Marked Practice Exam [61 out of 74, 82%, ‘A’-grade, 2001]

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Marked Practice Exam [61 out of 74, 82%, ‘A’ grade]

{Essay CONTENTS: ‘Ltd’ definition; ‘exchange rate’ definition; business effects of fall in interest rates; staff and shareholders’ differing perceptions of redundancy decisions; example of a ‘SWOT’ [Strengths, Weaknesses, Opportunities, Threats] analysis; factors to consider before expanding into new markets and exporting to foreign shores; business effects of economic upturn.}

1.a.) “Ltd” is a term which refers to a private limited company. This is a company which can have up to 50 shareholders only, all of whom must have a vested interest in the business – for example, employees. ‘Ltds’ are often family run businesses, such as J&M Taylor.[^]

1.b.) “Exchange rate” is a measurement of the value of one currency against another. For example, the GB£ is usually worth about US$1.5. This has implications for businesses, as when the £ is high, export markets cannot be fully exploited because the equivalent price in another country will be higher than the products already available there.[^]

2.) Two ways in which a fall in interest rates can affect a business are concerning the capital investment plans and loan repayments. With reference to the case study, interest rates were being reduced in response to appeals from businesses, and the exchange rate was being pushed up too. Businesses couldn’t invest at such inflated rates of interest.

In analysis, reduced interest rates mean that banks do not have to pay so much interest on loan repayments. This makes the prospect of taking out a loan more likely, thus freeing up cash for capital investment, which can help the business run more smoothly. Reduced loan repayments also frees up more working capital for a business, as less money is being used to pay off expenses, and more can be spent on reinvestment.

In evaluation, reduced interest rates means less money is going out of the business through loan repayments. Therefore, survival chances are improved as more money can be used to meet expenses. Willingness to invest capital in the business improves the growth chances as expansion can be made, and long-term profitability should be ensured through smooth, effective business implementation.[^]

3.) Two groups of stakeholders who will react differently to redundancy decisions are the staff themselves and the shareholders. With reference to the case study, the fast food sector was feeling the effects of rising levels of unemployment; Robert had reported a 10% drop in customers.

In analysis, staff may become de-motivated through redundancy threats, and the sight of their fellow employees being chopped. This will decrease their productivity, therefore having a negative company effect.

Shareholders will see the decision to cut back as either justified or unjustified in line with the economic climate. If they feel the correct decision has been made, they are likely to re-elect the manager of the business at the AGM; if not, they may do the opposite or sell their shares.

In evaluation, poor productivity leads to poorer company performance in terms of meeting consumer demand, impacting negatively on the business in terms of profit. Customers may move to different, rival brands, decreasing long-term survival chances – they will not achieve their implicit long-term aim if this happens. Poor shareholder confidence will make the manager unlikely to retain his job, or – if it’s a Plc – shares could be sold and a takeover could occur; thus, the company will not have survived – it will be somebody else’s property.[^]

4.a.) A ‘SWOT’ analysis of the business could take the form of:

SWOT ANALYSIS

  • STRENGTHS:
  • Good reputation, built up over 20 years
  • Supply to a fast food market which will always be there, to a lesser or greater extent
  • Wide customer base
  • A good reputation should mean good customer loyalty, which increases survival chances
  • WEAKNESSES:
  • Few employees ~ might not be able to produce enough to meet demand
  • Only one market ~ rival competition, and a decrease in demand, could put company under pressure
  • If the company cannot produce enough to meet demand, customers will go elsewhere ~ this will obviously damage the long term profitability of the company, and damage its survival chances as sales revenue will be proportionately less to income
  • OPPORTUNITIES:
  • Expand into new markets ~ taking their successful brand image into new markets could prove to be profitable, as customers already know the brand and feel comfortable with the product quality
  • Exporting into new countries ~ by exploiting gaps in foreign markets, they could increase customer base, and improve revenue
  • THREATS:
  • Interest Rates ~ cannot afford to invest if they are too high, and any existing repayments will increase
  • Competition ~ increased competition could lead to a decreased market share, and therefore less profits [^]

4.b.) By looking at my ‘SWOT’ analysis, I will look at the options of expanding into new markets and exporting into foreign shores.

In relation to the case study, Mary suggested they should “concentrate” on the existing business, but export the “products they make and supply”. Joanne suggested entering the “organic food” market.

In analysis, the expansion into the organic market could have many benefits. Their hard-earned, long-established ‘reputation’ could be carried over into the new market – this has implications as customers know and feel happy with the brand, and are more likely to trust and buy it.

However, in exporting to foreign shores, they face problems with cultural boundaries {the locals not taking kindly to English market invasion}, which could mean the business doesn’t start up successfully, as they have difficulty persuading customers to buy their product over somebody else’s.

In evaluation, the expansion into the organic market – an area of the market where there is little existing competition – would increase their consumer base. More consumers should generate higher profit margins, further aiding the company’s growth and expansion, as profits can be re-invested in this area. Long-term survival should be assured with higher revenue, profits, and market leadership.

The venture into foreign climates involves a high risk factor, with resistance from locals potentially resulting in the company’s failure to generate adequate revenue to cover the costs. This means that growth will be limited, as insufficient turnover will not allow investment into expansion. Long-term implicit survival targets may fail because debts become higher than revenue – they have no money to pay the bills.

Therefore, my justified recommendation would be to enter the organic produce market.[^]

5.) A future upturn in the business cycle can be evaluated in terms of capital investment and expansion for J&M Taylor Ltd. Joanne was trying to persuade the family to set up a new business, forecasting a future upturn in the economy, with relevance to the case study.

In analysis, a future upturn in the cycle would generate more money for the company because customers start to spend more once redundancy fears are surmounted. This extra money could be used for capital investment – this is an opportunity for the company as new machinery and better working processes – if effectively implemented – could increase productivity, leaving them better equipped to meet demand. Alternatively, a more stable economy could be the reason for expanding into new markets; as more money is in the business cycle, the element of risk would be reduced as customers are spending more freely.

In evaluation, higher productivity would lead to increased customer satisfaction, as products are supplied consistently and at a high level of quality. This is likely to increase customer retention, increasing profitability as they spend regularly on a company’s goods. High levels of loyalty should lead to increased survival chances, as customers stick with the company. Better customer spending, and capital investment allow the potential for growth within one market – and expansion into new markets – to be maximised. Therefore, J&M Taylor Ltd could expand safely into the organic market – increasing their customer base – and implement better technology and working practices as a result of a future upturn in the business cycle.[^]

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34-year-old father of three wonderful children [William, Seth, and Alyssa]. Works as an Assistant Technical Officer in the Sterile Services Department of Treliske Hospital, Cornwall. Enjoys jogging, web design, being a bit of a geek, and supporting Arsenal FC. Obtained a BA degree in English from the University of Bolton in 2008, and has continued to gain qualifications in a diverse range of subjects thereafter.

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Posted in AS Level Business Studies [A1]

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