position as a market leader. This is because the brand epitomises quality and innovation in the eye of the loyal consumer. Apple is therefore able to charge premium prices for products as the brand name has increased the inelasticity of the product. Therefore, when new products such as the latest iPhone are launched onto the market, demand will be high despite the use of price skimming. Price is likely to be lowered only when a product is replaced by an even newer model.

332 marks for the definition below, or similar:

The tendency by stakeholders to focus on short-term gains possibly at the expense of longer-term potential.

34Possible points might include:

In the short term there may be a large cash outlay funded either by retained profit, a share issue or loans. Depending upon how this was invested this can impact on profit in both the short and medium term, e.g. loan repayments.
In the short term the new technology is unlikely to bring in additional sales as there tends to be a time lag.
In the longer term, despite maintenance costs, the new technology is likely to lead to greater efficiency, reducing costs and hence increasing profitability.

35AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Lean production is the implementation of techniques to reduce waste in operations, e.g. JIT or Kaizen groups.

Possible answers include:

It may take time to build a relationship with suppliers to ensure JIT runs smoothly, therefore in the short term the business may experience stoppages due to stock shortages, but in the long run will reduce the cost associated with storing stock.
The time taken to train employees may reduce productivity in the short run.

Analysis requires a chain of argument to explain cause and effect.

A manufacturing business may implement JIT for the first time. This will mean rather than holding a buffer, inventory stock will be delivered just as it is needed for production. This requires a reliable relationship with suppliers that may take time to build up. If the correct quantity of goods of the correct quality is not delivered there will be a stoppage in manufacturing. This will affect short-term productivity. However, in the long run waste will be reduced and hence costs cut, allowing the business to increase profitability.

36Measure 1: Flights departing on time

Explanation:Punctuality of departures and arrivals is crucial to customer satisfaction. When travelling for business or leisure purposes, customers will not want to be left waiting around at airports which potentially could lead to missing connecting flights and cause stress and discomfort.

Measure 2: Average time at check-in

Explanation: Long queues at airports during check-in will be a major irritant to travellers, especially if they have already travelled a long distance or are travelling with children.

Measure 3: Number of complaints

Explanation: This could refer to any aspect of the customer experience, e.g. lost luggage, poor quality service on board the plane or inadequate information.

37Possible points might include:

food miles
use of excess packaging
sustainable farming

38Possible points might include:

clarity of nutritional information
employee satisfaction
hygiene standards for customers

39AO1 Knowledge = 2 marks