A Level Business: Business and Its Environment — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Business and Its Environment revision notes

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Section A

1. State what each letter of PESTLE stands for. [3]

2. Explain the difference between the micro and macro environment. [2]

Section B

3. Explain how each of the following could affect a UK manufacturer exporting to Europe: a rise in the exchange rate, a rise in inflation, new environmental regulation. [9]

4. Explain two benefits and two costs to a business of adopting a corporate social responsibility policy. [8]

5. Explain what is meant by stakeholder mapping, and how a business should manage a stakeholder with high power and high interest compared with one of low power and low interest. [6]

6. Evaluate the extent to which a business can control its external environment. [12]

Section C

7. State three qualities or skills that make entrepreneurial success more likely, and explain why each matters. [6]

8. Explain how a business’s objectives typically change as it develops from a start-up to an established firm. [6]

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Answers

1. Political, Economic, Social, Technological, Legal, Environmental [3 — 1 mark per two correct].

2. The micro environment consists of factors close to the business that it can influence, such as customers, suppliers, competitors and employees [1]. The macro environment consists of wider factors it cannot control, such as interest rates, legislation and demographic change [1].

3. Rise in the exchange rate — the firm’s goods become more expensive in euros, so European demand falls and sales revenue declines [1]; imported raw materials become cheaper, partly offsetting this by lowering costs [1]; the firm may have to cut its margin to hold its price in the export market [1]. Rise in inflation — input and wage costs rise, squeezing margins unless prices are increased [1]; if UK inflation is higher than in the destination market, the firm becomes less price-competitive over time [1]; interest rates may be raised in response, increasing borrowing costs and dampening domestic demand [1]. New environmental regulation — the firm may face compliance costs such as new equipment or waste treatment, raising fixed costs [1]; it may need to redesign products or processes, requiring investment [1]; however it can also create a marketing advantage and open access to environmentally regulated markets if the firm complies early [1].

4. Benefits: CSR enhances brand reputation and differentiates the business, attracting customers who care about how products are made and supporting a price premium [1] [1]. It improves recruitment, motivation and retention of staff, cutting the cost of turnover and raising productivity [1] [1]. Costs: CSR raises direct costs — fair-trade sourcing, higher wages, recycled packaging — which either reduces margin or raises price [1] [1]. It constrains decision-making: the business may be unable to relocate to a cheaper supplier or close a loss-making site without reputational damage, reducing flexibility [1] [1].

5. Stakeholder mapping plots stakeholders on a grid of their power to affect the business against their level of interest in it [1] [1]. A stakeholder with high power and high interest — for example a major institutional shareholder — must be managed closely: consulted before major decisions and kept fully informed, because they can block or force change [1] [1]. A stakeholder with low power and low interest requires only minimal effort — general monitoring [1], with information provided through routine channels rather than active engagement [1].

6. Arguments that a business has little control: macro factors such as interest rates, exchange rates, recessions and demographic change are determined outside the firm [1]; legislation is imposed by government and must simply be complied with [1]; even very large firms are price takers in commodity and currency markets [1]. Arguments that a business has some control: it can influence rather than control — large firms lobby government and shape regulation in their favour [1]; it can shape consumer tastes through advertising and product innovation rather than merely responding to them [1]; it can reduce its exposure: hedging currency risk with forward contracts, diversifying markets so no single economy dominates, and holding cash reserves to survive downturns [1] [1]; a technologically dominant firm can create the market it then operates in [1]. Judgement: a business cannot control the external environment, but it can substantially control its exposure to it [1]. The extent of influence depends on the firm’s size and market power, and on which factor is in question [1] — a multinational can meaningfully influence regulation and consumer taste, while a small firm can realistically only forecast, hedge and adapt [1] [1].

7. Any three, 2 marks each: opportunity recognition — spotting a gap in the market or an unmet need before others do is the starting point for any viable business idea [1] [1]; the ability to secure and manage finance — without adequate funding and disciplined cash-flow control, a business cannot survive its early, most vulnerable period [1] [1]; resilience in the face of setbacks — early rejection and failure are common, and the entrepreneur must adapt and continue rather than give up at the first difficulty [1] [1]; the capacity to plan and adapt the business idea as circumstances change — markets shift, and an idea that cannot evolve with them is unlikely to survive [1] [1].

8. A new business typically prioritises survival, since cash flow and building an initial customer base are the most immediate threats to its continuation [1] [1]. An established, profitable business can instead prioritise growth, profit maximisation, or increasing market share, since survival is no longer the immediate concern [1] [1]. Some businesses, particularly those under strong stakeholder pressure or led by founders with strong values, adopt objectives centred on social or environmental responsibility, even at some cost to short-term profit [1] [1].

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Where marks are usually lost

• Listing PESTLE factors without applying them to the business in the question.
• Giving only the costs or only the benefits of CSR.
• Describing stakeholder mapping without saying how each group is managed.
• Answering “can a business control its environment” as a yes/no rather than by degree.