2.1.5 How Small Firms Compete — Practice Questions

Seven original multiple-choice questions on how small firms survive against larger rivals: unique selling points, flexibility, customer service, niche markets and relationships with stakeholders.

7 questions Edexcel B A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 2.1.5 How Small Firms Compete revision notes.

1. 1. The owner of an independent cheese shop lists four things about the business. The only one that is a unique selling point is

   Definition in context

   Select one answer

   A Card payments, which every shop in the town accepts.

   B Local farm cheeses that customers want and no rival stocks.

   C Opening at 6 a.m., though no customers come in before 9 a.m.

   D Prices that match the supermarket's on its best-selling cheeses.
   Show model answer

   Answer: B (Local farm cheeses that customers want and no rival stocks.). A unique selling point has to pass two tests: customers value it, and rivals do not offer it. Local farm cheeses that customers want and no rival stocks pass both. They give buyers a reason to come to this shop rather than the supermarket, and a reason to pay a little more.

   Why the other options are wrong

   • A — Customers may value paying by card, but every shop offers it, so it is not unique.
   • C — No other shop may open at 6 a.m., but no customer wants it either. A feature nobody values is not a selling point.
   • D — Matching a rival's price is the opposite of being unique: it offers what the supermarket already offers. It is also a price war a small shop with higher costs is unlikely to win.

2. 2. Customers will pay up to 5% more than a large rival's price to buy from a small firm with good service. Table 1 compares four small firms' average costs with the price a large rival charges for the same product. Each small firm must charge at least its average cost.
   Using Table 1, the small firm best placed to survive on service rather than price is

   Data interpretation

   Table 1: Four small firms' average cost and a large rival's price

   	Product	Small firm's average cost	Large rival's price
   Firm 1	Three-seat sofa	£520	£500
   Firm 2	Birthday card	£2.40	£1.60
   Firm 3	Bag of dog food	£12.00	£10.00
   Firm 4	Fitted car tyre	£66	£60

   Select one answer

   A Firm 1.

   B Firm 2.

   C Firm 3.

   D Firm 4.
   Show model answer

   Answer: A (Firm 1.). To cover its costs each small firm must charge at least its average cost. Work out how far above the large rival's price that is, as a percentage of the rival's price.
   Firm 1: £520 − £500 = £20; £20 ÷ £500 = 4%.
   Firm 2: £2.40 − £1.60 = £0.80; £0.80 ÷ £1.60 = 50%.
   Firm 3: £12.00 − £10.00 = £2; £2 ÷ £10 = 20%.
   Firm 4: £66 − £60 = £6; £6 ÷ £60 = 10%.
   Firm 1 is the only one that needs customers to pay less than 5% more than the rival's price. What matters is the size of the cost gap relative to the price, not in pounds.

   Why the other options are wrong

   • B — Firm 2 has the smallest gap in pounds, 80p, but on a £1.60 card that is a 50% premium. That is ten times the 5% customers will pay.
   • C — A £2 gap looks small, but on a £10 bag of dog food it means charging 20% more than the rival, four times what customers will pay.
   • D — Firm 4 is closer, but it needs 10% more than the rival's price, twice the 5% customers will pay.

3. 3. A customer needs blinds for an unusual round window. A national blinds chain offers only its standard sizes. A small local blinds maker, run by its owner, takes the order and fits the blinds within a week. The small firm can do this mainly because

   Applied reasoning

   Select one answer

   A It has more layers of management to plan the work.

   B Its average cost is lower, as it makes fewer blinds.

   C Its owner can agree to a one-off job on the spot.

   D National chains are unable to make blinds to measure.
   Show model answer

   Answer: C (Its owner can agree to a one-off job on the spot.). This is flexibility in responding to customer needs. A small firm has few layers of management, often just the owner → an unusual request is decided on the spot → the job is done within days. The chain's fixed range and head-office procedures make it slow to say yes to one-off work, so it misses the sale.

   Why the other options are wrong

   • A — This is the reverse. Few layers of management are what make a small firm quick to decide; more layers would slow it down.
   • B — This inverts economies of scale. A firm making fewer blinds usually has a higher average cost, not a lower one, which is why small firms rarely compete on price.
   • D — The chain could make a round blind; it chooses not to, because its range and procedures are built around standard sizes. That is a matter of flexibility, not ability.

4. 4. A family-run tyre garage starts greeting customers by name, phoning them when their tyres are due for a check and explaining every job in plain words. The evidence that would best show this is helping the business is

   Applied reasoning

   Select one answer

   A More customers asking it to match a chain's prices.

   B More customers who only visit during its sales.

   C More hours spent by staff with each customer.

   D More repeat customers and more sent by friends.
   Show model answer

   Answer: D (More repeat customers and more sent by friends.). Good customer service works through loyalty: customers feel valued → they come back and recommend the garage to friends → repeat sales and free word-of-mouth advertising, from customers who are less likely to switch for a lower price. More repeat and recommended customers is the result the strategy is aiming at.

   Why the other options are wrong

   • A — Customers asking for price matches are judging the garage on price, which is what good service is meant to move them away from.
   • B — Customers who come only for discounts are the most price-sensitive and least loyal. A rise in them would suggest the service is not winning loyalty.
   • C — Time spent with customers is something the garage puts in, not a result. It shows the service is being given, not that it is bringing in more business.

5. 5. A small florist has bought from the same local grower for ten years. The grower now delivers fresh flowers every morning, so the florist keeps two days' stock instead of a week's, and drops off extra flowers within the hour when a large order comes in. The most direct benefit to the florist is

   Applied reasoning

   Select one answer

   A A lower price per flower, from buying in bulk.

   B Higher prices, as customers see it supports local growers.

   C Lower stock costs, with fewer flowers thrown away.

   D Lower wage costs, as its staff are more motivated.
   Show model answer

   Answer: C (Lower stock costs, with fewer flowers thrown away.). This is a relationship with a stakeholder, here a supplier. Daily delivery means the florist holds far less stock → less money tied up in flowers and fewer wilting before they sell → lower stock costs and less waste. Help in a rush also lets it take large orders it could not otherwise meet.

   Why the other options are wrong

   • A — Bulk buying is a purchasing economy of scale. The florist now buys smaller amounts more often, the opposite of buying in bulk, and the stem says nothing about a lower price.
   • B — Goodwill from the local community is a different stakeholder relationship. Nothing in the stem says customers know about, or pay more for, the grower link.
   • D — Motivated staff come from the relationship with employees. This deal is with a supplier, and it affects stock, not wages.

6. 6. A small firm makes saddles for people who ride side-saddle. A national saddle maker has never tried to compete with it. The most likely reason is that

   Applied reasoning

   Select one answer

   A Its niche is too small for the national firm to bother with.

   B National firms are not allowed to enter niche markets.

   C Side-saddle riders refuse to pay premium prices.

   D The small firm has lower average costs than the national one.
   Show model answer

   Answer: A (Its niche is too small for the national firm to bother with.). Side-saddle riding is a niche market: a small, clearly defined part of a larger market, with its own needs. It is often too small for a large firm to bother with → little direct competition → the small firm becomes the expert, with loyal customers willing to pay a premium.

   Why the other options are wrong

   • B — There is no rule keeping large firms out of niches. They usually stay out by choice, because the market is too small to be worth it.
   • C — This is the reverse of how niche markets work. Customers with particular needs and few alternatives are usually willing to pay more, not less.
   • D — This inverts economies of scale. The national firm's size usually gives it the lower average cost; the small firm survives by avoiding head-on competition, not by being cheaper.

7. 7. A small garden-maintenance firm has 40 staff, and 5% of them leave each year. In large firms in the same trade, 30% of staff leave each year. Replacing each leaver costs £2,000 in recruitment and training.
   Compared with a firm of the same size that loses staff at the large firms' rate, the small firm's yearly recruitment and training costs are lower by

   Calculation

   Select one answer

   A £4,000

   B £20,000

   C £24,000

   D £50,000
   Show model answer

   Answer: B (£20,000). A small team that knows the owner and the customers tends to be more motivated, so fewer staff leave → lower recruitment and training costs.
   Small firm: 5% × 40 = 2 leavers; 2 × £2,000 = £4,000.
   Same-sized firm at the large firms' rate: 30% × 40 = 12 leavers; 12 × £2,000 = £24,000.
   Saving: £24,000 − £4,000 = £20,000 a year.

   Why the other options are wrong

   • A — £4,000 is what the small firm spends each year, not how much less it spends than the other firm.
   • C — £24,000 is what the other firm spends. The saving is the difference between the two costs.
   • D — This treats the 25-percentage-point gap as 25 leavers: 25 × £2,000 = £50,000. The gap is 25% of 40 staff, which is 10 leavers.