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business studies

bs1001 business success ncea level 1

2011/2


business studies ncea level 1

Expected time to complete work This work will take you about 10 hours to complete. You will work towards the following standard: Achievement Standard 1.1 AS90837 Demonstrate an understanding of internal features of a small business Level 1, External 4 credits In this booklet you will focus on these learning outcomes: •• explaining business success and entrepreneurship •• explaining business objectives •• recognising methods of market research •• explaining different types of businesses. All the work for this standard is in this booklet and in BS1002.

Copyright © 2010 Board of Trustees of Te Aho o Te Kura Pounamu, Private Bag 39992, Wellington Mail Centre, Lower Hutt 5045, New Zealand. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the written permission of Te Aho o Te Kura Pounamu.

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contents 1

Business success

2 Entrepreneurship 3

Risk taking

4

Business objectives

5

Market research

6

Sole traders

7 Partnerships 8 Companies 9

Teacher-marked assessment

10 Answer guide

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how to do the work When you see:

1A

Complete the activity.

Check your answers.

Your teacher will assess this work.

You will need: •• a pen, pencil and ruler •• a calculator. Resource overview Each lesson should take about one hour. Write your answers to the self-marked activities in the spaces provided. At the end of each lesson, mark your practice work using the answer guide. The answers give you essential feedback. Use them to help you learn. Always: •• ensure you have attempted all activities on your own before referring to the answer guide •• check your answers carefully after you finish each activity •• add any corrections or amendments in a different colour •• try to work out why any of your answers are wrong •• study any reasons given for an answer. Phone or email your teacher if you would like to discuss your work. When you have finished the booklet, complete the teacher-marked work and send the booklet back to your teacher. It will be returned to you after it is marked. Use the glossary at the end of the booklet to revise key terms.

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business success learning outcome Explain business success and entrepreneurship.

learning intentions You will be able to: •• describe the nature of business success •• recognise the importance of business in economic terms.

introduction What is the study of business? Business is about how individuals and groups of people organise, plan and act to create and develop goods and services to satisfy customers. Businesses employ people to produce these goods and services and this helps the economy to work and grow. New Zealand has a market economy that is based on private business enterprises – large and small – that compete with each other to sell their goods and services to you, the consumer. Private businesses employ 85% of New Zealand’s workforce (the remaining 15% work for the government or local councils). Businesses are therefore responsible for most of the economic activity in the country.

business success

What do we mean by business success? In the first instance, it is being profitable and earning a living for the business's owners. This business studies course will look at how individual business enterprises can be successful. But we first need to look at the wider role business plays in a country such as New Zealand and how business activity is the cornerstone of our way of life and standard of living.

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business success

The economic role of business is usually the first thing we think of when we explore why business is important. But it is what we do with the wealth created by business that enables us to increase the quality of our life. The following diagram illustrates how the first step towards increasing our living standards starts with the business entrepreneur, who comes up with better ways of producing improved goods and services. 6. Choice: Through competition and trade, consumers have access to a wide range of goods and services.

5. Quality of life: Business enables the production of a huge range of goods and services that consumers buy to improve their standard of living.

4. Wealth creation: Business sales pay employees’ wages and profits allow for investment in new business opportunities, resulting in economic growth.

1. Entrepreneurship: Business provides the opportunity for individuals with ideas to develop them and gain rewards.

The roles and importance of business

2. Employment: Business provides 85% of employment opportunities in New Zealand.

3. Provider of goods and services: Business combines labour and other resources to produce goods and services.

entrepreneurship Entrepreneurs are successful business operators who are at the cutting edge of business activity in a market economy. Their innovative ideas for new products or marketing methods exert competitive pressure on other businesses. The resulting new or improved products at lower prices start off the cycle outlined above by creating the extra employment and wealth that increases the standard of living for consumers.

employment One of the most important roles business plays in society is the provision of employment. An organisation needs to be aware of the interdependence between its business and its greatest asset – its staff. Business organisations attract people into their employ by offering them things they value, such as good pay and work conditions, a career path, promotion and interesting work. 4

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business success

People work in a wide range of businesses, large and small, including primary production, manufacturing, retailing and service industries. When you walk down the main street of a city or town you may see many types of businesses. But there are many enterprises you may never see because the business owners may work from their home, on the road or in out of the way places.

provider of goods and services Business combines labour with resources and its productive capacity to produce the goods and services that everyone wants and needs. Competition and the desire for profit encourages individual businesses to produce these goods and services efficiently and of a quality and price that consumers want to buy.

business and wealth creation The wages and salaries paid to workers becomes income for businesses when people buy their goods and services. The profits that business organisations make from these sales enable them to invest in further ventures to produce more and better goods and services. The generation of profit is the primary role of business but, in doing so, business creates wealth that will eventually benefit everyone.

business and the quality of life

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The potential to create wealth through business encourages investment in new ways to produce improved goods and services. New ideas create labour-saving devices (such as washing machines and computers), which reduce the time needed to complete tasks, resulting in increased leisure time. When business finds more efficient ways to produce items at lower prices, we benefit by having more money to spend on other things. Such innovations enhance our quality of life.

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business success

business and choice Within a free market system, such as that in New Zealand, the choices of consumers and businesses determine the allocation of resources in the economy. As consumers we can choose what we buy and where. Businesses can choose what they produce and how. If consumers are unhappy with the quality or price of an item produced by one business, they may choose to buy from a competitor. This competition encourages businesses to choose ways of producing goods and services at the lowest possible price and the highest possible quality. In summary, the choice offered to consumers and businesses is at the centre of our economic system. It encourages profit-seeking business entrepreneurs to develop innovative ideas, to organise and to take risks to develop goods and services that consumers want to buy. 1A

exercise 1a 1. Describe how business makes a significant contribution to the New Zealand economy in terms of: a. employment

b. provision of goods and services

c. entrepreneurship

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business success

2. Explain how consumer choice affects our standard of living.

3. Bell Motors, a car manufacturer, wants to increase the quality and value of the cars it produces. The table below outlines the various roles undertaken by the business.

Match up the following statements with the business role to show how Bell Motors’ innovations for a new car will lead to wider benefits for consumers. a. The buyers of Bell Motors’ cars benefit by having a cheap car that uses less petrol. b. Bell Motors comes up with a new idea to reduce the use of petrol in its cars. c. The success of Bell Motors’ new cars forces other car manufacturers to increase the quality and value of their cars. d. Bell Motors hires workers to produce the cars. Business role

Bell Motors

Entrepreneurship

Business and employment

The provider of goods and services

Business and choice

Check your answers.

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entrepreneurship learning outcome Explain business success and entrepreneurship.

learning intentions You will be able to: •• outline the components of entrepreneurship •• explore innovation and new products and services.

introduction An entrepreneur is someone who assumes risk and responsibility in a business. Business entrepreneurs play a key role in encouraging economic growth and increasing the quality of life by bringing to the market new and improved products for consumers to buy. The innovations they develop and the competitive pressures they exert on other businesses put them at the cutting edge of business activity. Every successful economy needs its entrepreneurs and, as we will see, New Zealand has had its fair share of them. Three important aspects of being a successful business entrepreneur are:

1. Innovation The entrepreneur must first come up with an innovative idea for a new product or service or marketing method.

2. Risk taking The entrepreneur must be prepared to take risks with his time and money – some new ventures can succeed spectacularly, but many fail.

3. Organisation The successful entrepreneur must be an excellent organiser: having a realistic business plan and sufficient finance, organising the start-up and advertising the product or service.

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entrepreneurship

innovation

Over the years many New Zealand-based entrepreneurs have come up with innovations and ideas for successful business ventures. Here are some examples.

developing new products

The Hamilton jet boat: William Hamilton invented the jet boat in 1958, revolutionising river and shallow water transportation. The company he founded has gone on to become the world’s leading water-jet manufacturer. Cloudy Bay wines: This vineyard was established in 1985 and produced some of the first New Zealand wine to be widely exported. Its flagship sauvignon blanc, with its distinctive fruity style, has come to match and even surpass the classic French wines of this grape variety and has become a ‘cult’ wine around the world.

developing new services

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Bungy jumping: AJ Hackett pioneered this extreme sport when he opened a jumping site on the Kawarau bridge in Queenstown in 1988. His venture has helped make Central Otago into an international tourist destination and his success has seen him open up bungy sites in many other countries.

Whale Watch Kaikoura: From small beginnings in 1987, the four Māori ‘founding families’ have made this operation into an international tourist attraction, catering for more than 100,000 whale watchers annually. In 2009 it was awarded the top international prize for responsible tourism.

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entrepreneurship

developing new marketing methods

TradeMe: Sam Morgan launched his Internet auction website in 1999 and, after several years of dramatic growth, sold it to Fairfax Media in 2006 for $750 million. His new marketing concept has largely replaced classified advertising in newspapers because of the greater opportunities and convenience offered by online buying and selling. The Warehouse: Stephen Tindall started The Warehouse in 1982 with capital of just $40,000 and there are now over 120 branches. His concept of mass buying and selling in a one-stop shop has pioneered a new way of market retailing in New Zealand. 2A

exercise 2a 1. Select one of the above examples of entrepreneurs and, in two or three sentences in your own words, explain why you think people have been attracted to the new product or market they offer.

2. Think of a successful, innovative business. Name the business product, service or marketing method. Briefly describe what the business entrepreneur has done to make it successful.

Check your answers.

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entrepreneurship

developing improved products All of the above examples of entrepreneurship started from small beginnings and are based on new or niche goods and services and methods of marketing. But existing business enterprises need to constantly upgrade and modify their regular products if they are to maintain their competitive edge over their rivals. 2B

exercise 2b Each of the following products and services has been in use for many years, but producers are always looking at innovations to improve their use: •• mobile phone •• computer •• power tools •• fridge •• car •• public transport •• vacuum cleaner. Choose three of the above products or services and describe how innovation has improved their use (and therefore added to their value).

Check your answers.

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risk taking learning outcome Explain business success and entrepreneurship.

learning intention You will be able to: •• explore the concept of risk taking.

introduction Many new business ventures never get off the ground because potential entrepreneurs are not prepared to take the necessary risks with their time and money. They need to be cautious because the failure rate is high: in New Zealand more than two-thirds of new ventures are no longer operating three years later. Businesses can fail because the budding entrepreneur overestimates consumer demand for their product, service or marketing tool. This can happen when little or no market research is undertaken to test potential demand.

risk and reward

In business there is a positive relationship between risk and reward. In simple terms, the greater the risk taken by an entrepreneur, the greater the potential reward in terms of the profit they hope to make. There is no point taking on a risky venture if the expected rewards are not great. But, on the other hand, a high-risk venture also carries with it the possibility of running up spectacular losses.

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risk taking

a low-risk approach Many cautious entrepreneurs may choose to buy into existing businesses that are already well established. For example, they could take over a retail shop or a pizza outlet that has a proven customer base and is satisfactorily profitable. But compared to the amount of money they are putting into the venture the return may be comfortable rather than great.

a high-risk approach A business venture based on a new product or service or marketing method of inevitably carries with it a high degree of risk. People will be unfamiliar with what is being offered, and even the most extensive market research may not be able to test the likely consumer reaction. The highrisk entrepreneur must be prepared to heavily promote their product and to persevere with it despite initial setbacks. Promotion: The Warehouse made its breakthrough as a mass retailer by extensive advertising: ‘where everyone gets a bargain’. Other entrepreneurs may resort to publicity stunts. For example, William Hamilton made world headlines when he navigated his jet boat up the wild waters of the American Grand Canyon in a feat that no one thought was possible. AJ Hackett attracted international attention to bungy jumping by jumping off high buildings, bridges and helicopters around the world. Perseverance: Some entrepreneurs take the long-haul approach with their new business concept. They may start from small beginnings and gradually build as their idea gains attention. The risk for them may not be money but the personal time they are investing. Whale Watch Kaikoura is an example of this­- it started off with a single inflatable boat, building up to a fleet of six sizeable launches. 3A

exercise 3a 1. Bill Knox is a carpenter who enjoys working with wood. He invests his savings into setting up a business that builds houses, employing six workers. Explain, in terms of risk and lifestyle, why he may be happy if his business remains small rather than growing into a larger one.

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risk taking

2. Choose either Sam Morgan’s TradeMe or Stephen Tindall’s The Warehouse and in one or two paragraphs outline the risks either entrepreneur faced in the early stages of their ventures. If necessary, you can get more information about them on the internet.

Check your answers.

organisation

Even a perfectly marketable business venture may fail when the entrepreneur is unorganisedFor example, they may not have a realistic business plan, they might be under-capitalised, the business might be structurally weak or there might be insufficient marketing and advertising. A well-organised entrepreneur must ensure the following when setting up a new venture: •• For business start-up: capital items such as premises, equipment and vehicles may have to be purchased before any sales are made. •• For ongoing operations: there must be sufficient finance (working capital) to buy inventories, pay staff and cover other general running expenses. For strong organisational structure: •• Staff must be hired and properly organised. •• Business systems such as computers and internal and external communications must be put in place. For marketing and advertising plan is in place: •• A marketing plan based on market research, where appropriate, along with an advertising strategy, must be devised.

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There is a realistic business plan All of the above need to be incorporated in a business plan that sets out: •• the start-up plan •• longer-term objectives of the business.

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All of these organisational features will be looked at in greater depth later in the course.

3B

exercise 3b Whale Watch Kaikorua Whale Watch is an award-winning tourism company based in Kaikoura. It is owned and operated by the Kati Kuri people of Kaikoura. The company was started in 1987 to take visitors out from Kaikoura in boats to see giant sperm whales up close. Initially the company founders mortgaged their homes to purchase their boats for the whale watching business. The main risk was that watching whales would not catch on as something that people were prepared to pay money for. If it failed, the families could lose their homes. To manage this risk they began from a small initial outlay, buying just one small inflatable vessel. These days the company runs modern catamarans and attracts more than 100,000 visitors per year. The sperm whales are amongst the largest mammals in the world and visitors are very keen to see them up close. Whale watching has proved to be a successful venture for the company and for Kaikoura. The business has provided employment for local Māori and the ability to buy back ancestral land for the benefit of the indigenous people and their cultural identity.

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risk taking

And the business has benefited the wider community through the construction of an entire marina and by attracting more than 100,000 people to Kaikoura businesses annually. The significant increase in tourism to Kaikoura has also led to more local investment in businesses like restaurants and accommodation outlets. 1. Explain why you think watching sperm whales could be turned into a successful business venture.

2. Outline how the four ‘founding families’ started their business in 1987.

3. Explain what risks these families faced when starting up the venture and how they managed this risk.

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risk taking

4. Explain how the Whale Watch venture has provided benefits for local Māori and the wider Kaikoura community.

Check your answers. Case Study Part 1: Hine Smith’s ‘High Fashions’ The prescription of Achievement Standard 90837 requires that students may be required to apply their knowledge of business concepts on the basis of the activities of an actual small business (with fewer than 20 employees). You will asked to supply the name of the small business and may be questioned on the external factors that influence the activities of this business. A fictional business that is representative of small business activity in New Zealand is permitted. The name of the small business used in booklets BS1001 and BS1002 will be 'High Fashions'. Hine Smith has been employed for some years by a large general retailer of women’s clothing. She has built up an extensive understanding of the market—of the various clothing and fashion trends and of customers and what they are prepared to pay. However, Hine is an entrepreneur at heart and is keen to start her own business venture. She believes there is a niche in the market for ‘smart casual’ clothing for young women and men. She feels there is a high demand for such clothing because people in their early 20s have full social lives and are starting out on their working lives. And because they are earning incomes for the first time and are still mostly single, Hine believes they have the means to pay for trendy

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risk taking

‘smart casual’ clothing. 1. Hine’s entrepreneurial innovation is to exploit a niche in the clothing market for younger people. Explain this in your own words.

2. Explain whether you believe Hine’s venture is low-risk or high-risk.

Check your answers.

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business objectives learning outcome Explain business objectives.

learning intentions You will be able to: •• describe business objectives •• explore different types of objectives.

introduction The previous lesson stressed the importance of being well organised if a business enterprise is to be successful. The starting point for business owners is to be clear about their objectives or aims. The most common business objectives are: •• making a profit •• ensuring business survival •• expanding the business •• fostering community concerns. A business will focus on some objectives more than others, depending upon its circumstances.

profit

Profit is the return to the owners of the business, or their income. It is important because: •• without profit a business may be forced to close down •• profit can be used to help finance expansion of the business.

survival

Survival is the main objective of a business when: •• it is starting up •• the economy is in recession and consumers are spending less money •• another business selling similar product is set up in competition.

expansion

Gaining more sales and expanding the size of a business can be important for a number of reasons. For example: •• Obtaining a higher market share can increase profits for the owners. •• A larger business may have a better chance of survival because it may not be so reliant on a narrow range of products and markets. •• A larger business can benefit from economies of scale, because large-scale production can bring in cost savings (economies).

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business objectives

fostering community concerns

Some businesses promote community concerns and services as an important objective. This could include: •• providing jobs •• supporting community organisations •• providing for environmental concerns by eliminating waste and pollution or by using natural and free-range products. 4A

exercise 4a Here are some details of four businesses: •• A trucking business notices that another haulage business is starting up in the locality. •• An entrepreneur is starting up a business in the rapidly growing computer industry. •• A business selling hardware is the only shop selling these products in a town. •• A bakery wants to change its baking operations but not at the cost of laying off workers. 1. Explain what is likely to be the main objective of each of these businesses. 2. What decisions could be taken to help each business achieve their objective? Trucking business: 1.

2.

Computer entrepreneur: 1.

2.

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business objectives

Hardware business: 1.

2.

Bakery: 1.

2.

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business objectives

changing objectives

A business may change its objectives over time for the following reasons: •• The business may achieve an objective and need to move onto another one (for example, a new business that survives the start-up period may change to the objective of increasing profit). •• The competitive environment might change, with the launch of new products from competitors. •• A business that has aimed to maximise its profits may find that pollution from its operations is causing community concerns.

setting specific goals

Businesses may refine their objectives into specific and measurable goals. These include the day-to-day operational decisions that business owners must make to ensure profits are being made, or expansion targets are being met, or undue risks are not being taken. •• A business wanting to maximise its profits will set specific sales and production targets. •• A business concerned about its survival will set cash-flow goals to ensure its debts are paid on time. •• A company concerned with the local community may encourage its employees to take part in community events. 4B

exercise 4b Explain the specific goals or strategies the following businesses are likely to have. 1. A lawn-mower manufacturing business is under contract to deliver 100 machines by a certain date.

2. A gift shop wants to maximise its sales turnover in the pre-Christmas shopping rush.

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business objectives

3. An insurance business finds that getting its new employees to ‘learn on the job’ can be wasteful and wants to know what the alternatives are.

4. A profitable business wants to expand its operations but doesn’t want to finance this expansion from borrowing.

Check your answers.

mission statements

Sometimes a business will outline its key longer-term objectives in a written mission or vision statement. This can be used: •• to set out the philosophy of the business and the commitments it may make in the interests of employees, customers or environmental concerns. •• as a marketing tool based on promises about price and quality levels or guarantees. 4C

exercise 4c Here is the mission statement of The Warehouse: The Warehouse New Zealand: Vision and Values Our values The Warehouse New Zealand is a values-based business. Our key values are: Where people come first The culture of The Warehouse is unique and has been one of the key reasons behind the success of the company. Where everyone gets a bargain We are focused on ensuring that we provide great value products for our customers every day.

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business objectives

Where the environment matters The Warehouse has an extensive programme of environmental and social initiatives, which we feel are improving our community and our environment. View our Triple Bottom Line Report for more information about our most recent environmental and social activities. We aim to ensure that these values flow on to our stakeholders – our team members, customers, suppliers, shareholders and our community. 1. The Warehouse’s philosophy is based on the claim it is a values-based business. Explain what you think this means.

2. Do you agree with The Warehouse’s claim that ‘everyone gets a bargain’?

3. Do you believe The Warehouse’s mission statement is an effective marketing tool? Why?

Check your answers.

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business objectives

Case Study Part 2: Hine Smith’s ‘High Fashions’ Hine Smith is an entrepreneur at heart and is keen to start her own business venture. She believes there is a niche in the market for ‘smart casual’ clothing for young women and men. She feels there is a high demand for such clothing because people in their early 20s have full social lives and are starting out on their working lives. And because they are earning incomes for the first time and are still mostly single, Hine believes they have the means to pay for trendy ‘smart casual’ clothing. Before starting up the venture, Hine needs to be sure about her business objectives. 1. Outline the main objective she should follow in the first year.

2. Explain some specific goals she could set to implement this objective.

Check your answers.

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market research learning outcome Recognise methods of market research.

learning intentions You will be able to: •• describe the processes involved in market research •• explore different methods of market research.

introduction Market research is a key requirement in two different phases of a business enterprise. 1. When a new enterprise is starting up: •• We have seen in previous lessons that new entrepreneurs need to be confident that consumers want their product and are prepared to pay for it. •• Research on the potential demand for a product and the state of the competition is required to allow entrepreneurs to set their basic business objectives in the start-up phase. 2. For ongoing operations: An established business needs continuing research on the state of the market to set its marketing and advertising strategies. Therefore market research is needed by a business owner to find answers to questions such as: •• What do potential customers like and dislike about my product? •• What price would they pay? •• What type of customer would buy my product (for example, young or old people, men or women)? •• What type of marketing promotion would be effective with this type of customer? •• What is the competition like?

types of information Market research can yield:

•• Quantitative information, which gives data on the quantity of things; for example, ‘What percentage of households own laptops?’ or ‘How many men’s suits are sold each year in Wellington?’. •• Qualitative information, which gives details about people’s opinions and judgements; for example,‘Why do young people buy more mobile phones than older people?’ or ‘Why do people prefer one brand of a product compared to another?’. Both types of information can be gathered from: •• primary research – or field research •• secondary research – or desk research.

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market research

5A

exercise 5a 1. Katarina Telford is thinking about starting up a women’s clothing shop in a large town. Identify some of the factors she would need to research before taking the plunge.

2. The chocolate market is very competitive, but ABC Ltd believes there is a niche for a chocolate bar that is aimed at younger people. Identify some specific information ABC Ltd would want to research before going ahead with this project.

3. Describe the disadvantages of: a. Quantitative information

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market research

b. Qualitative information

Check your answers.

primary research

Primary research is the collection of original data from direct contact with potential or existing customers. This data can be collected from: •• questionnaires •• interviews and consumer groups •• experiments.

questionnaires Questionnaires are the most important form of primary research. They may be conducted face to face, online or by telephone or post. People are asked a series of questions about their opinions of a product. Advantage: •• A well-designed questionnaire can offer detailed qualitative and quantitative information about people’s reaction to a product. Disadvantages: •• Poorly thought-out questions can give misleading information (for example, people may like the product but may not buy it) and may not give the information required. •• Conducting a questionnaire and then analysing the results can be time-consuming and costly.

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market research

interviews and consumer groups People are questioned directly either, individually or in a focus group, about their opinions. Advantage: •• This is a more flexible way of gaining detailed information, as the interviewer can explain questions that are not understood and can follow up on answers. Disadvantages: •• There can be interviewer bias, with the interviewer leading people into answering in a certain way, resulting in misleading data. •• Conducting personal interviews can be even more costly and time consuming than questionnaires.

experiments or sampling People are asked to try out a product, particularly a new one, and to give their reaction; for example, consumers are asked to sample or taste a product in a supermarket. Advantage: •• It is an easy way to gather consumers’ first reactions to a product. Disadvantages: •• People may not show their real feeling, to avoid causing offence. •• The people asked may not be representative of the population.

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market research

5B

exercise 5b Some primary research is required on the following products. State which type of research would be the most appropriate for each and explain why. 1. The possible success of a new flavour of ice cream.

2. Whether to introduce a mobile phone with some new features.

3. Whether to extend an existing bus service into a new city suburb.

Check your answers.

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market research

secondary research

Secondary research, or field research, is the use of information that has already been collected for other purposes and is available for use in market research. The information may be from internal sources (from inside the business) or external sources.

internal sources of information This information originally collected inside a business for accounting and finance purposes and is readily and cheaply available for market research. For example: •• The Sales department holds detailed records of sales turnover; this data yields valuable information on which brands and product lines have been selling well and which haven’t. •• The Finance department collects data on the costs of manufacturing products. •• Customer comments and complaints about products can come from sales staff and the Customer Service department.

external sources of information Some information for market research purposes can come from outside the company. Some examples are: •• Government reports and statistics – demographic information about the population and its age structure and income levels can be useful when drawing up customer profiles. •• The media and the Internet – these carry news reports about the state of the economy and the effect on consumer spending patterns. •• Trade journals and market research agency reports – these may have more specialised reports on the state of a market or product line. Advantage of secondary research: •• It is cheap and readily accessible, with information that could not be obtained by primary research. Disadvantages of secondary research: •• The information can be too general, not always accurate, or may require much interpretation. •• It may be historical information that is out of date.

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marketing research

5C

exercise 5c Copy out the table below and fill in the boxes. Advantages and disadvantages of different types of market research Method

Examples

Primary research

Questionnaires

Advantages

Disadvantages

Examples appropriate use

Why the information may not be accurate

Interviews or focus groups

Experiments or sampling

Secondary research

Internal sources

External sources

Check your answers.

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market research

Case Study Part 3: Hine Smith’s ‘High Fashions’. Hine is keen to start her own business venture. She believes there is a niche in the market for ‘smart casual’ clothing for young women and men. She feels there is a high demand for such clothing because people in their early 20s have full social lives and are starting out on their working lives. And because they are earning incomes for the first time and are still mostly single, Hine believes they have the means to pay for trendy ‘smart casual’ clothing. Having set her overall business objectives, Hine wants to have some market research done to test her view that there is a profitable market for smart casual clothing. 1. Outline an external source of secondary information that could provide data on the potential size and income levels of the customer base Hine is aiming at.

2. Hine also wants data on the opinions of potential customers about what they want in their clothing. a. Suggest a way this information could be collected.

b. List some items of information that Hine would be keen to know.

Check your answers.

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sole traders learning outcome Explain different types of business.

learning intention You will be able to: •• describe the characteristics of a sole trader.

introduction A sole trader is a business owned by one person, who normally works in the business. Sometimes other workers may be employed, but the business is still called a sole trader because it is owned by one person.

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organisation and management

All businesses need to be organised and managed. In the case of a sole trader, the owner makes all the business decisions about the day to day and general running of the business. All the work is organised by the owner but may be carried out by employees. The owner takes all the risks and responsibilities for the success or failure of the business. They have an incentive to run the business as efficiently as possible, because they get all the profits or are responsible for losses.

unlimited liability

If a loss does occur and the business gets into financial difficulty, the owner is responsible for all the debts of the business. This is called unlimited liability and means they may have to sell their car or house to repay debts. Such a risk is a major disadvantage of being a sole trader. The sole trader is the most simple business organisation to set up or wind up because no legal documents are required. The sole trader owns all the assets of the business.

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finance of sole traders

A business needs to have money or finance to set up or expand. Such finance is called capital. In this sense, capital is money that is available to a business to buy capital goods. (This is not to be confused with the other economic term, capital – a factor of production.) The amount of capital a sole trader can raise depends on: •• money the owner has personally saved •• money the owner can borrow, usually from a bank or other financial institution but sometimes from family or friends. A single owner may find it difficult to raise capital, because finance is limited to whatever money the owner has or can borrow. In offering a loan the lender must be sure that the business will be successful enough to be able to pay the loan back.

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As the business grows, profit can be returned to the business as a source of finance. This is called retained profits.

examples of sole traders

Fran Bramley owns a fruit and vegetable shop. She employs a shop assistant and a person who goes to the markets to collect the fruit and vegetables. The business is a sole trader because it is owned by one person who provides the capital to set up the business, makes all the business decisions and takes all the risks. Examples of other sole traders are found in retailing and can include dairies, hairdressing salons and other small shops.

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sole traders

Case Study Part 4: Hine Smith’s ‘High Fashions’. Hine Smith has been employed for some years by a large general retailer of women’s clothing. She has built up an extensive understanding of the market – of the various clothing and fashion trends and of customers and what they are prepared to pay. However, Hine is an entrepreneur at heart and is keen to start her own business venture. She believes there is a niche in the market for ‘smart casual’ clothing for young women and men. She feels there is a high demand for such clothing because people in their early 20s have full social lives and are starting out on their working lives. And because they are earning incomes for the first time and are still mostly single, Hine believes they have the means to pay for trendy ‘smart casual’ clothing. Hine plans to rent suitable shop premises in the central city area of Wellington. She also intends to hire six to eight office and sales staff. But she must first decide on the type of business organisation she should have - a sole trader, a partnership or as a company. She looks at the possibility of being a sole trader. 1. a. How many owners would High Fashions have?

b. Who would make the management decisions?

c. Where would Hine get the finance to start up or expand the business?

2. Unlimited liability would be a major disadvantage for Hine Smith’s proposed venture. What does unlimited liability mean?

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3. Here is a list of factors Hine would need to consider when deciding whether her business should operate as a sole trader. Which features would be advantages and which would be disadvantages for her? a. The business would be easy to set up or wind up, because no legal formalities are required. b. Hine may find it difficult to raise capital. c. High Fashions has unlimited liability. d. Hine gets all the profits. e. Hine is responsible for all the losses. f. The decision making process is simple. 4. In view of your answers above and the scope of Hine’s venture (a shop in the centre city with six to eight staff), explain whether being a sole trader would suit her needs.

Check your answers.

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partnerships learning outcome Explain different types of business.

learning intention You will be able to: •• explore the nature of partnerships.

introduction Partnerships are usually owned by people in similar occupations who join together to form one business. A partnership may be owned by any number of partners between 2and 25 or, in special cases, up to 50.

organisation and management

Decisions about how a partnership will be organised and managed are made by the partners. The partners share all the work but each partner may bring a special expertise or talent to the business and be responsible for a different part of the business. As the business expands, employees may be hired to carry out duties as well.

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The partners share the risks and are held legally responsible for the behaviour of any one of the partnership’s members if that behaviour is carried out under the name of the partnership. For example, if one partner uses money from clients for personal use, then all the partners are held collectively responsible. The partners together own the assets and share all the profits, although not necessarily evenly.

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unlimited liability

A partnership has unlimited liability. This means that all the partners, together or individually, are responsible for the debts of the business and may have to sell personal assets to repay those debts. So one partner may end up being liable for the debts of the partnership.

finance of partnerships

All the partners contribute to the capital of the business. Sometimes an extra partner may join the business to bring in more money. A partnership may have a sleeping partner, who invests capital in the business and shares the profits, yet takes no part in the work or management of the business. The addition of partners means partnerships can have more access to capital than a sole trader, so the business is more likely to grow. Loans can also be raised from a bank or another financial institution. Like sole traders, partnerships can retain profits for later use.

examples of partnerships

An example of a partnership may be a group of doctors who set up a medical centre together. They may share one building and the services of receptionists and nurses. Other examples of partnerships are found in law, accountancy and real estate.

partnership agreement

When a partnership is being set up, the partners have certain responsibilities under the Partnership Act 1908. Their main responsibility is to sign a legal document called a partnership agreement. This is a legal agreement which sets out the rules of the partnership such as: •• how much money is to be contributed by each partner •• the salaries each partner is to receive •• how the profits are to be shared. If no partnership agreement has been made, the partners are subject to a set of rules outlined in the Partnership Act, which states that the profits are to be shared out equally among the partners.

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partnerships

7A

exercise 7a Match the terms in list A with the correct meaning from list B. List A

List B

1. sole trader

a. anything which is owed to others

2. liability 3. risk

b. money available to a business with which to purchase capital goods

4. sleeping partner

c. the legal agreement between partners

5. capital

d. a person who contributes capital but does not have any say in the management of the partnership

6. partnership 7. partnership agreement 8. Partnership Act

e. the rules that apply when there is no partnership agreement f. expose to chance or loss g. a business in which one person provides the capital and manages the business h. a business in which 2 to 25 people join together to carry on the business

Check your answers. Case Study Part 5: Hine Smith’s ‘High Fashions’. Hine is an entrepreneur at heart and is keen to start her own business venture. She believes there is a niche in the market for ‘smart casual’ clothing for young women and men. She feels there is a high demand for such clothing because people in their early 20s have full social lives and are starting out on their working lives. And because they are earning incomes for the first time and are still mostly single, Hine believes they have the means to pay for trendy ‘smart casual’ clothing. Hine plans to rent suitable shop premises in the central city area of Wellington. She also intends to hire six to eight office and sales staff. Hine has decided that being a sole trader would not be a suitable form of business organisation. She now considers whether to take on a friend, Jane Wright, as a partner. Jane has no experience in the clothing trade but she does have office skills, and she could nearly match Hine’s investment of capital in the partnership.

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1. Would the following features of the proposed partnership be an advantage or a disadvantage to Hine Smith? a. Hine and Jane can concentrate on their special expertise or talent. b. The two are legally responsible for each other’s business behaviour. c. Each can be responsible for a different part of the business. d. High Fashions would have unlimited liability. e. Either Hine or Jane can be liable for the unpaid debts of the partnership. f. As a partnership, High Fashions would have more access to capital than a sole trader. g. High Fashions would be more likely to grow bigger as a partnership than as a sole trader. 2. Hine believes the greater access to capital as a partnership could provide enough finance to buy the shop premises and start up business operations. But she's still concerned about the legal status of a partnership and the risk she might take. Explain this.

Check your answers.

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companies learning outcome Explain different types of business.

learning intentions You will be able to: •• describe companies and how they operate.

introduction A company is a group of people who have joined together in a business enterprise. It is the most common form of business ownership in New Zealand, where about 40% of all businesses are companies. A company can be set up and owned by one or more people. The owners of a company are called shareholders. There are large companies, such as Fletcher Challenge and Telecom, with hundreds of owners. But even a small business, with one or two owners such as a sole trader or a partnership, can become a company.

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forming a company

A company is formed by applying to the Registrar of Companies and completing all the requirements of the Companies Act 1993. The Registrar issues a Certificate of Incorporation if the application is approved.

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finance

Finance to set up or expand a company is referred to as capital. The capital of a company is divided into shares. Money can be raised by issuing shares. Shareholders purchase these shares and become the owners of the company. Anyone willing to invest in the company can buy shares, making it possible to raise significant amounts of capital. Other sources of finance could include loans from a bank or other financial institution and the issue of debentures. Debentures are a form of loan at a fixed interest for a fixed amount of time. Profits can be put back into the company as retained profits.

legal entity

A company is a legal entity in its own right, separate from the owners. This means the company can act like a person by owning property and entering into contractual agreements. The company continues to be a legal entity even if a shareholder dies or if shares are sold.

limited liability

The word ‘Limited’ in a company’s title (such as Ajax Holdings Limited) indicates it is a limited liability company. Limited liability is a major advantage of a company over other forms of business ownership such as sole trader and partnership. The owners’ personal assets are protected if the business falls into debt. That is, the owners are not required to contribute anything more to cover the debts of the business other than the value of the shares they have bought.

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Sometimes shares may be purchased but not fully paid for, and shareholders can be asked to pay the unpaid balance if the business fails.

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companies

company organisation and management

In a small company like a sole trader, the one owner is the shareholder, is also called the director, and will manage the business. In larger companies, some of the shareholders could form the board of directors to make overall policy decisions for the company. One of them could be the managing director, involved more directly in the running of the company. If the board is divided about a course of action to follow, the wishes of the directors who control a majority of the voting rights of the shares will be followed. In even larger companies, the shareholders elect a board of directors at the Annual General Meeting. The board then appoints a chief executive or general manager as the top employee to run the company’s daily operations. Depending on the size of the company, duties may be given to department managers who are responsible for specific areas such as production, accounts or marketing. This means companies can employ a greater range of expertise and managers can delegate jobs to other staff. The directors have to follow the rules and regulations for running a company in the Companies Act 1993. If they wish to alter the rules to suit the individual requirements of the company, they can draw up their own plan, called a constitution. The directors also have to present an annual financial report to shareholders.

directors’ responsibility

If directors are found to be negligent in their management, they can be held personally liable for the debts of the company.

distribution of profits

If a company makes a profit, the directors may propose that a dividend be paid out to the shareholders. The size of the dividend depends on the level of profits, and directors can recommend to retain part of the profit to spend on future expansion. Shareholders hope that the company will make a profit so they can get a return on the shares they own. It is similar to receiving interest paid on savings with a bank except that, if the company does not have money to distribute, dividends will not be paid.

listed companies

Listed companies are those that list with the stock exchange to raise money by issuing shares to the general public. A company becomes a listed company so it has access to greater amounts of finance. Only a small number of companies are listed, and they are usually larger ones such as Telecom, Fletcher Building and Lion Nathan.

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8A

exercise 8a 1. What are the owners of a company called?

2. Explain what is meant by a company being a legal entity in its own right.

3. Why is ‘limited liability’ a major advantage for a company compared to other forms of businesses? In your answer, explain the limit of the owner’s responsibility for meeting any debts of the company.

4. In a larger company, describe the role and responsibilities of the managing director compared to that of the chief executive.

5. How does profit influence the dividend paid to shareholders?

Check your answers.

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companies

Case Study Part 6: Hine Smith’s ‘High Fashions’ Hine is an entrepreneur at heart and is keen to start her own business venture. She believes there is a niche in the market for ‘smart casual’ clothing for young women and men. She feels there is a high demand for such clothing because people in their early 20s have full social lives and are starting out on their working lives. And because they are earning incomes for the first time and are still mostly single, Hine believes they have the means to pay for trendy ‘smart casual’ clothing. Hine Smith and her friend Jane Wright decide they will set up a company called ‘High Fashions Limited’ and will go ahead with the business, selling smart casual clothing. Hine will invest her savings of $100,000 as shares in the company and Jane will contribute $50,000 in shares. 1. The name of the company is High Fashions Limited. Explain the significance of ‘Limited’. 2. In the event of the company going into debt and failing, what would Hine’s liability be for any unpaid shares she owns?

3. Outline the procedure Hine and Jane will have to follow to form their company.

4. Hine owns more shares in the company than Jane. Explain what this could mean for the running of the business.

5. Imagine that the company earns a profit of $150,000 in its first year of operations and Hine and Jane decide to retain half of this in the company for future expansion. How much would each receive in dividends?

Check your answers.

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9

teacher-marked assessment This is the time to revise the main topics in this booklet before you attempt the assessment activity. You can: •• take as much time as you need •• make notes, highlight key points, have another go at the activities •• contact your teacher if you would like to discuss your work •• check the self-assessment table on the inside of the back cover and put a tick in the appropriate box after you have revised each lesson. Now attempt the teacher-marked assessment, which works towards Business Studies Achievement Standard 1.1 AS90837. The Achievement Criteria for this standard are: Achievement

Achievement with Merit

Achievement with Excellence

•• Demonstrate an understanding of internal features of a small business.

•• Demonstrate a detailed understanding of internal features of a small business.

•• Demonstrate a comprehensive understanding of internal features of a small business.

Achievement: to demonstrate an understanding would typically involve: •• defining, describing, identifying or outlining internal features •• stating relevant examples •• stating relevant business knowledge •• stating a Māori business concept(s) where relevant. Merit: to demonstrate a detailed understanding would typically involve: •• explaining internal features •• using relevant examples to support explanations •• including relevant business knowledge •• including a Māori business concept(s) where relevant. Excellence: to demonstrate a comprehensive understanding would typically involve: •• fully explaining internal features •• integrating relevant examples to fully support explanations •• integrating relevant business knowledge •• integrating a Māori business concept(s) where relevant.

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teacher-marked assessment

question one: business formation Use the information in the boxes and your business knowledge to complete the following tasks.

Robert is a mechanic. He was made redundant recently and used his redundancy payout to start up his own business. He has wanted to be his own boss for a long time, because he could then keep all the profit the business makes. John and Tui, two of his former workmates, are now working for him. Robert’s nephew, Billy, works, in the business as Tui’s apprentice. Robert’s wife, Hettie, works part-time as the accounts clerk assisting with financial record keeping.

1. Identify the legal entity that would be most suitable for Robert’s business.

2. Explain your answer to 1 by providing TWO reasons. a.

b.

3. State TWO possible disadvantages for Robert of using the legal entity you stated in 1. a.

b.

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teacher-marked assessment

Owning your own business requires energy, time, and commitment. 4. Discuss ONE issue that might arise for Robert OR the business, given that he is the only owner and boss. In your answer, you should: •• outline the issue that might arise AND provide an example •• explain a possible negative effect of the issue on Robert OR the business •• explain how Robert could prevent OR minimise the negative impact of the issue.

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teacher-marked assessment

question two: market research Use the information in the boxes and your business knowledge to complete the following tasks.

Business is slow for Robert. Hettie, the accounts clerk, thinks Robert should do some market research.

1. Outline TWO reasons why market research would be important for Robert’s business. a.

b.

2. Explain the main difference between primary and secondary market research.

3. Identify TWO examples of secondary market research that Robert could use. a.

b.

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teacher-marked assessment

Primary research can be used to identify what services potential customers would want.

4. Discuss ONE effective method of primary market research that Robert could use to bring new customers to the business. Select a method by placing a tick (√) in the table below. survey focus group interview questionnaire

In your answer, you should: •• describe the method of primary market research that you ticked AND provide an example •• explain the advantages the method would have for Robert’s business •• explain the disadvantages for Robert’s business of ONE of the other methods listed.

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teacher-marked assessment

question three: communication Use the information in the boxes and your business knowledge to complete the following tasks.

Communication is an essential part of the everyday operations of business.

1. State ONE reason why a manager would need to communicate with a worker.

2. Explain ONE advantage and ONE disadvantage of using a letter as a method of communication with a worker. Advantage:

Disadvantage:

3. State ONE stakeholder a business would need to communicate externally with.

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teacher-marked assessment

Good internal communication is important for operating a small business successfully.

4. Discuss the effect of internal communication on a named small business (fewer than twenty employees) you have studied. In your answer, you should: •• define the business term internal communication AND provide an example of how it would be used in the named business •• explain why good internal communication is important for the named business •• explain how poor communication could create a problem for the named business.

Name of the small business:

Your teacher will assess this work.

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teacher-marked assessment

what to do now Before you send in this booklet, check that you have: √∕X marked and corrected the self-marked practice activities completed the teacher-marked assessment filled in the self-assessment page at the back of the booklet filled in the cover sheet.

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answer guide How to use the answer guide. You will check your own answers except in assessed activities. The answers give you essential feedback. Use them well to help you learn. Always: •• check your answers carefully after you finish each exercise •• try to work out why any of your answers are wrong •• study any reasons given for the answer •• write any corrections on your work. Phone or email your teacher if you are having any difficulties.

1. Business success 1A

1.

a. Business provides about 85% of the employment opportunities in New Zealand. Business organisations attract people into their employment by offering them things they value, such as good pay and work conditions, a career path, promotion and interesting work. b. Businesses combine labour and other resources to produce goods and services that consumers want to buy. c. Businesses have innovative ideas for new or improved products and this can lead to employment and a better quality of life for consumers. 2. Consumers can choose what to buy and businesses can choose what to produce. Usually businesses will produce what they think consumers want to buy. Competition can mean that businesses will produce products that are well priced and of a high quality to attract consumers. 3. Business Role

Bell Motors

Entrepreneurship

b.

Business and employment

d.

The provider of goods and services

a.

Business and choice

c.

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answer guide

2. Entrepreneurship 2A

1. Your answer should indicate what new feature each product or service or market offered and why people were attracted to them. For example, The Warehouse’s concept of mass buying in a one-stop shop has meant lower prices and wider choices for consumers. 2. Your answer should name a successful, innovative business and a product, service or marketing method the business has developed. You need to briefly describe what the business entrepreneur has done to make it a successful, innovative business. For example, William Hamilton invented the Hamilton Jet Boat and revolutionised river and shallow water transportation. The company he founded has gone on to become the world’s leading water-jet manufacturer.

2B

There have been numerous innovations to the products and services mentioned, and the following are just some of them. •• Mobile phones: have got smaller and now include a wider range of telecommunication services. •• Computers: capacity has grown enormously, with Internet access and other services becoming much more efficient. •• Power tools: have become cheaper and more reliable with mass production. •• Fridge and family car: these products have become much more reliable over the last 20–30 years. •• Bus services: have become more extensive and reliable as the cost of private commuting has risen. •• Vacuum cleaner: has become more compact, efficient and reliable.

3. Risk taking 3A

1. Taking on larger property developments can entail much risk because of the high costs involved before any sales are possible. On the other hand, staying small and building just one house at a time maintains a steady and relatively risk-free cash flow. In terms of lifestyle, Bill Knox can continue to work with wood if his business remains small, whereas he would become more of an administrator if his business grew larger. 2. Sam Morgan’s TradeMe faced potential challenges from internationally based online businesses such as eBay, Yahoo and Amazon. eBay attempted to enter the New Zealand market in 2001 but did not understand local trading conditions and was unsuccessful. TradeMe also faced capital shortages in its earlier years. The main risk faced by The Warehouse in its early stages was the high cost of starting up – buying land, buildings, inventory, and advertising. Stephen Tindall managed much of this risk by buying cheaper land and buildings (often surplus ones) on the outskirts of towns and cities.

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3B

Whale Watch Kaikoura 1. Sperm whales attract attention because they are amongst the largest mammals in the world. These whales are attracted to the deep waters off Kaikoura by the squid they feed on and their regular presence in the area made the whale watch operation viable. 2. The four ‘founding families’ mortgaged their houses to secure a loan to start the business. 3. The main risk was that watching whales would not catch on as something that people were prepared to pay money for. If it failed the families could lose their homes. To manage this risk they began from a small initial outlay, buying just one small inflatable vessel. 4. The business has provided employment for local Maori and the ability to buy back ancestral land for the benefit of the indigenous people and their cultural identity. And the business has provided benefits for the wider community through the construction of an entire marina and by attracting more than 100,000 people to Kaikoura businesses annually. Case Study Part 1: Hine Smith’s ‘High Fashions’ 1. Hine believes there is a niche in the market for two reasons: •• there is a high demand from young people for smart casual clothing for work and social reasons. •• young people can afford to pay for this clothing. 2. It is low risk in the sense that everyone needs clothing, and general clothing retailers would usually fit in this category. But exploiting a niche market that requires you to pick particular fashions and trends among a small section of the population is likely to be risky.

4A

4. Business objectives

Trucking business: 1. Survival, as the trucking business is faced with competition from another haulage business. 2. The usual survival techniques are to keep prices competitive, increase advertising and offer additional services. Computer entrepreneur: 1. Growth: A growing industry provides opportunities for expansion. 2. Develop new and original products, emphasise quality and service. Hardware business: 1. Profit: As the only seller of hardware in town, the retailer can maintain high profit levels. 2. This retailer would attempt to keep potential competitors out of the local market by lowering prices if necessary.

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answer guide

Bakery: 1. Fostering community concerns by maintaining jobs. 2. The bakery would probably avoid buying labour-saving devices and would instead aim to produce high-quality products. 4B

1. The manufacturer will organise its labour and production processes to ensure that the 100 mowers are finished and ready for delivery by the required date. 2. The gift shop could organise its pricing and advertising strategies (for example, promoting sales) and by extending its hours of operations. 3. The insurance business may find that investing in ‘on the job’ training can save money. 4. This business would have the goal of setting aside part of its profits so that it can eventually finance the expansion of its operations.

4C

1. This refers to The Warehouse’s claims that ‘people come first’, that ‘everyone gets a bargain’ and that the environment matters. Whether these claims have any validity is a matter of personal opinion, but The Warehouse goes to some lengths to attend to customer complaints and provide money-back guarantees. 2. Again this is a matter of opinion, but the business model of The Warehouse is based on the concept of buying on a large scale so that selling prices can be kept down. 3. The basic points in the mission statement have been heavily advertised over the years, and the success and growth of The Warehouse indicate it has been an effective marketing tool. Case Study Part 2: Hine Smith’s ‘High Fashions’ 1. The first aim for a new business, particularly for a risky venture, is survival. 2. Specific goals to ensure survival could include promoting sales, to reach her potential customer, and making sure there is cash on hand to pay debts as they come due.

5A

5. Market research

1. Katarina Telford would need to research the state of the competition in the town. She would like to know about her potential customers – their age, incomes and tastes – so that an idea about preferred clothing styles and selling prices could emerge. 2. ABC Ltd would want quantitative information about the size of the age group it is targeting, and qualitative information from the targeted group on what they liked or disliked about the chocolate bar.

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answer guide

3. The disadvantages of quantitative as against qualitative information are the opposite of the advantages for each; for example, quantitative information cannot give data about people’s opinions and judgments, while qualitative information doesn’t provide accurate data about quantities and amounts. Both types of information usually need to be sought if market research – and marketing – is to be effective. 5B

1. Asking people to sample the ice cream (for example, in a supermarket) could be a quick and easy way of getting feedback about the new flavour. 2. A well-designed questionnaire on potential attitudes to the various new features of the proposed mobile phone and whether or not people would use these features could provide some useful qualitative data. 3. A focus group drawn from people living in the suburb (or a number of people interviewed individually) could be asked whether they would use the proposed bus service. The feedback from these interviews could provide further useful information.

5C

Advantages and disadvantages of different types of market research Method

Examples

Advantages

Disadvantages

Examples of appropriate use

Why the information may not be accurate

Primary research

Questionnaires

Can yield detailed qualitative data on people’s opinions.

Can be misleading and is costly.

Provide data on opinions about new products or what is liked about existing products.

Poorly thought-out questions can provide misleading data.

Interviews or focus groups

Direct interviews can yield more detailed information than questionnaires.

Are time consuming and expensive to conduct.

Especially useful when detailed data on opinions about products is sought.

There can be interviewer bias.

Experiments or sampling

Easy to set up and to gather consumers’ first reactions to products.

Data gathered may not be representative of the population.

Especially useful for testing food products.

People may not give their true feelings.

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answer guide

Secondary research

Internal sources

It is specific data, is readily available and cheap to collect.

Data can be out of date.

Useful when internal details on sales or production costs is required

Data can be out of date.

External sources

Data is quickly available and usually cheap to collect.

Data is usually collected for other purposes and may be inaccurate or too general.

Useful when general information about population, age, etc, are needed.

External data may be too general and out of date.

Case Study Part 3: Hine Smith’s ‘High Fashions’ 1. Government statistics could provide data on the number of people in the Wellington area in the 20 - 25 year age bracket and probably also their income levels. 2. a. A questionnaire or a panel interview of people in the targeted age range would be the most suitable way of collecting the data. b. Examples of information that could be useful include: –– styles and fashions that potential customers prefer in their smart casual clothes –– the rice they would pay –– the characteristics of these potential customers (apart from being young) –– the type of marketing promotion that would be effective with these customers.

6. Sole traders 6A

Case Study Part 4: Hine Smith’s ‘High Fashions’ 1. a. One owner. b. As the working owner, Hine would make management decisions. c. Finance to start up or expand the business could come from money Hine has saved or money she borrows, either from a bank or from her family or friends. 2. Unlimited liability means that if the business gets into financial difficulty, Hine Smith is responsible for all the debts of the business and may have to sell personal assets such as her home to repay those debts.

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answer guide

3. a, easy to set up or wind up, as no legal formalities are required: advantage b. Hine may find it difficult to raise capital: disadvantage c. High Fashions has unlimited liability: disadvantage d. Hine gets all the profits: advantage e. Hine is responsible for all the losses: disadvantage f. The decision making process is simple: advantage 4. Hine’s venture is considered risky (see lesson 3 on the risk element in entrepreneurship). You would have to be very careful about taking on such a venture as a sole trader, given the disadvantages of unlimited liability.

7. Partnerships 7A

List A

List B

1. sole trader

g. a business in which one person provides the capital and manages the business

2. liability

a. anything which is owed to others

3. risk

f. expose to chance of loss

4. sleeping partner

d. a person who contributes capital but does not have any say in the management of the partnership

5. capital

b. money available to a business with which to purchase capital goods

6. partnership

h. a business in which 2 to 25 people join together to carry on the business

7. partnership agreement

c. the legal agreement between partners

8. Partnership Act

e. the rules that applywhen there is no partnership agreement

Case Study Part 5: Hine Smith’s ‘High Fashions’ 1. a. Hine and Jane can concentrate on their special expertise or talent: advantage b. The two are legally responsible for each other’s business behaviour: disadvantage c. Each can be responsible for a different part of the business: advantage d. ‘High Fashions’ would have unlimited liability: disadvantage e. Either Hine or Jane can be liable for the unpaid debts of the partnership: disadvantage f. As a partnership, High Fashions would have more access to capital than a sole trader: advantage g. High fashions would be more likely to grow bigger as a partnership than a sole trader: advantage

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answer guide

2. The access to more capital as a partnership compared to being a sole trader is an advantage for Hine. But the dangers posed by unlimited liability for a high-risk venture that she wants to pursue remain.

8. Companies 8A

1. Shareholders.

2. Being a legal entity in its own right means the company is separate from the owners – the company can act like a person with a legal status which is separate from the owners. 3. Limited liability is a major advantage because the owner’s personal assets are protected if the business falls into debt. 4. In a larger company, the directors may appoint one of their group to be a managing director to be more directly involved in the running of the company. In even larger companies, the board of directors may appoint a chief executive, who is their top employee to run the daily operations of the company. 5. A dividend is that part of a company’s profit paid out to its shareholders. The size of the dividend depends on the level of profits. Case Study Part 6: Hine Smith’s ‘High Fashions’ 1. ‘Limited’ indicates High Fashions is a company with limited liability. 2. Hine would be liable for any unpaid shares in the company. Apart from this she would not have to use her personal assets to pay off any debts of the business. 3. They would apply to the Registrar of Companies and complete all of the requirements of the Companies Act 1993. The Registrar issues a Certificate of Incorporation if the application is approved. 4. Because Hine owns a majority of the shares in the company she is entitled to make all of the management decisions if she wishes. 5. A profit of $150,000 and deciding to retain half of this for future expansion means that $75,000 is available for dividend payments to the two shareholders. Hine owns two-thirds of the shares so she will receive $50,000 and Jane $25,000.

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acknowledgements Every effort has been made to acknowledge and contact copyright holders. Te Kura The Correspondence School apologises for any omissions and welcomes more accurate information. Questions: The Te Kura teacher-marked assessment in this booklet is drawn from examination question exemplars published by NZQA. Questions copyright © New Zealand Qualifications Authority and reproduced by permission. Photography: Istockphoto® and Shutter stock images®

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11

glossary business goals

day-to-day operational targets to achieve objectives

business objectives

what the business wants to achieve, such as profit

capital

owner’s investment

company

a group of people owning a business

competition

the action of buyers and sellers in the market

customer base

people who buy goods and services

dividends

payments made to shareholders by a company

economic growth

capacity of the economy to increase its material wealth

economies of scale

large-scale production can result in cost savings

entrepreneur

person who assumes risk and responsibility in a business

innovation

introduction of new processes, products, ideas

internal features

the formation, functions, people, management and environment of a business

liability

anything which is owed to others by a business

market research

used by businesses to find out what consumers want to buy and what they will pay

partnership

form of business ownership in which 2 to 25 people join together to own and run the business

small business

a maximum of 20 employees

sole trader

a single owner who manages a business

stock exchange

place for dealing in stocks and shares

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