Understanding business activity

Student's Book Chapters 1-5

1 Business activity
Farah opened her business, Farah's Salon (FS) just after leaving school. She offers hairdressing and beauty
services for women. She employs three workers who have quite different skills. One is a hair stylist, one is
a beauty specialist and the other is a receptionist. This means that Farah is able to offer a very wide range
of beauty and hairdressing services very efficiently. Shampoos, hair sprays and many other beauty products
are bought in from several suppliers. Farah's business is now very busy. Farah is planning to use some of
FS's capital to buy a computer to keep customer records of treatments they have received and to allow an
accurate record of appointments to be kept. However, she is worried about the opportunity cost of this.
Farah is keen to increase the added value of her business. She has not yet decided on how to achieve
this but she thinks that buying cheaper shampoos and other beauty products is probably the best way.
Farah needs to recruit another employee. She has to choose between one applicant who is an
experienced and specialist hair stylist but who has no other beauty experience and the other applicant
who has some experience of both hair and beauty but is not a specialist in either.
1 a Identify two different factors of production used by Farah. {2 marks]
Labour

Capital

b Define 'opportunity cost'. {2 marks]

the next best alternative GIVEN UP by choosing another item.

2 kn
2 APP c Outline two ways in which specialisation of its employees could benefit FS. {4 marks]
(CASE) Benefit 1: Better quality (1kn)

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Explain: Less mistakes will be done when offering hair styling and beauty services
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Benefit 2: Saves time
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Explain: given that the salon is very busy, specialist workers will be able to be more productive due
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to their high skills.
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 1 Business activity

d Explain two examples of how the business activities undertaken by FS benefit the
local economy. [6 marks]

e Do you think buying cheaper raw materials is the best way for a business to increase
added value? Justify your answer. {6 marks]
Although buying cheaper raw materials will reduce the cost of material

so if price remains constant, added value will increase. (ADV)

However, cheaper raw materials could result in compromising the

quality of service provided which can cause customer disappointment.

(DISADV)

Business could consider increasing the price (alternative) which will

allow not compromising quality but only if customers are going to afford

paying the high price.

I think that the business should buy cheaper raw materials IF they operate

in a competitive market, or deal with price sensitive consumers to ensure

that price is not affected and sales take place.

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1 UNDERSTANDING BUSINESS ACTIVITY

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2 a Define 'capital'.
[2 marks]
finance and machinery required for production of goods or services.
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b Identify two pieces of equipment or furniture that Farah could purchase if she did
not buy the computer. {2 marks]
hairdryers
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hairdresser chairs
c Outline two ways in which the economic problem affects FS. [4 marks]
Scarcity of capital - if she buys the computer, she will have to give

up buying new hairdressers' chairs

Scarcity of finance - if she recruits the specialist hairdresser she will

not be able to afford to recruit a beauty specialist

d Do you think a business should employ specialist workers who are experts in just one skill
or workers with several skills but who are not experts in any task? Justify your answer. {6 marks]
Although hiring a specialist would ensure high quality and low mistakes

as the specialist has high skills due to repetition of same tasks.

However, the non specialist would be able to provide more variety of

services which could cater for more number of customers.

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The specialist would be the best option if the customers are expecting

high quality, as this would ensure customer satisfaction, but if the

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customers are expecting variety of services, then the business
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could opt for hiring non specialist workers ················································
to ensure higher sales. ····················
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In the short term, non specialists might make mistakes due to less skills,
yet in the long term, they would be able to gain skills and at the same
time offer variety of services - thus making them a better option.

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 Service
2ry

improved living standards

bus owned by gov

businesses providing services to final consumers

Electricity/ internet providers/ banking services/ insurance services

transportation
2kn + 2app

1. shampoo/beauty products manufacturers which will be needed to provide the hairstyling

service

2. furniture manufacturers - provide specialist hairdressing chairs.

1 UNDERSTANDING BUSINESS ACTIVITY

d Explain two likely reasons why the relative importance of the secondary sector in
country X has declined. {6 marks]

Reason 1: country x industralised 100 years ago (app)

Explanation: this means that the secondary sector might not be up to date anymore, with the latest

skills and equipment so they lost their competitiveness to newly industralized countires that are more

efficient and cheap.

Reason 2: average incomes have increased in country x (app)

Explanation: as a result of that living standards have increased and thus there is more demand

on the service sector as now people can afford buying more services - so more business open in
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tertiary sector not secondary sector.

e Do you think that a service sector business would benefit from the government policy
to expand the public sector of the economy? Justify your answer. {6 marks]

Although the expansion of public sector of the economy can help the service sector especially

if they are direct suppliers to them - this is because the services offered by the public sector

will be cheaper and hence could reduce the operating costs for private sector and maximize their

profits.

However, for the government to expand this policy they will need to increase tax rates to fund,

thus the profits re-invested in the private business might decrease as a result and the consumers

in this country might suffer from lower incomes which reduces demand.

I think it depends on the amount of increase in the tax rates as a result of this policy, in the short

term businesses might suffer but in the long term they would benefit from low expenses.

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 3 Enterprise, business growth and size

3 Enterprise, business growth and size

Farah is very ambitious and she wants to expand her business quickly. She works long hours and
her commitment as an entrepreneur is a good example to her employees. She likes taking important
decisions by herself. Her many ideas for expanding the business include offering a wider range of
services to male customers as well as female. FS now employs 10 workers. The average sized business in
hairdressing and beauty employs five workers. The total value of FS sales this year increased by 15 per
cent. Farah believes that FS has more advanced equipment - such as sunbeds and steam baths - than
local competitors.
Farah is considering both internal growth and external growth for FS. She could open a new hair and
beauty salon in another part of the city. She also knows about two other businesses for sale. Business
A is a men' s hairdressing salon that has been trading for many years. The owner is retiring and wants to
sell quickly. Business B is a specialist producer of hand-made organic cosmetics. FS uses some of these in
the salon and they are very popular. The owner is ill and no longer wants the stress of harvesting natural
products and meeting production deadlines. Farah wants to draw up a new Business Plan to help guide
her through the next expansion stage of FS.
1 a Define 'entrepreneur'. {2 marks]

A person that owns, operates and takes the risk of opening a new business

b Identify two important characteristics that allow Farah to be a successful entrepreneur. {2 marks]

hard worker

committed

c Outline two ways the size of FS could be compared to similar businesses. {4 marks]

way 1: valye of capital emploted

explanation: FS has more advanced equipment such as sunbeds

way2 : number of emplyees

explanation: 10 employees while average sized has 5 - larger

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1 UNDERSTANDING BUSINESS ACTIVITY

d Explain two ways the Business Plan drawn up by Farah will help when she expands the
business. [6 marks]
2KN + 2APP + 2AN

1. Gives the "10" employees a sense of direction (kn) this is because it outlines the objectives and

makes the decision making more focused thus wasting less resources (an)

2. it helps in supporting loan applications (kn) as Farah needs to have large sums of funds to

buy the other hairdressers(app), thus the business plan will aid her in this process as they support/show

her planning ablility to lenders/allows lenders to trust that she will be able to repay. (an)

e Do you think internal growth or external growth should be used if a business is

to expand? Justify your answer. [6 marks]

Although internal growth might be a cheaper way to expand operations as it is dependent on

the firm's own resources, which can be suitable if the business does not have enough funds.

However, external growth can be a faster way as it is dependent on another firm's resources

so there are existing operations happening on a larger scale - business has access to existing

employees, machinery and raw material and probably existing expertise.

I think the use of external growth even though expensive in the short term due to the speedy process

but it is also faster in covering its costs in the long term and can be more profitable. So if the business

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 3 Enterprise, business growth and size
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·,

2 a Define 'Business Plan'. {2 marks]

document that outlines business objectives and details regarding all business funtions

such as marketing, HR, finance and operations

b Identify two reasons why Farah decided to become an entrepreneur. {2 marks]

she wants to be her own boss/ to be independent

she wants to put her own ideas into practice

c Outline two possible business problems Farah might experience as she expands FS. [4 marks]

1. difficulty in management (kn) especially that Farah might be operating in another city (app)

2. difficulty in sourcing capital (kn) as if she buys another hairdresser this would be an

expensive method of expansion (app)

d Farah has decided to use external growth to expand FS. Do you think she should
buy out Business A or Business B? Justify your answer. {6 marks]

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1 UNDERSTANDING BUSINESS ACTIVITY

, Types of business organisation

Farah set up FS as a sole trader. She financed the start-up with her own savings and loans from parents
and her bank. As she is planning further growth for the business, she has been advised to take at least
one partner. Alternatively, she could convert the business to a private limited company in"hich the
shareholders would benefit from limited liability. A friend has some savings he has offered t� invest and
become a partner in FS. He has no business experience and is often on holiday. A business consultant
who advises Farah has suggested that his wife could become a partner in FS. He told Farah: 'She has
savings to invest, is an experienced business person and likes being in control:
FS has contracts with many suppliers. Electricity and water are supplied to FS by public corporations.
Furniture for the salon is supplied by a large private limited company. It is owned by a wealthy family
who converted their business into a public limited company three years ago. The family regretted its
decision because of the limitations of this form of business organisation.
Farah has been asked by a large national chain of beauty salons - called Spa Town - if she is interested
in buying its franchise. It would give FS national advertising coverage but Spa Town would insist on
changes to the way Farah operates her business. Farah has rejected this offer.
1 a Define 'sole trader'. [2 marks]

an unincorporated BUSINESS that is owned by ONE person

b Identify two drawbacks of being a sole trader. [2 marks]

unlimited liability

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no continuity

c Outline two advantages to Farah of remaining a sole trader. [4 marks]

Advantage 1: Farah has complete control over the business

Explain: she was independent and was able to reject the Spa Town offer with no conflicts

Advantage 2: Farah keeps all profits

Explain: this encourages farah as she feels rewarded for investing her savings.

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 Reason 1: Risk of losing control (1kn)

Explain: as the business will need to sell shares to the general public, which could result in

dilution of ownership - since Farah likes being in control of the hair salon; there is a risk of this

being lost.

Reason 2: It is expensive to convert to public limited company (1kn)

Explain: because the business will need to advertise its shares to the public to be able to sell them

and have extra funds. Since FS is a small sole trader (1app) business, there might not be enough capital

to finance this process.

Although converting to a partnership will allow the business to access more

capital as more partners will be investing in the business, thus allowing for more

expansion and benefiting from economies of scale. However, decision making

will be shared, which can result in conflicts that can slow down the decision

making process and reduce business efficiency.

I recommend converting to a partnership but formulating a partnership agreement

which partners can resort to when conflicts arise - this would ensure more capital

with a minimum chance of arguments happening.

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1 UNDERSTANDING BUSINESS ACTIVITY
.....
2 a Define 'limited liability'. [2 marks]

its when the liability of shareholders is limited to the initial amount invested and

does not extend to their personal belongings.

b Identify two features of public corporations. {2 marks]

do not have profit as an objective

Their objective is to provide affordable/ available services to everyone/ create jobs

c Outline two reasons why some owners of private limited companies do not want to
convert their business to a public limited company. [4 marks]

Reason 1: risk of losing control

Explain: in a public limited company shares are sold to the public, so there is risk of

dilution of ownership

Reason 2: expensive

Explain: it is expensive to sell shares to the public as they need to be advertised

which might not be affordable by the business.

d Do you think Farah should convert FS into a private limited company? Justify
your answer. {6 marks]

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 5 Business objectives and stakeholder objectives

5 Business objectives and stakeholder objectives

Farah's business objective has changed since she started FS several years ago. It is now a private limited
company which means that FS must keep the owners satisfied with a return on their investment.
FS now owns several salons in the capital city. Farah plans to completely redevelop one of these sites.
She wants to remove the existing building and construct a large apartment block in its place. The lower
level will contain a newly equipped beauty salon and a gymnasium. The gymnasium will allow FS to
enter the fitness market for the first time and will appeal to men and women. There will be many new job
opportunities. The redevelopment will take six months. Local residents are not happy about the plans.
Some FS customers think that prices will be higher to make sure a profit is made. Farah told some senior
managers: 'All stakeholders willbenefit from the expansion of FS: Farah's plans for business growth will
be expensive and some shareholders are worried about the cost. They would prefer Farah to concentrate
on making the existing salons more profitable.
Recent increases in the costs of electricity and water are worrying Farah. The public corporations that
supply these utilities claim that the price rises are necessary to meet their objectives.
1 a Define 'shareholders'. {2 marks]

A person that buys a share in a limited company, this share represents part ownership

b Identify two objectives of shareholders. {2 marks]

profits

growth

c Outline four reasons why a business's objectives may change. [4 marks]

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 .........................................................................................................................
1 UNDERSTANDING BUSINESS ACTIVITY
..
d Explain two ways in which one stakeholder group, apart from employees, might be
affected by plans to redevelop one of the salons. {6 marks]
2kn
2an
2app One stakeholder group is the local community

Point 1: the redevelopment plan will cause disruption in the area where local residents live,

resulting in noise pollution and possibly traffic congestion for whole 6 months.

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Point 2: the redevelopment plans will create more jobs for people living nearby which can help

them improve their incomes while still working in a convenient location.

OR it will introduce a new service in the neighbourhood which is the gym, so the local residents

will have access to a conveniently located gym to improve their health.

e Do you think it is right for a business owner to say that 'all stakeholders will benefit
from the expansion of the business'? Justify your answer. {6 marks]
Although some stakeholders might benefit from expansion, such as owners, given that

expansion allows for accessing more customers and increasing profits. Also, customers

might benefit from having access to more variety of services or more convenient locations.

Yet, expansion can still increase costs especially in the initial part of the process, this will

disappoint owners especially that it could affect their profits in the short term. Customers

could also suffer from increased prices to cover expansion costs.

Thus, I believe that expansion will not benefit all stakeholders at least in the SHORT TERM

but in the long term, especially with benefiting from economies of scale, business could be able

to satisfy all stakeholders due to lower average costs.

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5 Business objectives and stakeholder objectives

2 a Define 'business objective'. {2 marks]

a target set by a business to achieve within a certain time period

b Identify two objectives of public corporations. {2 marks]

providing jobs

providing available/affordable products

c Outline two likely objectives Farah set for FS when it was first established. {4 marks]

Objective 1: Survival

Explain: to ensure that costs invested in opening the HAIR SALON are covered

and business was not forced out of the market

Objective 2: Profits

Explain: to act as funds for the opening the other branches in the city.

d Do you think that the objectives of customers will always conflict with the objectives
of shareholders? Justify your answer. {6 marks]

Although in some cases, customers and shareholders might have conflicting objectives

this is because customers usually want affordable prices and high quality which can

reduce profit per unit for shareholders. However, if customers are satisfied this would

mean they would return back again for future purchases, thus in the long term, profits

should be sustained hence satisfying shareholders. I think the objectives should not

conflict especially if the business operates in a competitive market, as in this case,

shareholders should put customer satisfaction first to be able to maintain loyalty

and hence their competitiveness in the market - allowing for sustained profits.

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