1.4 - Making The Business Idea.

Question 1

What is the role of a business plan?

Answer 1

To identify the business idea and the aims and objectives for this idea. Forces owner to think about what the business is going to do and how it will be organised and what resources it needs. This allows the owner to calculate how much money is needed. It will alsoe help reduce risk.

Question 2

What is franchising?

Answer 2

Where they sell the products or use the trademarks of another firm. They then give the firm they’re franchising from a fee or percentage of profits. Franchises can trade under the name of the franchisee but advertise that they sell a particular manufacturer’s product. Or the franchisee may buy the right to trade under the name of the franchisor.

Question 3

What is Product from the marketing mix?

Answer 3

A product is goods or a service that is sold to customers or other businesses. Customers buy a product to meet a need. This means the firm must concentrate on making products that best meet customer requirements.

A business needs to choose the function, appearance and cost most likely to make a product appeal to the target market and stand out from the competition. This is called product differentiation.

Question 4

What is sole trader?

Answer 4

A sole trader describes any business that is owned and controlled by one person - although they may employ workers. Sole traders do not have a separate legal existence from the business. Sole Traders have unlimited liability.

Question 5

What does Place involve?

Answer 5

This involves selecting the best channel of distribution. Potential methods include using:
> Retailers. Persuading shops to stock products means customers can buy items locally. However, using a middle man means lower profit margins for the producer.
> Producers can opt to distribute using a wholesaler who buys in bulk and resells smaller quantities to retailers or consumers. This again means lower profit margins for the manufacturer.
> Telesales and mail order. Direct communication allows a business to get products to customers without using a high street retailer. This is an example of direct selling.
> Internet selling or e-commerce. Online selling is an increasingly popular method of distribution and allows small firms a low cost method of marketing their products overseas. A business website can be both a method of distribution and promotion.

Question 6

What is the problem with creating a budget brand?

Answer 6

An alternative marketing strategy is to produce a budget brand. If a mobile phone has limited functions and a standard design then it can be manufactured cheaply. The low production costs allow for discount pricing.

Question 7

What are the two main types of pricing?

Answer 7

> Penetration pricing means setting a relatively low price to boost sales. It is often used when a new product is launched, or if the firm’s main objective is growth.
Price skimming means setting a relatively high price to boost profits. It is often used by well-known businesses launching new, high quality, premium products.

Question 8

What the advantages and disadvantages of franchising?

Answer 8

ADV

• Customers recognise the brand already so it is less likely to fail.
• Less risky than starting from scratch and it is easier to get a loan.
• Franchisor may help with training or help with management and accounting.

DISADV

• Franchisor may have strict rules on how to operate so the freedom of the franchisee is limited.
• Franchisor usually has to pay a lot of money to start the business and then make regular payments. Also, the costs may mean that they end up with less money than to begin with.

Question 9

What is the Boston Matrix?

Answer 9

Star products have a high market share in a fast growing market. (Top left)

Cash cows have a high market share in a slow growing market. (Bottom left)

Question marks or Problem children products have a low market share in fast growing markets. (Top right)

Dogs are products with a low market share in slow growing markets. (Bottom right)

Question 10

What are the advantages and disadvantages of being a sole trader?

Answer 10

Advantages

• Easy to set up
• Small capital investment means reduced start-up costs
• Freedom to make decisions

Disadvantages

• Responsibility
• Long hours
• Unlimited liability

Question 11

What is a PLC?

Answer 11

Public limited company. This means that shares in the company are traded on a stock market and can be bought and sold by anyone. This can bring a lot of extra finance into the business, if the shares on high demand, as this will increase their value.

Question 12

What is promotion?

Answer 12

Methods of promotion such as TV advertising are unlikely to be used by small firms since they’re very expensive. A small firm is likely to use cheaper methods, such as flyers or free samples.
Promoting the right brand (the overall image of the company) is really important - especially for a new business as it will be trying to establish an image with its customers.
Small businesses are more likely to promote to local customers (unless they are mainly based online), which is likely to affect the way in which they promote themselves. E.g. it may be effective to advertise in local rather than national newspapers.

Question 13

How does the labour supply affect business locations?

Answer 13

If the firm is in an area of high unemployment, it could allow low wages. Also, it means that there is a good selection of people to choose from, and the firm should be able to find enough workers. How

Question 14

What is an Ltd?

Answer 14

Private limited company. This means that shares can only be sold if all the shareholders agree. The shareholders are often the members of the same family.

Question 15

What should be included in a business plan?

Answer 15

• The business idea
• Business aims and objectives
• Target market
• Marketing mix
• Location
• Finance

Question 16

What is place?

Answer 16

Place is the point where products are made available to customers. A business has to decide on the most cost-effective way to make their products easily available to customers.

Question 17

What is limited liability?

Answer 17

If anything goes wrong, it is the company that is liable not the owners. The owners only risk losing the money that they have put into the business as they are legally separate from the business.

Question 18

How does the location of raw materials affect business locations?

Answer 18

Raw materials located nearby will reduce transport costs

Question 19

What are the advantages and disadvantages of being a PLC?

Answer 19

ADV

• More capital raised by PLC than any other business
• Helps company expand and diversify
• PLCs are incorporated and have limited liability so if things go wrong, the owners only lose the amount of money they’ve invested.

DISADV

• Hard to get a lot of shareholders to agree on how the firm is run
• Each shareholder has little say.
• Someone could buy enough shares to takeover the company
• Accounts have to be made public - so everyone can see if you are struggling
• PLCs could have a lot of shareholders so there are lots of people wanting shares.

Question 20

How is a product differentiated?

Answer 20

> Establishing a strong brand image (personality) for goods or a service.
Making clear the unique selling point (USP) of goods or a service, for example, by using the tag line ‘quality items for less than a pound’ for a chain of discount shops.
Offering a better location, features, functions, design, appearance or selling price than rival products.

Question 21

What is a partnership?

Answer 21

Partnerships are businesses owned by two or more people. Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together

Question 22

What is price from the marketing mix?

Answer 22

Price is the amount customers are charged for items.

Firms think very carefully about the price to charge for their products. There are a number of factors to take into account when reaching a pricing decision:
> Customers - Price affects sales. Lowering the price of a product increases customer demand. However, too low a price may lead customers to think you are selling a low quality ‘budget product’.
> Competitors - A business takes into account the price charged by rival organisations, particularly in competitive markets. Competitive pricing occurs when a firm decides its own price based on that charged by rivals. Setting a price above that charged by the market leader can only work if your product has better features and appearance.
> Costs - A business can make a profit only if the price charged eventually covers the costs of making an item. One way to try to ensure a profit is to use cost plus pricing. For example, adding a 50% mark up to a sandwich that costs £2 to make means setting the price at £3. The drawback of cost plus pricing is that it may not be competitive.

Question 23

How does the nature of the business affect its locations?

Answer 23

The nature of the business will influence what they prioritise when choosing their location. A firm relying on customer visiting its site is likely to be located near the market.

Question 24

What is the problem with creating a premium brand?

Answer 24

Firms face a dilemma if they choose to launch a premium brand. Improving the quality or appearance of a product adds to the cost of making it. In turn, this means that the business must charge higher prices if they are to make a profit.

Question 25

How does the using the internet affect business locations?

Answer 25

The internet means the the locations of some firms are more flexible. E-commerce (trading over the internet) means that manufactures can locate further from the market but closer to the raw materials. It also may mean that it doesn’t need a fixed premise for selling the products.

Question 26

What are the advantages and disadvantages of being a Ltd?

Answer 26

ADV

• You have limited liability
• Easier to get loans or mortgages

DISADV

• More expensive because of all the legal paperwork.
• They legally have to publish their accounts (doesn’t have to be public)

Question 27

How does the location of the market affect business locations?

Answer 27

Some firms pay more to transport their finished products than their raw materials. These firms locate near their customers. Some firms locate near their market so people know about them and can easily get to them. It also helps them get sales from passing trade (people passing by).

Question 28

What is unlimited liability?

Answer 28

You are liable (legally responsible) for paying back all of the business’s debts if it goes bust. As you aren’t legally separate from the business, your personal finances/possessions are at risk.

Question 29

How does the competitors affect business locations?

Answer 29

It should be easy to find skilled labour and local suppliers - when near a competitor. Also, customer will know where to come. However, some firms may prefer to stay away from competitors so they don’t lose sales or so don’t have to reduce prices to be more competitive.

Question 30

Describe a product life cycle.

Answer 30

Development of the product then the main stages.
1. launch
2. growth
3. maturity
4. decline
In the launch and growth stages, sales rise. In the maturity stage, revenues flatten out.

Getting a product known beyond the launch stage usually requires costly promotion activity.

At some point, sales begin to decline and the business has to decide whether to withdraw the item or use an extension strategy to bolster sales. Extension strategies include updating packaging, adding extra features or lowering price.

Question 31

What is the importance of business plans?

Answer 31

The plan can be used to convince financial backers (e.g. banks) that the idea is a sound investment. The business owner can show the financial backer information about how the business will operate, which should help the backer decide how likely it is that they’ll get their money back.
Writing a business plan should also help to reduce the risks of a new business idea.
If the business is a bad idea, the planning should help the owner or the financial backers realise this at an early stage-before they’ve wasted time and money on an idea that was never going to work.
For a new business, the business plan helps managers decide what objectives need to be set to achieve their aims once the business is up and running.
They can also help entrepreneurs make business decisions.

Question 32

What is the marketing mix?

Answer 32

Price, Product, Place and Promotion

Question 33

What are the advantages and disadvantages of being a partnership?

Answer 33

They can benefit from shared expertise. Another advantage of partnership is that there is someone to consult on business decisions. More owners means more capital is put into the business and it can grow faster.

The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. Like a sole trader, partners have unlimited liability.