Unit 2
Answers
1 U = £251,000
2
V = £5,000 Adverse
Y = £4,000 Favourable
W = £2,000 Favourable X = £26,000 Adverse
3 a) Sales revenue variance: sales level lower than expected; selling price lower than expected b) Labour cost variance: more labour hours needed to produce goods or services than budgeted for; higher labour costs per hour than budgeted.
1 X = 3 Adverse Y = 1 Favourable Z = 13 Adverse
2 It would be a mistake to set budgets for one year without monitoring performance throughout the year e.g. by calculating variances every month. These variances will guide management decision making and these decisions could lead to a correction of the adverse variances. So, for example, if food and drink variances were always adverse a decision could be taken to source cheaper supplies
(there could of course be consequences to this). In addition, if the variances are very big and caused by external factors beyond management control it might be more motivating to staff, and more realistic, if the budgets were amended to take these factors into account.
3 a) Sales revenue variance: the hotel might have been forced to lower average room rates because of weaker than expected demand. Even if this decision was not taken, promotional campaigns by competitors might lead to lower than forecast guest numbers. The recession in 2009 is hitting some hotel groups quite hard. b) Food and drink variance: costs from suppliers may have risen faster than was budgeted for; there could have been more wastage of food than normal – this could be a staff training problem that needs to be addressed.
4 Sales revenue: increase promotion e.g. abroad to encourage foreign tourists as pound has fallen), reduce room rates, special offers e.g. all inclusive packages; any other relevant and applied suggestion. Analysis should be shown explaining how each suggestion might increase sales revenue. Some might suggest higher room rates if they argue that demand might be price inelastic!
Evaluation of suggestions might include: cost of promotions; actions of competitors might cancel out the benefits of any decision made; elasticity of demand.
Food and drink: staff training to reduce wastage and to allow for cheaper food supplies to be turned into effective menu items; use cheaper suppliers e.g. avoid using organic suppliers; analysis of how these suggestions could reduce costs. Evaluation might include: motivation and support of staff essential in order to cut costs; cheaper food and drink supplies might lead to lower quality and reduce guest loyalty in long term.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 1

Unit 2
Answers
1 When a business finds it increasingly difficult to pay for day to day expenses or to pay its creditors: cash inflow does not match cash outflow.
2 Expenditure increased with the rapid expansion of the business. Cash receipts from customers were slower than expected.
3 The business is now desperate to raise cash as it did not plan for its cash flow needs – the owner seemed to be too keen to expand without considering the consequences. It may be forced to accept an overdraft (which has high interest costs and can be called back if the bank becomes concerned about the viability of the business). It may be forced to sell assets to lease them back (this increases fixed leasing costs) or use factoring services which will not pay 100% of the total value of debts.
The profitability of the business will be adversely affected by all of these options.
4 Evaluation might include things like sale and leaseback, reducing the value of the business at the time that the owner was trying to expand it. Leasing charges will be payable in the long term – all the time the business needs to use these assets. It might be better to factor the debts, which involves short term pain (20% of debts not paid by factoring company) but the value of the business will not be affected in the longer term and there will be no longer term costs to pay for. However, it would be better for the business if the owner could put more of his own capital in.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 2

Unit 2
Answers
1 Profit made on 500 items = £2,500 (The fact that half of the purchases have not yet been paid for in cash is unimportant.)
2 Assuming sales were for cash: Cash in = £5,000; Cash out (250 items @£5) = £1,250
Net cash flow = £3,750
1 Textbook
2
(All financial figures in
£m)
2006 2007
Tesco 2 , 280
39 , 454
× 100 = 5.78%
2 , 648
42 , 641
× 100 = 6.21%
Sainsbury’s
,
520
× 100 = 1.35%
17 , 151
× 100 = 3.03%
3 Sainsbury’s might have a much lower gross profit margin. Perhaps it charges a similar price for most goods compared with Tesco but has to pay suppliers higher prices due to fewer bulk buying discounts.
Sainsbury’s might have a similar gross profit margin but its overhead or fixed costs as a proportion of sales revenue are much higher. The administration and organisation of the company might be less efficient than that of Tesco
4 Raise prices to increase profit margins – but this could lead to much lower sales and lower total profits.
Reduce overheads or fixed costs e.g. delayer management structure or reduce promotion costs. Any cost cutting measure could have negative consequences e.g. less job security and motivation of key management staff or lower sales growth due to less promotion.
Reduce cost of supplies to increase the profit margin ratios (will this lower the quality of goods in the shops? How might consumers react to this?) If lower discounts are forced onto existing suppliers for the same quality of goods then this might lead to negative media publicity –
Sainsbury’s ‘using its muscle’ to frighten smaller suppliers.
1 Textbook (1 mark each for up to 2 points plus 1 mark for explanation)
2 Textbook but apply to context e.g. may be greatly affected by recession or economic boom which makes sales forecasting and budgeting more difficult. It is a competitive industry so actions by competitors could make budgeting for the year ahead more difficult. (1 mark each point made plus
1 mark for each point applied)
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 3

Unit 2
Answers
3 Definition of both terms. (1 mark each) Key point is that an adverse cost variance is one that reduces profit from the budgeted figure so actual costs must have been higher than budgeted costs.
4 Definition of both terms. (1 mark each) Key point is that an adverse revenue variance is one that reduces profit from budgeted figure so actual revenue must have been lower than budgeted revenue .
5 a) X = £85,000 Adverse; Y = £20,000 Favourable; Z = £90,000 Adverse b) Student answer based on textbook. Note that sales revenue variance is favourable so higher sales levels would help to explain the higher than budgeted labour and material costs. c) Students’ answer could be supported by the calculation of the profit variance for this time period from the data given (£85,000 Favourable). This shows that the business has performed better than expected or budgeted and this can help inform or influence the budgets for the next time period. This helps in monitoring, controlling and motivating staff and operations of the business.
Evaluation based on textbook points. (2 marks for points suggested, 2 marks for application to data e.g. calculation of profits variance, 2 marks for analysis of points, 2 marks for evaluation)
6 Need to identify if it is a lower than budgeted price or a lower than budgeted sales level that is the major cause of the adverse sales revenue variance. Business can: raise price – but this may cause sales level to fall even further; lower price to increase sales level – depends on demand responsiveness (elasticity); increase promotion – extra cost of this may not be outweighed by sales revenue increase. (1 mark for each suggestion plus 2 marks for explaining each point)
7 Define or explain cash flow problems. (2 marks) Lower than expected sales; no cash forecasting; debtors slower to pay than expected; unexpected cash expenses; car suppliers demand quicker payment. (1 mark for each suggestion plus 1 mark each for some explanation)
8 Put more personal capital into the business; arrange overdraft if a short term problem; sell and lease back assets; reduce cash expenses; delay paying suppliers; ask credit customers (debtors) for speedier payment. (1 mark for each suggestion plus 1 mark for brief explanation)
9 Define or explain cash flow problem/crisis. (2 marks) Suggestions and development of them as in textbook and above but allow 2 marks for application to TV retailing. For example: only allow cash sales (though this will likely reduce sales); reduce prices to encourage quicker sales and cash payments (but this will reduce profit margins on each TV sold). (2 marks for points made, 2 marks for application, 2 marks for analysis of points, 2 marks for evaluation of them)
10 Textbook (Allow 2 marks for explanation and 2 marks for appropriate worked example)
11 Explain both terms. (2 marks). Difference between them is accounted for by overheads or fixed costs so overheads, as a proportion of sales, must be increasing. (1 mark)
12 a)
2007 2008
Net profit margin 4
35
× 100 = 11.42%
3
42
× 100 = 7.14%
Return on capital 4
25
× 100 = 16%
3
25
× 100 = 12% b) Sales have risen between the two years but net profit has fallen – hence the fall in the net profit margin. Possible causes: lower prices (to attract higher sales levels); higher variable costs but no increase in prices (perhaps firm did not want to discourage customers from purchasing); higher overheads as a proportion of sales (could be due to a number of factors e.g. higher management costs, higher promotion costs perhaps to try to increase sales levels). (1 mark for each point – maximum 3, up to 2 marks for each point explained) c) It shows the return made on each £1 of capital invested. This can then be compared, by investors, with the return on other investments, similar businesses etc. It also demonstrates the efficiency of management in converting capital into profit.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 4

Unit 2
Answers d) The new return on capital will become: 5 × 100 = 16.67%. So, it appears to increase the
30 profitability of the business, once it is up and running. It is not clear how long this will take, though. (3 marks for new calculation and 3 marks for comment) e) Raise prices – but would be the impact on demand? Lower variable costs of materials – but what is the impact on quality and image for this business in particular? Lower labour costs e.g. higher productivity or lower wage rates – but what is the impact on motivation and quality? Lower overhead costs – the evaluation depends on which one is suggested by student. Return on capital employed RoCE could be increased by selling redundant assets and investing proceeds more profitably – but will these assets be needed in the future by this fast expanding business? (2 marks for suggestions, 2 marks for application to this business, 2 marks for analysis of how suggestions might increase profitability, 2 marks for evaluation)
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 5

Unit 2
Answers
1 a) Define levels of hierarchy: Bighams has few levels of hierarchy as Charlie believes in a handson approach. b) Define span of control: it is quite wide in Bighams as each manager is responsible for all employees in their ‘area’.
2 Define delegation and functional (departmental) areas. He could not deal with all issues himself as the business expanded; he may not have been an expert in all of these fields – the business would benefit from specialist management.
3 A form of training, it can be motivating to trainers (gives them status and responsibility) and to trainees (increases their knowledge and skills). Regional recipes could become a successful product idea for the business. But it adds to workload of staff who are already likely to be very busy which could harm the operational efficiency of the business.
4 Define internal communications. Effective communications will be very important to the firm’s success: two way communication will motivate; lead to better management decisions; avoid confusion; help provide direction to the business. This will not guarantee success but will greatly increase the chances of success in a competitive industry, subject to external factors such as economic changes and consumer taste changes.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 6

Unit 2
Answers
1 6 months to 30/06/06 = 4
40
× 100 = 10%
6 months to 31/12/06 =
7
42
× 100 = 16.67%
Difference = 6.7%
2 Textbook. It allows a business to assess the problems of time lost through absenteeism. It is most effective when broken down into business departments or sections so that particular problem areas can be identified and action taken, if necessary.
3 Gill is fair but firm and does not believe that there is any scope for staff participation or involvement in the business. This approach might be appropriate with short-term contract or part-time staff who may have too little experience of the business to contribute ideas. It might also be appropriate if quick decisions need to be taken, e.g. how to cover a worker’s absence. However, as all three measures given of employee effectiveness are worsening – absenteeism, turnover and complaints – perhaps Gill’s approach is not best for the business. Participation could: motivate staff; encourage staff to contribute good ideas based on their experience e.g. how to reduce guest complaints; improve managers’ decisions.
4 If hotel managers assume that high labour turnover and above average absenteeism is inevitable then it almost certainly will be! Much hotel work is low skilled and seasonal in nature – and low paid. Any chance of more regular, permanent or higher paid work will tend to encourage staff to leave or try to do two jobs – causing absenteeism. So, to some extent, employee effectiveness measures may well be poor in this industry. Staff management could be more imaginative: increased involvement; training to increase skill levels and productivity (and thus wages); permanent work contracts (though these might still be part-time or seasonal); profit sharing or bonus incentives. Any or all of these could make such employee problems less likely to be inevitable.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 7

Unit 2
Answers
1 Textbook definition. Hygiene operatives attending Bishop Auckland College on a dayrelease basis.
2 Wants ‘to stay ahead of the competition’: well trained staff will be needed to ensure this is possible.
The ‘newly-built state-of-the-art bakery’: this will need staff who have been specifically trained to operate the equipment.
3 For: ensures that all managers and employees can focus on training and improving their skills without the worry of meeting work targets etc.; may be more effective than staff training taking place all year round which could involve staff absences at key times of the year (this might be more disruptive to production than closing for one week).
Against: disruptive to suppliers and customers (maybe customers will seek other suppliers over this period and become very happy with their products and prices!); stock levels of perishable finished goods and material supplies will need to be monitored carefully
(should stocks of finished goods be built up to supply customers during the one week closure?)
4 Evaluative question that requires students to assess: the different methods of recruitment, selection and training and explain how these can contribute to the development of an effective workforce; that even with a good recruitment, selection and training system, an effective workforce also depends on motivation of staff at work, effective leadership etc.; staff may be poached by other employers if they have been trained to a very high level – this could reduce the effectiveness of the workforce.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 8

Unit 2
Answers
1 Textbook explanation. In the case study, quarry managers were given expanded roles that gave them empowerment to take control over more management tasks. This included taking control of planning activities and decision making. This empowerment reduced labour turnover.
2 Empowering staff at lower levels of the organisational structure – developing their managerial skills – could help to reduce staff turnover in a number of ways. Empowered staff will feel a greater sense of importance, status and responsibility. This will encourage them to apply for internal promotion posts and reduce the chance of them leaving the business to gain promotion. Also, other workers in the business may consider that better decisions are being taken by managers ‘closer to them’ rather than in top management positions. Better communication with these workers could reduce the risk of them leaving within the first two years of employment.
3 Explain different financial methods of motivation. Each has advantages and disadvantages which need to be analysed in the context of a quarry. For example: bonuses for faster work or higher levels of output would probably increase output and efficiency but could it put health and safety at risk in this dangerous environment? Subsidies for private medical insurance (possibly useful to the company in a business with a poor accident record?) would be expensive for over 700 staff and managers. But by treating everyone equally it would reduce barriers between managers and workers which could prove to be motivating.
4 The increased focus on non-financial methods of motivation – personal development, for example – is likely to have a positive impact on motivation. This helps to satisfy
Maslow’s higher order needs (e.g. esteem and self fulfilment). In this business it has helped to reduce labour turnover – this is a good indication of improved motivation.
However, this approach does not guarantee that all workers are motivated. Some part-time or temporary staff may only be interested in financial rewards. Some staff may not seek additional responsibility and involvement in the business – they might be resistant to the changes in attitudes required. The evidence in this case is that the new approach is working well but needs to be monitored frequently to ensure that it is giving the benefits expected.
1 The way the jobs, responsibilities and power within a business are organised. Often shown by means of an organisational chart. (3 marks for good understanding, 1–2 marks for some understanding)
2 Many levels of hierarchy; communication can be slow and inaccurate; spans of control tend to be narrow. (1 mark each)
3 With few levels of hierarchy, communication between top and bottom of the organisation is often quick and accurate (it has to pass through fewer levels); fewer levels of hierarchy leads to
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 9

Unit 2
Answers employing fewer middle managers – saves on overheads; spans of control are usually wider and this can lead to increased delegation. (1 mark for each point mentioned plus 1 mark for some explanation)
4 Define delegation. (1 mark) Benefits: Frees up senior management-time for strategic decisions; gives junior employees useful experience; increases the status and complexity of work performed by junior employees so improves motivation. (up to 3 marks for explaining any one point)
5 Textbook material. (1 mark for some understanding of role plus 1 mark for some development of this point × 4)
6 Factors referred to in the textbook include: business growth – more departments, divisions or levels of hierarchy might be necessary as a business expands; market conditions (if these are changing rapidly, would a flatter structure allow the business to be more flexible and adaptable to change?); culture of the business – if enterprise is to be encouraged in the business perhaps a formal and rigid hierarchical structure is inadvisable. (1 mark for mention plus 1 mark for developing each point)
7 a) Define organisational structure. (1 mark) Diagrams should be rewarded – especially if they show two owners with different departmental responsibilities or show the two branches of the business being operated as separate departments. ‘Effective’ would imply clear lines of authority and communication. (up to 3 marks for explaining why structure suggested is appropriate)
8 a) False – voluntary labour turnover (where employees chose to leave to take up employment in another job) is higher, especially during periods of low unemployment and in industries such as catering and leisure. Most employers will want to avoid the costs of making workers redundant unless absolutely necessary e.g. during a recession. b) True – this measure is easier to use for international comparisons (see page 145 of textbook). c) False – if output per worker is falling then this means efficiency is falling and unit labour costs will rise. d) True – high absenteeism reduces workers’ total output so this will reduce output per worker over a period of time.
(1 mark for correct statement plus 2 marks for explanation × 4)
9 Can make comparisons over time and with other firms in the same industry. Low levels of workforce performance will reduce a firm’s efficiency.
10 Textbook, page 150
11 Define external recruitment. (1 mark) It isn’t always necessary when workers within the business are willing and able to be considered for the vacant post. (2 marks)
12 Textbook
13 Time and finance available; how important the manager believes presentations or demonstrations of the applicants’ ability is; importance of character/personality for the job; are specialist selection skills available amongst existing internal staff? (1 mark for mention plus 1 mark for application to restaurant business)
14 Define recruitment and selection. (2 marks)
It is very important: if staff have inappropriate skills or outlooks because they have not been selected carefully, then this could be a major cause of high labour turnover and poor quality (plus application to this business).
It is not so important: even with staff who have been recruited and selected effectively labour turnover could be high (other local firms might offer higher wages); quality might be poor (worn out machinery for making soft toys). (up to 6 marks for analysing points for and against)
Evaluation: recruitment and selection can be vital to the efficiency of a business – especially where high skills are needed or the ability to work in teams is needed. However it is not the only factor influencing motivation, labour turnover and quality in this manufacturing context. (4 marks for evaluation)
15 Textbook (1 mark for mention of each method plus 1 mark for some development)
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 10

Unit 2
Answers
16 Define at least two terms e.g. non financial methods of motivation, job enrichment, job enlargement. (2 marks) Directors (or senior managers) might be against this as they believe: that it takes away their authority to take decisions; that workers are only motivated by money (the Taylor approach); in workers specialising in one role so they should not have their jobs enlarged; that such approaches take time and add to training costs (it is better and quicker for managers to control the business directly?). (up to 2 × 3 marks for identification and explanation of reasons)
17 Define or explain organisational design. (2 marks) Explain how organisational design can assist in motivating staff e.g. flat hierarchical (functional) structures, structure by customer type or by division and matrix structures (project teams) can lead to some forms of empowerment and teamworking. This can be motivating as it might satisfy more of Maslow’s higher order human needs.
(up to 3 marks) However, other factors also contribute to motivation of staff. Students can consider other financial and non-financial methods of motivation as being important too. (up to 3 marks)
Final evaluation: Yes, it can contribute to motivation of staff especially if other factors – such as
Herzberg’s hygiene factors (which can cause job dissatisfaction if they are not provided adequately)
– are in place. (2 marks for evaluation)
18 a) Textbook b) Define team-working. (1 mark) Benefits and drawbacks in textbook: explained and analysed (4 marks); applied to this business (3 marks). c) c) Define empowerment plus examples of how it can be achieved. (2 marks) Explain how it can be introduced and potential benefits. (3 marks) Explain limitation in context – how easy will it be with the nature of this business (with potentially repetitive production processes) to introduce enrichment? (3 marks) Overall evaluation: if it can reduce labour turnover this would be a real benefit as it would reduce business costs, and this seems to be a competitive market.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 11

Unit 2
Answers
Capacity utilisation: A 50% B 54.2%
Unit cost (£)
120
100
86.7
66
58.3
C 85.7% D 91.7%
1 It is the efficiency with which resources are used to produce goods and services – often measured in terms of ‘cost per unit’ or ‘unit cost’
2 Unit cost of production =
=
£2.8m
350 , 000
= £8 per unit
3 The business is currently operating at 55% of capacity (350,000 units per year). This means that total annual capacity is 636,363 units. If the business increased output to 90% then annual output is
572,726 units. Unit cost becomes £2.8m ÷ 572,726 = £4.90 (These are tricky figures but students should be able to work this out effectively with calculators!)
4 Quality (the percentage of output rejected as faulty); output per worker or per shift (productivity); unit cost; capacity utilisation or other relevant operations target (with brief explanation).
5 Sub-contracting output: this is cheaper than increasing capacity and may be cheaper than holding large stocks of finished watches to sell during peak periods. But can quality be relied upon especially when Swatch has such a good reputation to protect?
Hold additional stocks to sell during peak times: no problems with quality of output from subcontractors or temporary staff but consumer tastes may change for the designs that Swatch are holding in stock, plus the cost of capital tied up in stocks.
Overall: most likely method in this industry if the lack of capacity is temporary (e.g. seasonal demand swings) is to hold stocks (only a small storage capacity required and the stock is not perishable). If the capacity shortage is likely to be long term either sub-contracting or increasing scale of production (A2 concept) are more likely.
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 12

Unit 2
Answers
1 Textbook
2 Customer loyalty will be low – few return customers will reduce revenue, especially as this is likely to be a competitive market.
Disappointed customers are likely to tell family and friends – a bad reputation will spread quickly.
3 More customer loyalty and repeat clients. Less will have to be spent on attracting new customers which will help to reduce fixed costs
Higher reputation will allow the business to consider raising its prices especially if demand starts to exceed capacity. This should increase profitability
More rewarding place to work – dealing with customer complaints takes time and demotivates workers. It becomes easier to recruit and retain staff.
4 The manager set clear quality assurance standards which provided focus for all of the employees.
These were measurable and easy to review. Ideally they should have been discussed and agreed with workers yet there is no evidence of this having occurred. Such agreement might have added to the motivation levels of the staff and quality improvements could have been made even more quickly.
Costs rose initially – meeting challenging standards can lead to increased staffing needs but this would also help to increase customer satisfaction.
The manager seems to have been justified in setting these standards and introducing this quality system – but did she win the staff over first and convince them of the need for change?
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 13

Unit 2
Answers
1 Textbook definition
2 Speed of service; freshness of food; range of food and drink available; politeness and personality of staff. Explain all in context.
3 Repeat custom through high levels of customer loyalty – developing relationships with existing customers will always be cheaper than spending on promotion to attract new customers.
Word-of-mouth promotion from existing customers to others – again, this form of promotion will be cheaper than paid for advertising.
Business may be able to charge higher prices to reflect the high quality of customer service.
4 Company managers can set standards for customer service e.g. speed of service, range of goods on offer, but the actual delivery of quality service depends greatly on the individuals who have contact with the customer. This contact can be in any form e.g. face to face or telephone. However, without company managers setting standards for customer service and ensuring that staff are well motivated and want to offer quality service, even keen and friendly individual workers may not offer the customers what they expect during the purchasing process.
1 Textbook
2 Textbook
3 Helps reduce waste and costs; helps to focus the department on objectives; helps to reach the operational efficiency of the best in the industry. (2 marks for reasons plus 1 mark for explaining one point)
4 This could result in a waste of resources. Customer arrival and queuing times could be monitored and at less busy times of day, fewer cashiers could be used – staff could be performing other tasks.
(1 mark for point plus 3 marks for explanation)
5 Total costs divided by output (in a certain time period). (2 marks)
6
Firm A
Firm B
Rate of capacity utilisation (%)
50
83.3
Unit cost at current output (£)
10
30
Unit cost at maximum capacity (£)
7.50
26.67
Firm C 89.8 5 4.80
7 a) Two problems could include: should production be consistent throughout the year and stocks held or should production vary to meet demand patterns; given the nature of the product, variable production is likely so excess capacity might exist out of season – a waste of resources; full capacity working might be a problem during the peak season, creating other problems. (2 marks for problems plus 1 mark each for explanation)
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 14

Unit 2
Answers b) Freshness and quality will suffer if stocks are held for long periods. This would be a particular problem for this business as it specialises in expensive food hampers as customer expectations are likely to be very high too. Failure to match output to orders could mean turning customers away – there will be competitors in the industry who may be able to supply more promptly. (2 marks for points; 2 marks for application to business; 2 marks for explanation or analysis) c) Flexible labour contracts – part-time or temporary staff. Very common in catering industry but will they need training? Will they be able to maintain high quality standards? Will they be well motivated with lack of job security?
Outsourcing – using other catering companies to supply some of the contents of the hampers.
Will they meet Food Direct’s quality standards? Could customer satisfaction be reduced? Will sub-contracted businesses charge more for the products they produce than Food Direct could produced them for? (1 mark for each point, 2 marks for application, 2 marks for analysis of how method suggested will solve the problem, 2 marks for evaluation)
8 a) False – quality is not an absolute concept: higher priced goods often lead to customers having higher expectations. b) False – it can do, if additional staff training or extra staff are needed. But by reducing faulty goods and returned goods from customers, costs could fall. c) False – it certifies that quality assurance standards or processes are in place but it does not guarantee that they are kept to. d) True – by reducing waste and the cost of faulty goods being returned. Also by increasing customer loyalty and cutting down on the promotion needed to attract new customers.
9 Textbook
10 Quality control – inspecting for quality e.g. by employing inspectors to check on the quality of finished clothing garments. Staff do not take responsibility for quality and employing inspection staff can be expensive.
Quality assurance – setting agreed quality standards at all stages of the clothes making process. This could be combined with TQM so that all workers know the standards they should meet at their stage of the production process and they accept accountability for it.
(1 mark each for definition, 2 marks for application, 2 marks for explaining difference)
11 Relative, see textbook
12 Textbook
13 Survey of customer service – questionnaire to be returned to garage; online feedback – even small garages might have a simple website; face-to-face contact with customers.
14 Developing customer relationships (customer relationship marketing) tends to be cheaper than attracting new customers. Meeting existing customers’ expectations with the quality of food and service will lead to good customer loyalty, positive feedback and good word-of-mouth references.
The alternative might be to offer discount vouchers and pay for expensive advertising to attract new customers. (1 mark for content, 1 for application, 2 for explanation or analysis)
15 Textbook, see case study page 191.
16 Market research will indicate the market segment that the café should aim at and the price levels that are likely to be most appropriate. The segment identified will partly identify the customer expectations which will assist the business in setting customer service levels.
17 See earlier questions and textbook.
18 a) Online questionnaire; direct interviews as customer returns car. (1 mark for each method plus 1 mark for each explanation or application) b) Set quality standards that are equal to the best in the industry (benchmarking?) in terms of speed of service, quality of customer contact service, cleanliness of cars etc; train staff and motivate them to reach these standards consistently. (1 mark each for up to 2 points, 2 marks for each point explained)
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 15

Unit 2
Answers c) A balance of arguments is needed. It may not be possible to keep low prices and offer excellent customer service e.g. cleanliness of cars, age of cars or speed of service. How price elastic is the demand for car hire? Is there a market for lower prices but older cars?
It might be cheaper for the business to continue to offer older cars and less efficient customer service – in the short term. This might be profitable in a recession.
If the costs of promotion and advertising are high it might be cheaper in the long run to adopt a different strategy: how competitive is the market dominated by the well known car hire companies?
(2 marks for point made, 2 marks for application, 3 marks for analysis or explanation, 3 marks for evaluation and final judgement)
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 16

Unit 2
Answers
1 A relationship that leads to prompt and reliable delivery of quality goods and services (to the business customer’s expectations) at an acceptable cost.
2 Being offered large amount of credit freed up working capital, which was spent on marketing. This would have helped to reduce financing costs as the alternative might have been an expensive overdraft. Quick response to a rushed order allowed MultipliCD to offer good service to its own customers. This would enhance MuiltipliCD’s own reputation.
3 Low cost – fast food is a very competitive market; good quality – consumers’ expectations for quality and fresh food must be met; help with selecting ingredients and menu items to offer value for money; reliability of delivery – restaurant wants to avoid too many ‘that item is no longer available’ situations; any other relevant factor.
4 Success of either business will be heavily dependent on reliable and cost-effective supplies of acceptable quality ingredients. Good supplier relationships will help to improve the quality of the finished product, the continuity of production and final consumer satisfaction. Examples can be analysed from either industry. However these supplier relationships, although important, cannot guarantee success as many other factors will determine this too (e.g. motivated staff, quality assurance standards, design of the product etc.).
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 17

Unit 2
Answers
1 Textbook
2 Any two selected and explained. For example: chip and pin – convenience to customer and safer than cash; internet shopping – saves time and more convenient, saves customers a journey.
3 Reducing the number of check-out staff as the electronic RFID tags record product and price as customers pass the check-out point. Reduces cost of recruiting, training and paying staff.
Traceability, which is very important where consumer safety is concerned e.g. with faulty electronic products and also with organic products e.g. their origin and source can be traced back to original grower.
4 Buying new technology is only half of the IT strategy: different systems need to be analysed and weighed up with the costs compared to potential cost savings. Other issues need to be addressed too. Discussing with staff (e.g. through work councils or trade unions) about the impact on them, the need for training and new skills and explaining the possible redundancy implications. The introduction of the system needs to be planned for: specialist staffing needs and trial runs to ensure compatibility with existing systems. Finally, the decision needs to be reviewed against the objectives for it.
1 Computer suppliers, furniture suppliers, coffee and other drink or food suppliers.
2 Students’ own answer based on the supplier chosen e.g. value for money, reliability, quality etc. (1 mark for factor plus 1 mark each for application)
3 Trade shows, business directories or internet (1 mark each, maximum 2 marks)
4 Students’ own example, e.g. A furniture retailer in busy high street location: price important as it may be a location with other furniture suppliers; long creditors’ period as the shop may have to offer its customers credit too; the longer the retailer has before it pays back debt the better will be its working capital position. (2 marks for points, 2 marks for application, 2 marks for analysis)
5 Fast expanding means the manufacturer wants to be assured that the supplier can cope with demand increases, to avoid hold ups in production and failure to satisfy customers.
The manufacturer may not be able to find another supplier of similar components at short notice: needs to plan for this eventuality by finding out if the existing supplier can cope with increased demand. (1 mark for each point – maximum of 2, up to 2 marks for explanation)
6 a) Textbook b) Help to offer good service to supermarkets customers; supplier may advise on best quality products or best prices at different times of year. (1 mark for point, 1 mark for applying each point plus 2 marks for explaining each point) c) Needs: fresh and high quality produce; credit terms to help prevent cash flow problems; reliability to offer continuous selection of goods to customers; value for money even in a region of relatively high incomes. (1 mark each for factor, 1 mark each for application, 2 marks for each point well analysed) d) Supplier relationships will be particularly important in this highly competitive industry.
Suppliers will need to offer value for money (i.e. low prices while maintaining the supermarket’s
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Unit 2
Answers quality standards) as well as reliability of supply, credit terms (supermarkets are often bad payers) as well as contributing product development ideas to the supermarket. Good supplier relationships could help to establish an excellent image for the supermarket – e.g. genuine organic products at a reasonable price. But success depends on more than suppliers and good relationships may be a necessary but not sufficient condition for success. Other factors include location, staffing and training and store layout etc. (up to 3 marks for points or knowledge, 2 marks for application, 3 marks analysis of points and 2 marks for evaluation)
7 Textbook
8 Textbook e.g. case study on page 205
9 Textbook (1 mark for each definition plus 1 mark for differentiation e.g. by example of application of each technology)
10 Many answers possible. For example, a kitchen-design business: able to display several layouts to clients; able to make quick changes to designs; virtual tour around kitchen possible; quicker to design and more appealing to client. (1 mark for example, 2 marks for application and 1 mark for analysis)
11 Robots are the typical example: capital intensive production raises productivity and reduces unit costs – important in competitive markets with excess capacity; flexibility of product design that can be built on one production line – allows changes in consumer demand trends to be quickly converted into production changes. (2 marks for benefits, 2 marks for application, 2 marks for explanation or analysis)
12 May use labour intensive methods to allow for individual hand-crafted chocolate products to be made; offers a unique selling point compared to mass produced confectionery; may not have the finance to buy advanced technology – specialist chocolate maker implies may be a small business.
(2 marks for points, 2 marks for application, 2 marks for analysis)
13 Define productivity. Explain how IT based production methods are likely to increase output per worker – e.g. computer controlled cleaning machines may be quicker and have many more programmes which can be flexibly selected for different materials. (1 mark point made, 1 mark application, 2 marks analysis)
14 a) Textbook b) CAD – design new fabrics and show effect in ‘on-screen images’ of curtains or upholstery;
CAM – turn new designs into finished products quickly and accurately. (2 marks for uses, 2 marks for application, 2 marks for analysis of points) c) Training of staff – are they traditional craft workers; potential redundancies if the design and production process is very efficient; finance – how will the capital be raised if sales, and possibly profits, are falling? (2 marks for up to 2 points, 2 marks application, 2 marks for analysis) d) Further IT will reduce unit costs if output rises more than costs. This could be important with foreign competition taking a bigger market share. Offering customers a quicker service with possibly a wider range of designs or fabrics could become an important differentiating factor.
But will the hand-made image of the product damage reputation and sales? Will job losses be perceived as being socially irresponsible?
Overall judgement required. (3 marks for points, 2 marks for application, 3 marks for analysis and 2 marks for evaluation)
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Answers
1 Textbook and application from case
2 It is a business operating in a consumer market, offering services to male customers who want particular, well defined and well researched features from their hairdressers.
3 By focusing on a small segment of the large male hairdressing market it seems to be fulfilling a need for a certain type of consumer. It seems to have been well received and the publicity from the
British Hairdressing Awards will help to make the name more widely known to this market segment. It is possible that by researching the needs of the segment and fulfilling these, the business is able to charge higher prices than a traditional barber shop.
4 It seems to have been very important as the marketing started with market research, followed through into the product and service offered, was supported by appropriate pricing (very low prices would probably have been a mistake) and the brand image was promoted effectively via the website. Therefore the evidence suggests this to be a very complete and well integrated marketing mix. Business success will always depend on a range of factors, though. The staff selection and training were probably crucial factors too. Students may suggest and explain other factors.
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Unit 2
Answers
1 Define marketing mix. Product is the centre-piece, which may have been developed from detailed market research allowing different market niches to be targeted with slightly different variations of the product. Business seems to have been successful before the first major promotional campaign in
2007 but the campaign will help to reinforce the image of the company and its brand name. Prices vary (per 100g) depending on the quality of the product and contents but there is no other price information referring to competitors – is it higher or lower? Use of internet to sell breakfast cereal must be a first! This could be a major factor in their success as online shopping generally has increased.
2 Nestlé has huge resources for promotion or advertising. It would be pointless Alara trying to compete with this but the use of public (media) relations is a low cost and effective way of getting the message across. Further PR campaigns could be cost effective
Nestlé price reductions to frighten off competition might have only very limited success in term of reducing Alara’s sales if there is strong brand loyalty in the different niches it sells too.
Nestlé products are focused mainly on mass markets: will such a large business be interested in relatively low volume products and niche markets? Alara’s brand loyalty and distinctive products may mean that Nestlé’s product development does not affect them too much.
3 Advantages: unique selling point of developing specific recipes for small niche markets. This seems to be the major selling point and should allow relatively high prices to be charged. Low price elasticity is likely. Spending money on further product recipes and public relations is probably much more effective than trying to advertise or promote using mass marketing methods.
Disadvantages: if prices set are quite high due to the products’ unique selling points then this could encourage other firms to enter the market and compete with Alara. There is a danger of complete loss of consumer confidence if there are quality or health and safety problems with the product because the product is what the company bases its marketing mix around.
4 Sell through more UK supermarkets – market penetration. Using this channel means the business will face considerable competition for shelf space and consumer attention. Will Alara have to offer supermarkets very low prices? (there is very uneven market power here). Will trying to sell to a wider mass market mean the product loses some exclusivity and appeal with existing consumers?
There would be opportunities for much wider market coverage, potential for rapid sales growth and higher market share. The product or brand name will receive much wider coverage.
Sell overseas – market development. Offering the product to niche markets in other countries will maintain brand image. Would this be done through the internet or through retailers in these countries? How easy will it be to transport the product internationally? Will additional market research have to be conducted? Will a pan-European or pan-global strategy be effective or will
Alara have to adapt the product, prices and promotion to national cultural and consumer tastes?
Much depends on the objectives of the business owners and the finance available.
A final recommendation is needed.
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Unit 2
Answers
1 Define the term – textbook. There is a long product life cycle for many of the products made by this business but with extension strategies for some of the products to maintain sales in a changing market place. The business also seems prepared to introduce new brushes to its range which is now very extensive.
2 Although the basic products may be very similar to those brushes made 200 years ago, new features and enhancements have been introduced as extension strategies. This helps to increases sales of traditional products which could otherwise start to fall as consumer demands change and new competitors enter the market.
3 Long product life cycles reduce the need for frequent, often costly and risky new product development. Development and promotion costs are likely to be less than for a business that has to launch new products frequently to maintain market share. However, long product life cycles suggest a long maturity stage and this means that sales are unlikely to be increasing – this could limit the growth prospects of the business. Kent seem to have several mature products in a mature market – not a recipe for rapid growth or increasing profitability!
4 Define and illustrate the Boston Matrix. It could be of benefit to this business which has such an extensive product range. It might be useful to analyse each product in terms of its market share and the growth of the market segment it is being sold to. Appropriate action could then be taken with products – see textbook for details.
Boston Matrix is not without its limitations. Undertaking this analysis for so many products is likely to be very time consuming – will the benefits outweigh the time taken? The matrix has two basic assumptions – see textbook. These could be applied and explained in the context of this business, especially the assumption that fast growing market share is the best section to be in. For a traditional business such as this, it may not be the case: the business’s unique selling point is selling traditional products to traditional consumers through traditional channels! If they are successful in this, then the Boston Matrix may be of limited value to Kent.
1 Textbook
2 Textbook
3 Textbook
4 a) Define the term. (1 mark) May be able to charge higher prices; may have less competition; be able to use focused market research and promotion methods. (1 mark for each point plus 1 mark for some application) b) Define the term. (1 mark) This would be mass marketing as it could be sold to all children – not just the small minority that keeps ferrets! Advantages: could lead to high sales, wide ranging exposure of the business through the books (benefitting to the pet side of the business); costs of publishing the books should be spread over a high number of sales so even if the price is relatively low a profit might be earned. Disadvantages: takes the business away from what it is best known for (‘taking the eye off the ball’?); may be very difficult for this small business to gain access to the market (dominated by big publishers and well known titles or authors); less direct contact with consumers – more difficult to gain market knowledge than with niche
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Answers marketing. (2–3 marks for advantages, 2–3 marks for disadvantages – maximum of 5, 2 marks for application) c) Define market research. (1 mark) Explain the benefits: more likely to sell products that consumers want and at prices they are prepared to pay; more clearly focused promotion; less chance of business failing. But: can be expensive (in this case, internet market research would have kept costs to a minimum). Market research would be very important but successful marketing would also depend on: is the internet the best distribution channel to use? will competitors quickly enter this market if Ferrets UK is seen to be successful? Market research is significant, especially to a new business, but it cannot guarantee success.
5 Textbook. This question could also be set to students within a business context e.g. Tesco or Apple.
6 An integrated mix gives a clear and coherent message to consumers. All four elements blend together to support the overall image of the product. For example, setting a low price for handmade biscuits to be sold through Fortnum and Masons store in London would cause confusion in the mind of consumers: are these high or low quality products? Similarly, cutting edge technology products need to be supported by exclusive pricing and exciting but informative promotional campaigns.
7 a) Textbook b) Consumer expectations might change over time, e.g. low prices might be more important during a recession than having a new limousine as a taxi cab. Keeping in touch with consumer expectations should allow the firm to adapt to market demand trends. (2 marks for factors plus 2 marks for explanation or application) c) Define marketing mix. (1 mark) Perhaps ABC Cabs only accept bookings by phone at present.
This might need to change particularly if the business wants to encourage people to book taxis ahead (e.g. book a cab to the airport at the same time as booking an airline ticket). Increasing internet access and usage might open up new avenues for accessing potential customers relatively cheaply – once the website has been set up. Different prices for cabs booked in advance or required at different times of day or night could increase demand and revenue. The website could become the main form of promotion for this business too. (4–3 marks explained in context). But focusing on the website should not take attention away from the product – fast, reliable service and smart comfortable cabs. This might be a more important aspect of the marketing mix than online booking. Some customers might prefer direct conversation with company staff when booking cab. (4–3 marks explained in context but max 7 marks for analysis or application) Using technology to enhance the marketing mix could be very important for this business. It might help to reduce office staff costs and allow the business to become more competitive but this is not the only factor that should influence the mix. What about finance? competitors? (2 marks for overall judgement)
8 Textbook
9 Textbook. This could also be put into a market context e.g. for a new car or MP3 player.
10 The unique selling point is a very different feature of a good or service that helps to create brand identity in the minds of consumers. This might stem from a patented product or a design with copyright. Product differentiation is the process of creating in the minds of the customer a feature of a good or service that appears to make it different from those of competitors. This might be an actual or a perceived difference. (4 marks)
11 Textbook sourced explanation supported by at least one relevant example.
12 Textbook
13 a) Textbook b) Define Boston Matrix. (1 mark) It is not essential to draw one but if used, a diagram can aid explanation or analysis. Some of the product markets identified are likely to be faster growing than others (e.g. organic foods) and the business could have a small or large market share in any of these (e.g. could have a large market share of locally produced foods). Using the BM will help management to identify the four main categories of products and take appropriate action.
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Unit 2
Answers
Analysis of action that could be taken based on ‘the dog’/‘the problem child’ identification etc.
(2 marks for application plus 5 marks for analysis)
14 Textbook
15 Define, draw or outline product life cycle. (2 marks) Apply to products, for example, have imitation flowers had their day and are sales for organic foods still growing? Using PLC can help to devise appropriate marketing mix decisions at different stages of the PLC and can assist in knowing when to use extension strategies or introduce new products. (2 marks analysis plus1 mark application)
PLC may not be accurate due to the need to forecast likely future sales to identify maturity, decline etc. It is very difficult to say where each product is on its PLC. (2 marks analysis plus 1 mark application) Is it really necessary in this case? There are no long product development times and new products could be quite quickly introduced by purchasing them from new suppliers e.g. wine or gardening equipment. (2 marks for judgement and evaluation)
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Unit 2
Answers
1 Textbook
2 Advertising has already been widely used. Two other activities could be: direct mailing to homes – perhaps selected from a data base of people who have recently booked holidays; public relations e.g. tourist board could sponsor concerts that receive widespread media coverage; any other reasonable answer
3 Advantages: the film company might be prepared to contribute or allow free advertising on its own posters etc. because the film is potentially benefiting too; the tourism based images and colours used could be very effective in a cinema environment; if the film is successful there could be a huge potential number of consumers who will see the cinema advertisements. Disadvantages: it might only be seen by a small segment of the total potential tourist market (e.g. a children’s film might not be seen by many adults); if the film flops or is badly reviewed that could reflect badly on the product being promoted with it.
4 Not the campaign outlined in the case study. This campaign seems to be focused mainly on English speaking or UK based audiences – unless the film and the tourist adverts are translated into
Cantonese too! Other campaigns might be needed e.g. focused on Chinese TV viewers, using travel magazines or websites that are available in China.
5 Try to see The Apprentice programme broadcast on 14/5/09 on BBC – the contestants had to try to repackage and promote the town of Margate!
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Unit 2
Answers
1 a) Sales revenue before price reduction = £10 × 50 = £500 b)
Sales revenue after price reduction = £8 × 65 = £520
2 As revenue increased after price reduction this means that demand was price elastic.
Percentage change in demand =
15
50
× 100 = 30%
PED =

30
20
= −1.5
3 The number of competitors in a market is one of the main influences on PED. If the price of a product is increased with a competitor or competitors offering similar products, now at lower prices, a high proportion of consumers are likely to switch to the rival’s products.
1 Textbook
2 Sales revenue = 30,000 × £80 = £2.4m
3 PED = −0.5 = percentage change in demand ÷ 5%
So the percentage change in demand must be −2.5% (demand falls as the price has been increased).
2.5% of 30,000 = 750
So new sales level = 29,250
New sales revenue = 29,250 × £84 = £2,457,000
4 It would be unwise to use penetration pricing (a definition of this is needed) as it would damage the
Levi brand and it would result in less revenue as demand is price inelastic (result is between 0 and
−1).
5 Part of the integrated marketing mix. Students should explain this concept and analyse it and apply it to the Levi’s context.
6
The price of £80 is unlikely to be cost driven in terms of the variable costs of making the jeans. The variable cost of the jeans is likely to be very low (how can Tesco sell similar jeans for £4?) but there will be high costs of promotion to maintain the brand name and identity. Price is most likely influenced by low PED and the need to maintain a premium image of the product.
7 This research could take the form of checking on price comparisons of fair trade products, e.g. coffee and chocolate, with prices of traditionally sourced alternatives.
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Unit 2
Answers
1 Textbook
2 Such an exhibition is very clearly focused on a target market so most visitors will be potential customers. Many wedding items will not be purchased unless they can be seen, compared, tried on etc. and an exhibition gives this opportunity. It is very important to build relationships e.g. with wedding dress designers who can respond to a particular customer’s requests. This gives small businesses in the wedding market the same opportunities as large ones to access potential customers.
3 Advantages: as above but applied to stationary – how important is it for customers to see examples of this before buying? Disadvantages: a stall at a wedding exhibition could be very expensive; for this type of product there might be other, cheaper and more effective ways (e.g. website display of styles with an opportunity to print off exemplar cards etc.); staffing the stall at wedding exhibitions might be expensive and too costly for a very small business.
4 This requires an assessment of the markets and products that most effectively lend themselves to direct marketing and those that do not. Consider the benefits of online selling and compare these to the benefits of other channels. For example: stockholding can be undertaken by retailers and warehouse operations; delivery can become the responsibility of the retailer etc. Answers need to contain several examples – service industries in particular will find it very difficult to sell via retailers as direct contact with customer is usually needed. But, for example, paint manufacturers do not want to be bothered with selling half- litre cans of sky blue emulsion in Blackpool while a local retailer would!
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Unit 2
Answers
1 Fewer numbers of petrol stations has given those that remain more market power. This has made the retailing of petrol less competitive. There may now be many towns and villages with only one station – giving local monopoly power. However, the market power and influence of supermarkets has increased and they compete for market share with price reductions. This has made the market more competitive. Petrol is a product that is very difficult to differentiate so price is an important factor in consumers’ decisions.
2 The article suggests relatively low entry barriers (apart from site costs) so if competition in the industry fell and price or profit margins rose, other retailers might join the industry.
3 With increasing difficulty. The major retailers are the big oil companies themselves and the supermarkets that create an oligopolistic market structure. Independent retailers will not have the benefits of economies of scale so they might have to compete with service e.g. having to serve customers not provide self-service, having a wide ranges of goods in the shop and long opening hours. Some of these independent operators might have local monopoly power if the market is quite small and remote, where it is not worthwhile a larger firm setting up a station.
4 They often use it as a loss leader – use low prices to attract customers to buy other products, either from the petrol station shop or the larger supermarket if one is attached to the petrol station. They often use petrol in promotional campaigns too – ‘5p per litre off if you spend £50 or more in the shop’. Also, food retailing is a mature market and this gives an opportunity to increase sales in a growing market (with yearly increases in the number of cars and trucks).
5 Yes: high site costs; few economies of scale so likely to be uncompetitive; may have a limited budget for promotion; best sites already owned by the major oil companies.
6 No: refineries seem willing to sell to independents; some firms may have sites that can be easily adapted to petrol retailing and offer the chance to spend on other items e.g. DIY stores.
1 Textbook
2 Textbook. Question could also be put into the context of why one particular business might use promotional methods. (1 mark for each aim plus 1 mark for explanation)
3 Textbook. Again, this could be applied to one business. (1 mark for method plus 1 mark for explanation or application if put into a business context)
4 Textbook
5 a) Textbook b) Full shelves, otherwise the display seems uncared for; good quality display materials, to support the quality of the product; attractive layout and lighting, to appeal to passing shoppers; placement next to popular items in a busy part of the store. (1 mark for feature plus1 mark for explanation) c) Any two from: displays the product prominently, it seems to give the product importance or status; attracts many impulse buyers; might lead to ‘pester power’ purchases if aimed at children.
(1 mark for feature plus 2 marks for each explanation)
6 Target market would be important (do not want to waste promotional spend on consumers unlikely to be interested in this type of product); the benefits of the product need to be explained (the
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Answers suitable style of promotion needs to get this information across e.g. written leaflets in stores); competitors promotions – should these be matched or would a different approach be beneficial? (1 mark each for up to 2 factors, 2 marks application; 2 × 2 marks for analysis)
7 Textbook
8 Textbook (1 mark for each plus 1 mark for brief explanation)
9 Textbook
10 a) If price elasticity of demand has a value less than –1 then demand is said to be price inelastic.
This means that the percentage change in demand will be less than the percentage change in price. So a 10% price increase is likely to lead to a 2.5% fall in demand. Revenue will rise in this case. b) Costs, competition, objectives of the business and the nature of the market are likely to be the four main factors. For example, if the wage rates for this type of labour are increasing then a price rise is likely too. If a local competitor has left the industry then there might be an opportunity for C & G to increase their prices. However, if it is easy to join this type of installation business, C & G might have to keep prices quite low. (1 mark for each factor, 2 marks for application, 4 marks for analysis)
As the market at present is growing due to the external factor of changing television signals, the existence of competitors, even more of them, might not be a major factor. There might be enough work for all firms even though prices charged could be high. If the firms colluded and worked together to fix prices then competition would be much less important. However, this is strictly illegal and serious punishment might follow!
However, if barriers to entry are low and many firms join, or if the market becomes saturated when most people have been converted, then competition might become a much more significant influence on price. (3 marks for knowledge of the factors, 2 marks for application, 3 marks for analysis,, 4 marks for evaluation and final judgement).
11 Definition plus formula. (2 marks) Advantages: answer should explain the impact on revenue with price increases/reductions with both elastic and inelastic demand (could use numerical examples).
(6 marks analysis) Disadvantages: how accurate is PED, especially if data used to calculate is out of date; latest PED may not be appropriate for new price changes if the external environment has changed e.g. number of competitors; other factors should influence price as well e.g. costs (there is little point in reducing prices to gain additional revenue, PED greater than –1, if the price is now below the cost of production). (4 marks evaluation)
12 Textbook
13 Textbook
14 Location of customers – if widely dispersed geographically then a shop in just one location might not be appropriate; internet access of potential customers – this is likely to be a light product to post so online selling might be appropriate; how essential is it for customers to see and try this product before buying? – if very important then selling through a chain of high image retailers might be appropriate; other answers possible too. (1 mark × 3 for factors, 2 marks for application, 3 marks for analysis)
15 a) Direct sales e.g. visiting the stores to encourage them to accept these products; catalogue or detailed price list sent to stores; e-commerce and using a website to attract business buyers; food trade fairs where business buyers might be sold to directly. (1 mark for each method plus 1 mark for each explanation) b) Mass market, as even this small producer is ‘taking on the big stores’ and the products are ‘now stocked in major supermarkets across the UK’. It does not say that these are specialist, free range or organic products which might have made this a niche marketing strategy. c) Definition – the level of competition or number of competitors in the market- market conditions.
(1 mark) If there are many farmers competing to attract customers from supermarkets (quite likely) then:
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Answers
Products may be similar unless The Black Farmer can differentiate its meat products in a meaningful way.
Promotion to supermarket buyers will be limited – the use of food trade fairs might be an important way of presenting The Black Farmer’s products to these buyers. Promotion to the final consumer might be too expensive for a small business but free publicity through, for example, taste tests in Sunday newspaper magazines etc. would be a useful way of getting consumers to ask supermarkets for the product. This would stimulate interest from the supermarket buyers.
Farmers in this market are likely to be price takers i.e. the supermarket buyer will determine the price unless a differentiated product or image could be established.
Place: it would probably be too expensive to set up their own retail shop but selling directly to consumers through an attractive website would be an option.
So, the impact of many small farmers in this competitive market would have a great impact on the marketing mix of The Black Farmer. (1 mark for definition, 2 marks for mention of impact on marketing mix components, 2 marks for application, 3 marks for analysis) d) Marketing: market research could be very important to discover (for example) market leaders in this market, the prices other firms charge, consumer tastes and how these are changing. Reacting quickly to these changes can give a competitive advantage (e.g. venison sausages!) Though what is the cost and how up to date will the research be?
Place: many specialist meat producers now use online selling directly to consumers. This gives the cost advantage of eliminating intermediaries in the channel of distribution. But there is the potential cost disadvantages of setting the site up and updating it and packing and despatching meat.
Non-marketing: cost reductions – use cheaper cuts of meat, convert to non-organic or non free range (if these were features of the existing product). Could this damage the image the business is trying to establish?
Quality: this could give a competitive advantage if supermarkets and consumers were prepared to pay for a premium product. Would this depend on market research and the state of the economy and consumers’ finances?
All of these may be possible but the business will have to weigh up which is likely to be the most important and the potential negative effects of each method used. Other answers are possible. (3 marks for factors, 2 marks application, 3 marks application, 4 marks evaluation)
AQA Business Studies AS Level © Nelson Thornes Ltd 2009 30