Business 9609/11 May/June 2019: question paper and mark scheme

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1(a) Define the term ‘competitive pricing strategy’. 2 A pricing strategy / method of pricing where a price for a product or service is set / made (1) Based upon the price set by competitors (1). A business offers to match the price of competitors (1). Set a price slightly below competitors (1). An example Mcdonalds v Burger King (1). Sound definition 2 of the factors listed above (2 marks) Partial definition 1 of the factors listed above (1 mark) No creditable content. (0 marks) 1(b) Briefly explain why a business might use a price skimming strategy. 3 Answers could include: • Price skimming is the setting of a high price for a product that is considered to be unique or having special features and thus has a low price elasticity of demand (inelastic). • May be a new product – aim is to maximise short-term profits before competitors enter the market. • Create customer perception of high quality. • Customers can equate quality with high price. • Producers of luxury goods/designer goods focus on status conscious customers who will pay high prices. • Recoup high costs involved in production (e.g. pharmaceutical companies). • To maximise profit. • To exploit a product with a low elasticity of demand. Sound explanation of the advantages of a business using a price skimming strategy. (3 marks) Partial / limited explanation of the advantages of a business using a price skimming strategy. (2 marks) Explanation / reference to a price skimming strategy. (1 mark) No creditable content (0 marks)

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2(a) Define the term ‘retained earnings’. 2 The profits made by a business that are not distributed to shareholders (1). Profits left after all deductions have been made / dividends have been paid (1). Profits re-invested in the business (1). Profits kept as a reserve (1). A source of internal finance (1). Sound definition 2 of the factors listed above (2 marks) Partial definition 1 of the factors listed above (1 mark) No creditable content. (0 marks) 2(b) Briefly explain the distinction between short-term and long-term 3 sources of business finance. Answers could include: Short-term financing. • Usually refers to financing that spans a period of less than a year but could extend according to the types of loan/debt being considered. • Loan requiring a short repayment period, probably at a lower interest. • Risk is lower so more accessible to smaller businesses. • Include short-term loans, overdrafts, short-term leases, accounts payable. • Used for day to day financial requirements / to cover any shortfall between income and expenditure. Long-term financing • Spans a longer period of time, from over 1 year – 30 years. • Long-term financing is riskier, so banks often require collateral to prevent default on repayment. • Includes share issue, bonds, long-term bank loans, long-term leases, retained earnings, mortgages. • Restricted to large businesses, established businesses that can supply collateral. • Used for longer term/larger investment projects. Answers may make reference to features of short-term and long-term sources of business finance such as those listed above. Accurate references to these features are acceptable as explanations of the distinction between these two sources of business finance. Sound explanation of the features of short-term and long-term sources of business finance. (3 marks) Partial / limited of the features of short-term and long-term sources of business finance. (2 marks) Explanation / reference to sources of business finance. (1 mark) No creditable content (0 marks)

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3 Explain factors that could influence the scale of operations of a 5 business. Answers could include: • The size of the operations of a business from small / limited to large / extensive. • The objectives of the owners of a business – there may be reluctance to expand a small business. • Capital available may be limited – growth will be restrained. • The size of the market that a business operates in may be relatively small – or a deliberate choice for a niche market. • The extent of competition – intensive competition may limit scale of operations. • Possibility / scope for economies of scale – may offer opportunities for expansion. • State of the external economy may affect scale. • Legal restrictions may affect opportunities to expand. • Size of labour resource available. • Nature of product – less standardised products such as handicrafts may mean small scale business. • Nature of demand – if demand for a product is high the size of a business may well increase. • The ability of the business owner – if motivated and skilful will seek to build a bigger business. Effective explanation of factors that could influence the scale of operations of a business. (4–5 marks) Explanation of factors that could influence the scale of operations of a business. (2–3 marks) Description / information of scale of operations. (1 mark) No creditable content. (0 marks) NOTE Some answers may interpret this question as the internal factors that could influence the operational capacity of a business, e.g. an interruption in the supply chain might mean a lack of raw materials to support a productive process. Consequently, the scale of production reduces. This interpretation of the question is acceptable and should be rewarded.

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4(a) Define the term ‘private limited company’. 2 A business owned by private shareholders (1). A small to medium-sized company (1). Owned by shareholders (1). Shareholders have limited liability (1). Shareholders are often members of the same family (1). The business is a separate legal entity (1). Cannot sell shares to general public / stock exchange (1). Sound definition 2 of the factors listed above (2 marks) Partial definition 1 of the factors listed above (1 mark) No creditable content. (0 marks) 4(b) Briefly explain two possible disadvantages to a sole trader of changing 3 to a private limited company. Answers could include: • Loss of 100% ownership of the business. • Loss of control of the business (might not be a majority shareholder). • Cost of changing to a private limited company. • May lose influence over key decisions such as distribution of profit, future growth policies. • Needs to produce end of year accounts – more transparency of financial affairs. • Information disclosure could make a business competitively disadvantaged. Sound explanation of two disadvantages to a sole trader of changing to a private limited company. (3 marks) Sound explanation of one disadvantage or partial explanation of two disadvantages to a sole trader of changing to a private limited company. (2 marks) Partial explanation of one disadvantage or a list of two disadvantages to a sole trader of changing to a private limited company. (1 mark) No creditable content. (0 marks)

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5(a) Analyse the difference between autocratic and laissez-faire leadership. 8 Level Description Marks 4 Good analysis of the difference between 7–8 autocratic and laissez-faire leadership. 3 Some analysis of the difference between 5–6 autocratic and laissez-faire leadership. 2 Some application of the difference between 3–4 autocratic and laissez-faire leadership. 1 Some understanding of autocratic/laissez-faire 1–2 leadership. 0 No creditable content. 0 Answers could include: • An autocratic leader has complete command over employees. • Leader takes all major decisions. • Views / ideas / suggestions are discouraged. • Criticism not allowed. • Can lead to speedy decision making and high productivity. • Can lead to poor employee motivation and high labour turnover. • Works best with unskilled, monotonous, routine work where leader is best performer. • A laissez-faire leader is one who trusts employees / team to perform the job themselves. • Arm’s length management. • Views are shared and suggestions welcomed. • Works best when employees are highly skilled, loyal, and experienced. • Works best with employees who are subject area specialists – capable of accepting responsibility. • Should not be used to mask managerial incompetence. 5(b) ‘A democratic style of leadership is the most effective leadership style 12 for a manufacturing business in a very competitive industry’. Discuss this view. Level Description Marks 4 Effective evaluation of the view that a democratic 9–12 style of leadership is the most effective leadership style for a manufacturing business in a very competitive industry. 3 Limited evaluation of the view that a democratic 7–8 style of leadership is the most effective leadership style for a manufacturing business in a very competitive industry. 2 Analysis and some application of the view that a 3–6 democratic style of leadership is effective in a business. 1 Understanding of democratic style of leadership / 1–2 manufacturing business / competitive industry. 0 No creditable content 0 Answers could include: • An initial definition of democratic leadership style might be given – key features. • References to the competitive business environment may include a discussion of the requirement for a business to be a brand leader, or innovative/different, or flexible, or efficient and effective – to compete. • Such a competitive position may need to be built on a motivated workforce – sound operational management decisions – perhaps stimulated by a democratic distinctive senior management leadership. • However, could lead to slow decision making and business falls behind the competition. • Could lead to more mistakes being made. Evaluation could include: • Strong candidates may well refer to the manufacturing business context and question the importance of democratic leadership with possibly unskilled/routine work and where capital investment might be more important than leadership styles. • Candidates may well refer to the importance of leadership (democratic leadership) in a very competitive industry. • Discussion might be advanced in relation to what is meant by ‘the most effective leadership style’.

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6 Discuss the view that the limitations of Income statements and 20 statements of financial position significantly reduce their usefulness as measures of business performance. Level Description Marks 5 Effective evaluation of the view that the limitations 17–20 of these two financial statements significantly reduce their usefulness as measures of business performance. 4 Limited evaluation and good analysis of the view 13–16 that the limitations of these two financial statements significantly reduce their usefulness as measures of business performance. 3 Analysis of the view that the limitations of these 11–12 two financial statements significantly reduce their usefulness as measures of business performance. 2 Limited analysis, with application, of the view that 5–10 the limitations of financial statements affect their usefulness. 1 Understanding of financial statements / business 1–4 performance. 0 No creditable content. 0 Answers could include: • A focus on the component parts of the two financial statements. • A reference to those aspects of the statements that could be used as measures of business performance such as profit, level of sales, stock levels, value of assets, long-term liabilities. • Some analysis of the value/usefulness of such measures. • Leading to a recognition of the limitations of such quantitative measures: – Numbers may be incomplete or approximate. – Trends not shown. – Assumptions made by accountants. – Window dressing of accounts. – Historic costs may not reflect economic reality. – Conventions, assumptions, judgements may lead to imprecision. – Non-monetary factors ignored. 6 Evaluation could include: • Reference to the limitations of financial accounts and consideration of what might be missing, such as qualitative factors – reputation, morale of staff, nature of organisation culture, capability of senior management etc. • Opportunity to address/evaluate the relative usefulness of quantitative and qualitative measures of business performance. How significant are the limitations? Do we need both to get a full understanding of health / strength of a business? The case for a balanced scorecard approach?

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7(a) Analyse the advantages and disadvantages for a retail business of 8 using Just in Time (JIT) to manage its inventory. Level Description Marks 4 Good analysis of the advantages and 7–8 disadvantages for a retail business of using JIT to manage its inventory. 3 Some analysis of the advantages and 5–6 disadvantages for a retail business of using JIT to manage its inventory. 2 Some application of the advantages and 3–4 disadvantages for a retail business of using JIT to manage its inventory. 1 Some understanding of JIT / retail business. 1–2 0 No creditable content. 0 Answers could include: • Definition of JIT – avoid holding high levels of inventory to require supplies to arrive just as they are needed. • Advantages and disadvantages of JIT set out and analysed in the context of retail – great variety of products – need to consistently meet customer demand – limited space for holding inventory – products may be fragile, perishable. • Advantages – capital investment in stock reduced as is opportunity cost of stockholding – cost of storage reduced – more space to display products – danger of out-of-date stock reduced – reduced risk of wastage – quicker response to customer demand. • Disadvantages – failure of supply delivery could mean empty shelves, product shortage – delivery costs (frequent) may be high – may not be able to benefit from bulk buying (depends on the size of the retail business) – very dependent on quality of supplier (it may, of course, be its own delivery service in a large retail business). It is often difficult for retailers to accurately calculate customer demand. 7(b) Discuss the importance of flexibility and innovation to a multi-national 12 furniture manufacturer. Level Description Marks 4 Effective evaluation of the importance of flexibility 9–12 and innovation to a multi-national furniture manufacturer 3 Limited evaluation of the importance of flexibility 7–8 and innovation to a multi-national furniture manufacturer. 2 Analysis and some application of the importance 3–6 of flexibility / innovation to a business. 1 Understanding of flexibility / innovation. 1–2 0 No creditable content. 0 Answers could include: • Operational flexibility is the ability of a business to vary the level of production and range of products in response to consumer demands. • Flexibility might be achieved by having a flexible and adaptable workforce, flexible flow-line production equipment, increase capacity by purchasing more equipment / logistics / supply chain management. • Innovation is the use of new or improved processes e.g. production / design / R&D / work practices / systems. • Innovation might be achieved by developing new products or new production processes / CAD and CAM / training and restructuring of the workforce. • There are then a number of topic areas that could be applied to a home furnishing retailer (IKEA is an example), such as: – The need to provide affordable, high quality furniture; adapt to trends; adapt to different cultural requirements; need to have effective inventory control mechanisms to ensure constant stock/inventory availability. • Production processes needed to guarantee furniture products at a specific quality and price for a specific amount of time. • Reduce the number of components in the furnishings – maintain good relations with suppliers – long term. • Engage in product/process innovation to use more sustainable/recycled products. • Innovative design and production of self-assembly furnishings. • Unique packaging to reduce space in storage units. • Innovative means of selling, distributing products – e.g. customers select and take home products – delivery costs reduced or none at all. • Credit application of flexibility and innovation measures that will be important to the performance of a home furnishing retailer – in areas such as production, retailing, supply chain, inventory management. 7(b) Evaluation could include reference to how important flexibility and innovation could be in relation to other factors such as marketing and investment and to factors such as the state of development of a particular furniture business.