**GONDO ONLINE TUITION**

BUSINESS STUDIES, ADVANCED LEVEL

EXAM PRACTICE QUESTIONs AND ANSWERS
TOPIC: BUSINESS AND ITS ENVIRONMENT
Paper 1: structured questions

PREFACE

Ever since I began to teach Business studies, I was bothered and disturbed by the dearth and
scarcity of study material for this subject. The desperation of the students, their participation
in class together with the labour I invested in looking for and convivially studying the materials
in order to teach this subject have all compelled me to come up with this study guide.

This handout is not intended to be and is not, neither can it be, an exhaustion of the Business
studies. It is a mere study guide. As usual, I accept responsibility for any mistakes or
shortcomings.

ACKNOWLEDGEMENTS

I am indebted to the God of the Christian Bible, through his Son Jesus Christ – the Messiah,
who is the quintessential fountain of my limited wisdom.

May the God of the Christian Bible bless you and give you enlightenment and wisdom as you
flip through the pages of this handout.

© Dr T. Gondo 0779 818 530

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1) Define the term “globalisation” (2)

ˉ It is the reduction in national boundaries due to the wide spread use of information
technology, improved jet travel and inter connectedness between world financial
markets
ˉ Or greater freedom of movement of goods, capital and people around the world

Exam tip: Write a full definition, there is no half or part marks

2) To what extent is the number of workers employed by a business useful in measuring

the size of the business? (4)

ˉ The larger the number of workers the larger the business in general
ˉ More employees mean higher output and hence a large business

However

ˉ Some businesses employ a few workers because they might be capital intensive
- Other businesses may appear big when looking at the number of employees yet they
are small in terms of market share, annual profits etc.

Exam tip: Raise and develop one point for and point against

3) Explain why the government of your country may be concerned about the number of
manufacturing firms which are closing down (4)

Concerned because it means:

ˉ Eroded tax base for the government

ˉ Increase in the unemployment level
ˉ Need to increase the government expenditure in order to provide for the poor
ˉ Political instability
ˉ Increased poverty levels

Exam tip: Raise two points and then develop/explain/expand them

4) Evaluate the benefits of exchange rate devaluation to business in your country (4)

Benefits

ˉ Exports become more competitive

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 ˉ Exports become cheaper
ˉ Reduction in balance of payment (DOP) deficit
ˉ Increased export revenue and forex inflows
ˉ Increase in the rate of employment through increased domestic output

However

ˉ Imports become more expensive

ˉ Possibility of cost-push inflation
ˉ Businesses relying on imported raw materials may incur high production costs
Exam tip: Raise and develop one point for and one point against

5a) Define the term scarcity (2)

ˉ Is the lack of sufficient products to fulfil the total wants of the population
ˉ Or limited resources to supply unlimited wants
Exam tip: Write a full definition, there is no half or part marks

b) Give three objectives that might be pursued by a firm (3)

ˉ Survival
ˉ Profit maximisation
ˉ Expansion
ˉ To increase added value
ˉ To provide a service to the community
Exam tip: Do not explain, just mere list

6) Business size can be measured in a number of ways. State any four common ways (4)

ˉ By capital employed
ˉ By number of employees
ˉ By profit made
ˉ Geographic spread
ˉ By value of output and sales
Exam tip: Do not explain, just mere list

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7) Business can set up having different legal structures:

a) Why may a business choose to operate as a Private Limited Company (4)

ˉ Shareholders have limited liability

ˉ Can raise large sums of capital due to issue of shares to large number of people
ˉ Control – people who started the business can control the business as long as they do
not sell too many shares to other people

Exam tip: Raise two points and then develop/explain/expand

b) Explain any two advantages that are available to sole traders and not to partnerships
(4)

ˉ Enjoy complete secrecy in business matters

ˉ Few legal regulations
ˉ Free decision making as there is no consultation
ˉ Freedom to choose holidays and hours of work

Exam tip: Raise two points and then develop/explain/expand

8i) What is meant by private sector of an economy? (2)

ˉ It is made up of businesses not owned by the government, their main aim is to make
profit

Exam tip: Write a full definition, there is no half or part marks Candidates should
address sector not private limited companies

ii) Why some goods and services still provided by the central government (4)

ˉ To meet the needs of the population

ˉ Reduce social costs
ˉ For the provision of goods and services at affordable prices

Exam tip: Raise two points and then develop/explain/expand

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9)Directors of two companies are considering the merging of their firms. Suggest the
possible views of the following to the proposed merger.

i) shareholders of both companies (2)

➢ good – increased dividends; reduced competition

➢ bad – fear of takeover

ii) workers of both companies (2)

➢ good – increase in salaries if big

➢ bad – fear of new leadership;fear of new leadership

iii) customers (2)

➢ good – improved quality of products; improved supply

➢ bad – no customer care because of new workers

iv) the government (2)

➢ good – the government will get more tax revenue

➢ bad – social costs

10a) State three levels of economic activity in which an economy is divided (3)

ˉ primary sector
ˉ secondary sector
ˉ tertiary sector

Exam tip: Do not explain, just mere list

b) Give any four stakeholders involved in business activity other than government and
shareholders (4)

ˉ creditors
ˉ customers
ˉ workers
ˉ banks
ˉ competitors

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 ˉ potential investors
ˉ debenture holder
ˉ community

Exam tip: Do not explain, just mere list

11a) List any two objectives of the following:

Government (2)

ˉ quality products
ˉ revenue (tax)
ˉ price control, economic growth
ˉ employment creation
ˉ balance of payment

Shareholders (2)

ˉ profits
ˉ dividends
ˉ survival
ˉ growth/expansion
Exam tip: Do not explain, just mere list

bi) What do you understand by public sector of the economy (2)

ˉ business activities owned and controlled by the government/state for example

parastatals, municipalities, public corporation, local authority/government department.

Exam tip: Write a full definition, there is no half or part marks. Candidates to address
public sector not public limited company

ii) Explain any two reasons why the government might want to control business activities
in the private sector (4)

ˉ to curb monopolies and merges

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 ˉ to prevent unfair pricing practises
ˉ to reduce social costs
ˉ to prevent illegal employment practises
ˉ consumer protection
Exam tip: Raise two points and then develop/explain/expand them

12a) State three characteristics of an independent trader (3)

ˉ owned by private individual

ˉ owner makes all decisions relating to the running of the business
ˉ owner is in full control of the business for example setting objectives, policies and day-
to-day activities
ˉ owner enjoys the profits alone

Exam tip: Do not explain, just mere list

b) Suggest three reasons why people set up their own businesses (3)

ˉ to make profits
ˉ to safeguard their wealth
ˉ as a hobby
ˉ to gain social status, standard of living
ˉ your own boss
ˉ to create employment, self-employment
Exam tip: Do not explain, just mere list

c) Explain any two reasons why businesses set objectives (4)

ˉ to provide a guide to action

ˉ to provide a sense of direction and unity
ˉ to provide a framework for decision making
ˉ motivate employees
ˉ measure and control performance
Exam tip: Raise two points and then develop/explain/expand them

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13) Privatisation and commercialisation are more common than nationalisation in the
world economies of today. Define the terms:

i) Privatisation (2)

ˉ is the conversion of a state owned enterprise into private sector business, sell of state
owned properties/business to private individuals

ii) Commercialisation (2)

ˉ means organizing all the activities of an owned business entity to allow it to be self-
sustainable by making profits, the business still remains in the hands of the government

iii) nationalisation (2)

ˉ conversion of a privately-owned enterprise into state ownership

14a) Explain the concept of legal personality as it relates to businesses (3)

ˉ a business that runs itself as a limited company

ˉ registered with the registrar of companies
ˉ is regarded as a separate legal entity
ˉ distinct and independent from its directors or shareholders
ˉ the owners have limited liability

Exam tip: the question requires a brief explanation of this concept

b) What is the importance of this status in the growth of a business? (2)

a separate entity:

ˉ it can own land, property etc.

ˉ can easily borrow money for expansion
ˉ can hire specialized personnel
ˉ limited liability lures potential investors

Exam tip: this calls for an explanation of the application of the concept in operating
the business in its growing stage and how it allows the firm to operate in perpetuity

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15a) What problems are likely to be faced by small firms in your country (4)

ˉ lack of capital
ˉ lack of expertise
ˉ stiff competition
ˉ political instability
Exam tip: Raise two points and then develop/explain/expand them

b) Suggest possible solutions to the problems you have identified in 15a) (4)

ˉ source government support e.g government grants

ˉ cooperative buying
ˉ ready built factory shells from government
ˉ source of training subsidies from government
ˉ operate in niche markets
Exam tip: Raise two points and then develop/explain/expand them

16) How can small businesses effectively compete with large businesses selling the same
goods? (4)

ˉ The small firms may utilize joint ventures in procurement of supplies so as to enjoy
purchasing economies of scale, just like the large firms
ˉ Opening for longer hours that is small firms like kiosks and mini markets may open
earlier and close later than large firms
ˉ The small firms may target markets which are neglected by large firms
ˉ Small firms may offer personalised customer service since they are located closer to
their customers e.g plumping
Exam tip: Raise two points and then develop/explain/expand them

17) Explain why a producer of televisions might be worried by the possibility of an

increase in the rate of interest (4)

ˉ Increased cost of borrowing - A television manufacturer requires a lot of working

capital in the manufacturing processes since the goods being manufactured are high

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 valued (shopping goods). Therefore, increased cost of borrowing may in turn result in
the manufacturer not accessing sufficient working capital thus capacity utilisation may
be reduced
ˉ Reduced market size - televisions are high valued electronic gadgets hence the targeted
customers may also rely on personal loans to acquire such products. Therefore, an
increase in the rate of interest may make it difficult for the targeted customers to borrow
from financial institutions hence the market size will be reduced.
Exam tip: Raise two points and then develop/explain/expand them

18a) What is meant by the term privatisation? (2)

ˉ This is the transfer of ownership of state owned organisations into the private sector in
which they will be individually owned.
Exam tip: Write a full definition, there is no half or part marks

b) Do you consider privatisation to be important in your country? Give reasons (4)

ˉ Privatisation is important since it encourages economic growth through investments

ˉ However, the privatisation may result in the exploitation of customers. Customers may
end up being charged exorbitant prices.

Exam tip: Raise and develop one point for and one point against

19a) Distinguish between merger and takeover (2)

ˉ A merger refers to the integration of two or more firms, guided by mutual consent
whereas a takeover is when one company gains a controlling stake in another company

Exam tip: If two marks are allocated, simply give definitions but if more than two
marks are allocated, provide other matched difference or examples

b) What possible reasons could be put forward to justify a merger (4)

ˉ To combine and integrate different expertise

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 ˉ To gain purchasing economies of scale as a result of increasing scale of operations for
example horizontal integration
ˉ To manage risks since mergers results in the widening of the product portfolio for
example lateral integration provides the room for the enjoyment of risk bearing
economies of scale
ˉ To increase the market share for example in horizontal integration
ˉ To ensure a reliable market

20) Giving examples distinguish between stakeholders and shareholders in an

organisation (4)

stakeholders Shareholders

ˉ Are people or organisations that have ˉ Shareholders are part of the business
direct or indirect interest in the stakeholders that own the business
business organisation ˉ Examples include ordinary
ˉ Examples include customers, shareholders and preference
suppliers, government and shareholder
shareholders

21) Many businesses use integration as a method of growth. Explain any other methods
of growth (4)

ˉ Organic growth - This occurs when the organisation grows on its own for example
establishing a new branch
ˉ Franchising - In this case the business will get into a contractual agreement with other
business and permit it to use its trading name
Exam tip: Raise two points and then develop/explain/expand them

22) Explain any two advantages that a business enjoys by being large (4)

ˉ Enjoyment of economies of scale - If a business increases its scope of operation it is

likely to be granted bulk buying discounts thus its cost per unit may fall

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 ˉ Increased reputation - If a business grows it will be able to attract and retain more
customers since customers are more loyal to a large business
Exam tip: Raise two points and then develop/explain/expand them

23) Define the term market share (2)

ˉ This is a proportion of the firm’s sales in relation to the total industrial sales
Exam tip: Write a full definition, there is no half or part marks

24) Explain the term cooperate culture (2)

ˉ These are customary and traditional ways of thinking and doing things in the
organisation which is shared to a greater extent by organisational members and which
new members must fully or partially accept for them to fit in the organisation

25a) The free market enterprise is one of the three basic economic system. State the
other two (2)

ˉ Command economy
ˉ Mixed economy

b) Which economic structure best describes the economy of your country? Support
your answer (2)

ˉ Zimbabwe has a mixed economy. This is because it consists of government owned

organisations which are in the Public sector such as ZBC, ZESA and Municipalities as
well as organisations that are in the private sector such as Delta, Econet and Telecel

26) Using examples, distinguish between vertical and lateral integration (4)

ˉ Vertical integration is the fusion of two or more businesses in the same line of business
but at different levels of production. Examples of vertical integration include the fusion
of Caps Holdings with QV Pharmacy whereas lateral integration is the fusion of two
or more businesses which are not in the same line and which are at different levels of
production. An example of lateral integration is the fusion of Battery Express with
Motor City Ford

27) Justify the need for growth of firms in your country (4)

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 ˉ Growth of firms create employment opportunities and reduce the extremely high
unemployment level in Zimbabwe
ˉ If firms grow there will be more profits that will be ploughed back to the society under
the corporate social responsibility initiative
ˉ Growth of firms in Zimbabwe will increase the Gross Domestic Product and will
create room for economic growth
ˉ Exports will be boosted if there is growth of firms in Zimbabwe and this will improve
the balance of payment position

28) What is meant by the term quota? (2)

ˉ This is a component of the protectionist policy which relates to the physical restriction
in the quantity of imports
Exam tip: Write a full definition, there is no half or part marks

29) Why may the government of your country be worried about increased import
expenditure? (4)

ˉ It results in a negative balance of payment

ˉ It causes the depreciation of the local currency
ˉ It promotes capital flight that is the country may lose both local and foreign currency
ˉ More expenditure on imports results in the influx of foreign products which may
impose unfair competition on locally produced products
Exam tip: Raise two points and then develop/explain/expand them

30) What do you understand by the following terms?

i) Demerger (2)

ii) Divestment (2)

ˉ Demerger is a de-integration technique which involves the separation of previously

merged firms
ˉ Divestment is a de-integration technique which involves a complete sell of the business
or the disposal of a major part of the business for example BP Shell disposed its
Zimbabwean subsidiary

31) How are businesses affected by an increase in taxation? (4)

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 ˉ Increase in taxation may hinder the growth objective for example an increase in
corporation tax depletes the internal sources of finance
ˉ Increase in taxation may also worsen industrial relations for example an increase
in pay as you earn reduces the net income of the workers
ˉ Reduced market size for example an increase in VAT is passed down to customers
and the demand for goods is reduced
ˉ Reduced capital returns for example an increase in capital gains tax depletes the
amount of cash inflow from disposal of non-current assets

Exam tip: Raise two points and then develop/explain/expand them

32) Outline any three drawbacks of import controls (3)

ˉ They may cause an increase in the price of imported components for example
imposition of tariffs
ˉ They may reduce the level of competition in the country which will affect the level of
innovation
ˉ Trade relations with major trading partners may be negatively affected
Exam tip: Explain these points briefly, to outline is to explain briefly

33) Why may governments keen to promote exports? (4)

ˉ Exports boost the foreign currency reserves of the country

ˉ Through an increase in exports the balance of payment position may be improved
ˉ Exports also encourage industrial growth since they widen the market for local
products
ˉ The growth of local industries as a result of exports will also help to reduce the
unemployment level

Exam tip: Raise two points and then develop/explain/expand them

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34) Distinguish between internal and external constraints (4)

Internal
ˉ Found within the organisation
ˉ They are controllable
ˉ They are regarded as the weaknesses
of the organisation
ˉ Examples include demotivation of
workers and lack of skills
external
ˉ Found outside the business
ˉ The business can only adapt
ˉ They are regarded as the threats of
the business
ˉ Examples include competition and
inflation

Exam tip: If two marks are allocated, simply give definitions but if more than two marks are
allocated, provide other matched difference or examples.

35) Explain the effects of inflation on businesses (4)

ˉ Inflation increases the cost of production which may force businesses to downsize or
to cease their operation
ˉ The purchasing power of customers is negatively affected hence the market size is
reduced
ˉ The operating environment becomes unstable which will make the planning to become
difficult
ˉ Inflationary periods cause a lot of labour unrest since the workers will constantly
bargain for wage increments
Exam tip: Raise two points and then develop/explain/expand them

36) Show how any two elements of the marketing mix might help in achieving the
marketing objectives of a firm (4)

ˉ Promotion – activities such as advertising, sales promotion and publicity enable the
firm to communicate with its targeted customers. Customers are attracted and market
share is increased

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 ˉ Product - goods and services provided by the firm are meant to satisfy the needs of the
customer
Exam tip: Raise two points and then develop/explain/expand them

37a) What is a multinational company? (2)

ˉ It is a huge business corporation which originates in one country known as the parent
country and establishes subsidiaries in various host countries

Exam tip: Write a full definition, there is no half or part marks

b) Why may the government of your country limit the entry of multinational companies
in your country? (4)

ˉ Because they impose stiff competition on local infant firms

ˉ They also exploit the local workers and sometimes practise discrimination in their
employment for example top post are reserved for the expatriates
ˉ They may also externalise funds to their parent country since they repatriate much of
their profits to their country of origin thereby causing capital flight
ˉ MNCs usually interfere with local politics hence they may cause political instability

Exam tip: Raise two points and then develop/explain/expand them

38) Explain the influence of any two elements of the macro environment to a business of
your choice (4)

ˉ Legal constraints on consumption - On Delta’s alcoholic beverages this constraint

affects the market size that is the alcoholic beverages are not supposed to be consumed
by people under the age of 18
ˉ Ethical constraints- The alcoholic beverages are perceived to be unethical by many
people in the Zimbabwean market since they move in contrast with the Christian values
which are common in Zimbabwe
Exam tip: Raise two points and then develop/explain/expand them

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39) How may macroeconomic policies of government affect business objectives and
strategies? (4)

ˉ Fiscal policy - taxes deplete the retained profits of the firm making the accomplishment
of the growth objective difficult therefore businesses will rely on debt sources of
finance since internal sources would have been depleted
ˉ Monetary policy - an increase in interest rates will make borrowing to become
expensive which may affect the operations of the business. As a result, business
organisations will rely on internal sources of finance
ˉ Monetary policy (OMO) - the government sells treasury bills in the money market
which will provide investment opportunities for businesses. Therefore, businesses will
increase their revenue base through the purchase and disposal of these gilt-edged
securities
ˉ Protectionist policy - tariffs, embargos and quotas limit the level of competition on
locally produced products. Therefore, local businesses will maximise their profit and
hence are able to increase their reputation through ploughing back their profits to the
society
Exam tip: Raise two points and then develop/explain/expand them

40) What is de-industrialisation? (2)

ˉ This is the decrease in importance of the secondary sector mainly due to the growth of
the tertiary sector
Exam tip: Write a full definition, there is no half or part marks

41) Explain the difficulties faced by small firms in their operations (4)

ˉ Lack of finance due to low credit worthiness status since they possess less noncurrent
assets therefore they do not have sufficient collateral security
ˉ Stiff competition from large firms since their product portfolio is narrow compared to
large firms
ˉ Non-enjoyment of economies of scale since they operate on a small scale therefore
their unit costs are high which compromises on profitability
ˉ Failure to attract competent personnel since they lack managerial economies of scale
Exam tip: Raise two points and then develop/explain/expand them

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42a) State two examples of direct taxes (2)

ˉ Corporation tax
ˉ Pay as you earn
Exam tip: Do not explain, just mere list

b) How might businesses be affected by taxation? (4)

ˉ Corporation tax depletes the retained earnings which negatively affects the growth
objective
ˉ Pay as you earn reduces the employees’ disposable income which in turn affects the
industrial relations at the work place
ˉ Value added tax increases the prices of products and hence reduces the market size
ˉ Capital gains tax reduces the returns of the business from disposal of excess current
assets
Exam tip: Raise two points and then develop/explain/expand

43) State any three forms of de-integration (3)

ˉ Management buy out

ˉ Contracting out
ˉ Demerger
Exam tip: Do not explain, just mere list44) Distinguish between public sector and
the private sector of an economy (4)

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 Public sector Private sector

ˉ Consist of state owned organisations ˉ Consist of organisations that are

ˉ Driven by social objectives owned by individuals
ˉ Organisations are run by money ˉ Driven by profit maximisation
collected from taxes ˉ Funded by capital contributed by
ˉ Examples of organisations in this individuals
sector include municipalities ˉ Examples of organisations in this
sector include sole traders,
partnerships and limited companies

45) What are the main causes of business failure? (3)

ˉ Inappropriate leadership style

ˉ Competition
ˉ Unstable economic environment

46a) List any three types of businesses found in the private sector (3)

ˉ Sole trader
ˉ Partnership
ˉ Limited Company

b) Explain why government may be interested in controlling an organisation which

supplies electricity in your country (4)

ˉ An organisation that supplies electricity is strategic to the economy therefore it has to

be state owned to ensure economic stability
ˉ To ensure continuous supply of the important utility so as to safeguard the standard of
living
ˉ To ensure fair distribution of electricity for example ZESA embarked on the rural
electrification programme
ˉ To ensure that affordable prices are charged
Exam tip: Raise two points and then develop/explain/expand.

47a) Outline any three problems associated with joint ventures (3)

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 ˉ Conflict of objectives for example the firms involved may be direct competitors
ˉ Slow decision making since the companies involved in a joint venture will be
operating in different areas
ˉ High chances of conflict occurrence since profits are shared
Exam tip: Explain these points briefly, to outline is to explain briefly

b) Explain two reasons for divestment (4)

ˉ Economic instability - This causes negative returns to businesses. Companies such

as Corn Textiles divested from the Zimbabwean market because of the economic
downturn experienced in Zimbabwe
ˉ Depletion of raw materials - this physical constraint reduces the viability of
businesses for example BHP(an Australian based mining company) divested its
Zimbabwean Subsidiary when Platinum reserves were depleted
Exam tip: Raise two points and then develop/explain/expand.

48) Analyse the conflict between owners’ objectives and government’s objectives (4)

ˉ The owners of the business may want to plough back profits in the business but the
Government may reduce this retained profit through charging Corporation tax which is
done through the fiscal policy
ˉ During periods of economic recessions, the owners of the business may seek to made
some workers redundant as a survival method but the government may be against that
since it seeks to reduce the level of unemployment in the country
ˉ The owners of the business may want to cut operational costs through cutting the wage
bill but this moves in contrast with the objectives of the Government. The Labour Act
and the minimum wage set by the Government are meant to prevent such practices

49a) Outline any three objectives of your country (3)

ˉ Ensuring low levels of unemployment

ˉ Ensuring low levels of inflation
ˉ Ensuring political stability
Exam tip: Explain these points briefly, to outline is to explain briefly

b) What is the difference between fiscal policy and monetary policy? (4)

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 Fiscal policy
ˉ Major components are tax and
government expenditure
ˉ Implemented through the ministry
of Finance
Monetary policy
ˉ Major components are interest rates,
money supply and open market
operations
ˉ Implemented through the central
bank

Exam tip: If two marks are allocated, simply give definitions but if more than two
marks are allocated, provide other matched difference or examples.

50) Explain the effect of corporate culture to a business (4)

ˉ Corporate culture determines the leadership style used by the business for example
businesses that have a culture of open door policy use a democratic leadership style
ˉ Culture affects the organisational climate that is the general atmosphere that prevails in
the organisation
ˉ The corporate values are also determined by the culture of the organisation that is
strongly held beliefs
ˉ Employee behaviour is also influenced by the organisational culture that is how
employees interact in the organisation
Exam tip: Raise two points and then develop/explain/expand them

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