Business Paper 2

For Edexcel

What are the 2 ways a business can grow?

Internal (organic) growth and external (inorganic) growth are the two ways a business can grow.

What is Internal (Organic) Growth?

Internal growth occurs when a business expands its existing operations.

What is External (Inorganic) Growth?

External growth happens when a business grows by performing a takeover or merger.

How does a business conduct internal growth?

A business conducts internal growth by entering new markets (geographically or consumer bases), innovating products or services, and utilizing e-commerce to reach a wider consumer base.

How does a business growing internally attempt to enter new markets? (3 ways)

A business growing internally enters new markets by expanding into overseas markets, amending the marketing mix, and taking advantage of new technology.

What are the pros and cons of entering overseas markets?

Pros: Access to a brand new market, which may be successful and profitable. Cons: The new market is unfamiliar and may be complex and costly to enter.

What are the pros and cons of amending the marketing mix?

Pros: Allows the business to adapt to the new market, e.g., changing prices to match competition. Cons: It may be costly to amend the marketing mix, e.g., paying for new promotion or creating an entirely new product.

What are the pros and cons of taking use of new technology?

Pros: May make products cheaper to produce and allows a wider consumer base via e-commerce. Cons: Costly to set up, e.g., new machinery for faster production or staff wages to keep online stores running.

What are the pros of Internal (Organic) Growth?

Pros include low risk, the business maintaining its values with no interference from stakeholders, and higher production leading to economies of scale and lower average costs.

What are the cons of Internal (Organic) Growth?

Cons include slower growth, a longer period between investment and return on investment, and growth being limited and dependent on the reliability of sales forecasts.

What is a Takeover?

A takeover is when a business buys and acquires control of another business.

What is a Merger?

A merger is when two or more businesses combine to become one large business.

What are the 4 methods of mergers and takeovers?

The four methods are horizontal integration, forward vertical integration, backward vertical integration, and conglomerate integration.

What is Horizontal Integration?

Horizontal integration occurs when two competitors merge or perform a takeover to become more competitive, increase market share, and gain more control when negotiating prices.

What is Forward Vertical Integration?

Forward vertical integration is when a business takes control of another that operates at a later stage in the supply chain.

What is Backward Vertical Integration?

Backward vertical integration is when a business takes control of a business earlier in the supply chain.

What is Conglomerate Integration?

Conglomerate integration happens when businesses in unrelated markets join through a takeover or merger, enabling them to spread their risk over a wider range of products and services.

What are the pros of External (Inorganic) growth?

Pros include reduced competition and the ability to increase market share quickly overnight.

What are the cons of External (Inorganic) growth?

Cons include the high cost to merge or takeover and managers potentially lacking the experience to deal with the other business, with training also being costly.

What is a Public Limited Company (PLC)?

A Public Limited Company (PLC) is a business owned by shareholders who are members of the general public, with shares bought and sold on the stock exchange.

What are the pros of being a PLC?

Pros include the ability to raise additional finance through selling shares at high prices, being seen as more reliable which enhances prestige and reputation, and potentially buying in bulk as it grows, leading to better prices from suppliers.

Here is the continuation with a tab space between each question and answer:

What are the cons of being a PLC?

Cons include being costly to set up, all financial records must be published so rivals can see, greater risk of hostile takeover by a rival company, and increased media attention which could ruin its reputation in case of a scandal.

What are the 2 internal sources of finance?

The two internal sources of finance are retained profit and selling assets.

What are retained profits and what are the pros and cons?

Retained profits are profits made from previous years. Pros: The money is readily available, so businesses don’t need to borrow from banks, avoiding debt. Cons: The more profit invested, the less dividends for shareholders, who may then sell their shares and invest elsewhere.

EXAM TIP: RETAINED PROFITS

There are often clues in exam questions as to whether retained profits are a suitable source of finance for a large business. If the business is described as successful or profitable, then retained profits may be a good source of finance. The exam question may also provide profit figures.

What is selling assets and what are the pros and cons?

Selling assets involves selling property like buildings and machinery that isn’t needed. Pros: Provides quick cash and can make space for more profitable uses. Cons: Might not get full market value for the property, and the business may need it again in the future.

What are the 3 External Sources of finance?

The three external sources of finance are loan capital, share capital, and stock market floatation.

What is Loan Capital and what are the pros and cons of it?

Loan capital is a sum of money borrowed from a bank and paid back in installments plus interest. Pros: Regular payments are made over time. Cons: Must meet bank requirements (e.g., providing financial records to ensure repayment), and interest makes it more costly.

What is Share Capital and what are the pros and cons of it?

Share capital is money raised when a business becomes a private limited company (Ltd) by offering shares to a selected group of people. Pros: Doesn’t have to be repaid, no interest applied, and the business can choose shareholders. Cons: Dividends are paid from profits, diluting business control.

What is Stock Market Floatation and what are the pros and cons of it?

Stock market floatation is money raised when a business becomes a PLC by offering shares to the public. Pros: Large sums of capital can be raised easily, no repayment or interest, and it boosts brand recognition. Cons: Complicated and costly, risk of losing control, dividends paid, public financial records, and investors may sell shares for quick profit.

EXAM TIP: JUSTIFY QUESTIONS

Exam questions may ask you to choose and justify a source of finance based on profitability (more profits enable reinvestment and better loan terms), assets (provide flexibility and collateral), past history and future prospects (strong performance improves financing access), type of ownership (private vs. public limits), and amount of finance needed (large amounts may justify going public).

Why do business aims and objectives change?

Business aims and objectives change due to market conditions (e.g., too much competition), technology (costly or new tech introduced), performance (poor performance requires improvement), legislation (new laws increase costs), and internal reasons (new leadership with new ideas).

What may a business changing objectives change objectives to?

A business may change objectives to focus on survival or growth, entering or exiting markets, growing or reducing the workforce, or increasing or decreasing the product range.

What is Globalisation?

Globalisation is where businesses operate on an international scale, selling and buying in multiple countries.

What is Importing?

Importing is buying products from another country.

How does importing affect businesses positively?

Importing can lower costs as raw materials may be cheaper, reducing selling prices and increasing profits.

How does importing affect domestic/local businesses?

Importing may cause domestic businesses to suffer due to increased competition, leading to cost-cutting and staff layoffs.

What is Exporting?

Exporting is the sale of goods and services to foreign markets.

What does exporting allow for a business?

Exporting increases target markets and market share, enabling the product to be sold globally (globalisation).

Why may a business operate in a different country?

A business may operate in a different country to enter new markets, take advantage of larger populations for more sales, or reduce costs by sourcing raw materials locally and minimizing importing.

What are the 2 main barriers to International trade?

The two main barriers to international trade are tariffs and trading blocs.

What is a Tariff?

A tariff is a tax on imported goods.

What are the pros of tariffs?

Pros include more revenue for the government and better competitive chances for domestic businesses.

What are the cons of tariffs?

Cons include imported goods becoming more costly and potential retaliatory tariffs from other countries affecting exporters.

What is a Trading Bloc?

A trading bloc is a group of countries that work together to provide special trading deals, promoting trade within the bloc.

What are the Pros of Trading blocs?

Pros include promoting free trade without tariffs, free movement of labor across the bloc, and good trading relationships with member countries.

What are the cons of Trading Blocs?

Cons include expensive importing/exporting outside the bloc and countries typically being limited to one trading bloc, restricting other opportunities.

What tech allows businesses to trade internationally?

The internet and e-commerce allow businesses to trade internationally.

What are the advantages to e-commerce?

Advantages include being open 24/7, lower operating costs compared to physical stores, access to a huge range of potential customers, ease of selling overseas, and cost-effective promotion via social media and email.

What does the marketing mix consist of? (the 4Ps)

The marketing mix consists of Price, Product, Place, and Promotion.

How is the Marketing Mix amended when entering new markets?

Price is affected by trade blocs, tariffs, exchange rates, and income; Product is adjusted for cultural beliefs, style, trends, and dietary needs; Place depends on physical or online availability and internet access; Promotion adapts to cultural, social differences, and language translations.

What are Good Ethics in a business?

Good ethics include treating workers fairly with fair pay and safe conditions, treating suppliers fairly by paying on time, sourcing resources ethically (no child labor), and meeting government requirements like paying taxes and following legislation.

What are the trade-offs when following good ethics in a business?

Positive: A good reputation attracts more customers, increasing sales and revenue, and customers may pay higher prices. Negative: Being unethical leads to a bad reputation, loss of customers and sales, and higher costs from paying fair prices.

How is sustainability involved in Business?

Sustainability involves replanting renewable resources, using renewable energy like solar or wind power for eco-friendly products, and making products recyclable or from recyclable materials.

How does sustainability impact a business negatively?

Making products recyclable or using eco-friendly resources can be costly, reducing profits, and setting up renewable energy sources is expensive and may require large investments for sufficient energy, increasing costs.

What is a pressure group?

A pressure group is a group of people with a similar aim or interest who join together to influence public opinion on government policy or actions.

What may a pressure group do to take action on a business?

Pressure groups may organize boycotts and protests, run media campaigns, or lobby politicians to take action against a business.

How will pressure group activity impact the marketing mix?

Boycotts and protests may damage a business’s reputation, pressuring it to alter its product or promotion methods to avoid offending certain cultures.

What is the Design Mix?

The design mix is the range of features important when designing a product: Function, Aesthetics, and Cost.

What is Function in the Design Mix?

Function is how well a product does its job, its ease of use, and convenience.

How does the Function of a product improve competitiveness?

Improving a product’s function can provide a competitive advantage.

What is Aesthetics in the Design Mix?

Aesthetics refers to the look and visual appeal of an item; attractive items are more likely to sell, though aesthetics can vary and be limited among products.

What is Costs in the Design Mix?

Costs refer to how much it costs to make the product while still ensuring good profit.

How does increasing/decreasing Cost affect products?

Increasing costs may improve functionality and aesthetics, while decreasing costs may reduce both.

What is product differentiation?

Product differentiation is making a product stand out from others in the market.

Why does product differentiation help the business?

It positions the product, targets different market segments, and gains a competitive advantage.

What are the methods of Product differentiation?

Methods include branding, being cheaper than competitors, offering a wider product range, and providing better customer service.

What is the Product Life Cycle?

The product life cycle is the different stages a product goes through in its life.

What are the 5 stages of the Product Life Cycle?

The five stages are Research and Development (R&D), Introduction, Growth, Maturity, and Decline.

What happens in Research and Development (R&D) of the Product Life Cycle?

In R&D, the product is developed, market research is conducted, costs are high, there are no sales, and there’s a high failure rate.

What happens in the Introduction of the Product Life Cycle?

In the introduction stage, the product is launched, sales are low, promotion costs are high, and the product makes a loss.

What happens in the Growth stage of the Product Life Cycle?

In the growth stage, sales grow rapidly, the product becomes established, profit is made, and competitors launch rival products.

What happens in the Maturity stage of the Product Life Cycle?

In the maturity stage, the product is well-established, profits and sales are good but not increasing, and brand loyalty is developed to counter competition.

What happens in the Decline stage of the Product Life Cycle?

In the decline stage, sales and profits fall due to changing tastes or new, better products, and the product may be taken off the market.

What does a business do to prevent a product going into decline of the Product Life Cycle?

A business uses extension activities like advertising, repackaging, entering new markets, repricing, or adding value to keep the product in the maturity stage.

What are the 7 Pricing Strategies?

The seven pricing strategies are Penetration, Economy, Price Skimming, Psychological, Premium, Competitor, and Cost Plus.

What is Price Penetration?

Price penetration involves charging an initial low price to gain market share, then increasing it later (e.g., Pure Gym).

What is Economy Pricing?

Economy pricing is charging budget prices for high-volume products with low costs (e.g., Tesco).

What is Price Skimming?

Price skimming is selling in-demand products at a high price to gain a competitive advantage or due to a unique selling point, then reducing it (e.g., tech items).

What is Psychological Pricing?

Psychological pricing involves charging a price that looks cheaper (e.g., £19.99 instead of £20), often used for clothing.

What is Premium Pricing?

Premium pricing is pricing the highest-quality or most versatile products higher than other models in the product line.

What is Competitor Pricing?

Competitor pricing involves price matching competitors, using the "going rate," especially in saturated markets (e.g., McDonald’s).

What is Cost Plus Pricing?

Cost plus pricing sets a price that covers production costs plus a set profit amount (e.g., Curry’s PC World).

What influences Pricing strategies?

Pricing strategies are influenced by technology, competition, market segments, and the product life cycle.

How does Technology influence Pricing Strategies?

New technology can lower production costs, allowing competitive pricing, and helps compare competitors’ prices to set appropriate rates.

How does Competition influence Pricing Strategies?

High competition forces lower prices to stay competitive, while low competition allows price increases due to flexibility.

How do Market Segments influence Pricing Strategies?

Businesses consider income levels in market segments, offering discounts (e.g., student discounts) or different product versions for varied incomes or preferences.

How does the Product Life Cycle influence Pricing Strategies?

The product’s stage in the cycle determines whether to lower prices to maintain maturity or add value to sustain it.

What is a mass-market product?

A mass-market product is a similar product sold at low prices and made more cheaply.

How may business ethics impact the environment?

Using non-renewable materials increases pollution and carbon footprint; poor ethics can lead to stakeholder withdrawal and reduced sales.

What are First Movers?

First movers are people willing to buy a product at full price on release, charged higher prices initially (e.g., smart TVs or Apple products), which later decrease.

What is Promotion?

Promotion is how a business communicates its products or services.

Why does a business promote?

A business promotes to inform consumers about new products/services, persuade them to buy, remind them of benefits, and ultimately increase sales.

What are the 5 Promotion strategies?

The five promotion strategies are advertising, sponsorships, product trials, special offers, and branding.

What is Advertising?

Advertising is a paid message using emotive language to influence consumer purchases (e.g., "Buy now before it’s too late").

What are the types of media for Advertising?

Types of media include TV, radio, print (newspapers, leaflets), social media, websites, and billboards/posters (e.g., on trains or buses).

What are Sponsorships?

Sponsorships involve providing financial support or free products for events, venues, or experiences, targeting specific groups with prominent business/product display in return.

What are Product Trials?

Product trials offer free or reduced-cost access to encourage consumers to try a product, increasing sale chances.

What can a Product Trial involve?

Product trials can involve free samples (e.g., food), free trials (e.g., streaming services), or trial offers (e.g., money-back guarantees).