A Level Business: What is Business — 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: What is Business revision notes

---

Section A

1. Distinguish between a mission statement, a corporate objective and a functional objective. [3]

2. State the elements of SMART objectives. [2]

Section B

3. Explain three reasons why a business’s objectives might change over time. [6]

4. Distinguish between the shareholder and stakeholder approaches to business objectives, and explain one argument for each. [8]

5. Explain three roles of an entrepreneur in starting a business, and two reasons why many start-ups fail. [10]

6. Evaluate whether pursuing growth is always in the interests of a business’s shareholders. [12]

Section C

7. Explain what is meant by “divorce of ownership from control” in a public limited company, and state one way this problem can be reduced. [3]

8. A firm sells a good with inelastic demand. Explain, referring to price elasticity of demand, whether a price rise would increase its total revenue. [3]

9. During an economic downturn, sales of a discount retailer rise while sales of a luxury retailer fall. Explain this using income elasticity of demand. [4]

10. Explain two effects a rise in interest rates could have on a business. [4]

---

Answers

1. A mission statement sets out the business’s overall purpose and values in qualitative terms [1]. A corporate objective is a specific, measurable, medium-term goal for the whole organisation, such as a 10% rise in market share [1]. A functional objective is a departmental target that supports the corporate objective, such as marketing achieving 15% brand awareness growth [1].

2. Specific, Measurable, Achievable, Realistic (or Relevant), Time-bound [2 — 1 mark for three correct].

3. Any three, 2 marks each: the stage of the business’s life cycle changes — survival matters most at the start, growth and then profit later [1] [1]; the state of the economy — in a recession a business may switch from growth to cash-flow protection [1] [1]; a change in ownership or leadership brings different priorities, for example a new CEO focusing on shareholder returns [1] [1]; competitor or technological change may force a shift into new markets or products [1] [1].

4. The shareholder approach holds that the business’s purpose is to maximise returns to its owners, since they bear the risk and own the company [1] [1]. The stakeholder approach holds that the business should balance the interests of all groups affected by it — employees, customers, suppliers, the community — not just the owners [1] [1]. Argument for shareholder: shareholders bear the residual risk and have supplied the capital, so directors have a legal and moral duty to act in their interests; without returns, capital will not be supplied at all [1] [1]. Argument for stakeholder: satisfying employees and customers builds the loyalty and reputation on which long-term profits depend [1], so the two approaches converge over a long enough horizon and ignoring stakeholders creates regulatory and reputational risk [1].

5. Roles: the entrepreneur identifies the market opportunity or gap and develops the idea into a viable proposition [1] [1]; they provide or raise the capital and bear the financial risk personally [1] [1]; they organise the other factors of production and make the key decisions on product, price and staffing [1] [1]. Reasons for failure: poor cash flow management — even a profitable business fails if it cannot pay its bills when they fall due, often because customers pay late [1] [1]; inadequate market research — the entrepreneur overestimates demand or misjudges the level of competition, so sales never reach the level the plan assumed [1] [1].

6. For growth: growth allows the business to exploit economies of scale, lowering unit costs and raising margins [1]; a larger market share brings greater bargaining power over suppliers and more pricing power [1]; growth generally raises revenue and, if margins hold, absolute profit and the share price [1]; it can also spread risk across more products and markets [1]. Against: growth is often financed by debt or new share issues, which raises gearing or dilutes existing shareholders’ stake and earnings per share [1]; diseconomies of scale — communication and coordination problems, weaker motivation — can raise unit costs and erode the very margins growth was meant to improve [1]; rapid growth frequently causes overtrading, where the business runs out of cash despite rising sales [1]; management attention may be diverted from the profitable core business [1]. Judgement: growth serves shareholders only when the return on the capital employed exceeds its cost [1]. It depends on how the growth is financed, whether the market is genuinely large enough, and whether management has the capability to run a larger organisation [1]. Profitable, well-financed growth into a related market is likely to benefit shareholders; debt-funded diversification into unfamiliar markets frequently destroys value [1] [1].

7. In a plc, shareholders own the business but directors run it day to day [1], and their objectives can diverge — directors may pursue growth, status or job security, while shareholders want strong returns [1]. This can be reduced through share options or performance-related pay for directors, which realigns directors’ financial interests with shareholder returns [1].

8. Where demand is inelastic, a given percentage rise in price causes a smaller percentage fall in quantity demanded [1], so total revenue (price × quantity) rises [1], since the loss in volume is more than offset by the higher price per unit [1].

9. Inferior goods have negative income elasticity of demand — as incomes fall in a downturn, demand for them actually rises, which explains the discount retailer’s growth [2]. Luxury goods have high positive income elasticity — demand is highly sensitive to income, so it falls sharply when incomes fall or consumers feel less confident, explaining the luxury retailer’s decline [2].

10. Any two, 2 marks each: higher borrowing costs, discouraging investment and expansion funded by loans [1] [1]; reduced consumer spending, particularly on income-elastic, expensive items such as durables and housing, since disposable income falls once higher mortgage or loan repayments are met [1] [1]; a business holding variable-rate debt sees its own repayments rise directly, squeezing cash flow [1] [1].

---

Where marks are usually lost

• Confusing a mission statement with a corporate objective.
• Listing stakeholders instead of explaining the two approaches.
• Describing growth’s benefits without addressing how it is financed.
• Not reaching a conditional judgement in a 12-mark evaluation.