Component 2

Question 1

What are the types of data that can be presented?

Answer 1

-daily sales against targets
-daily output and faults
-machine hours
-sales by region
-profit levels
-annual growth

Question 2

What are some data presentation methods?

Answer 2

-Pie charts
-Bar charts
-Histogram
-Line graphs
-Maps
-Index numbers

Question 3

What are the benefits of using a pie chart?

Answer 3

-A pie chart gives a good visual representation of the relative sizes or shares of a whole part
-Pie charts can help businesses to make decisions
-A pie chart can be used to show market income, market share for products or something more specific such as the sales revenue

Question 4

What are the drawbacks of using a pie chart?

Answer 4

-Pie charts are not very effective for showing increases or decreases of proportions over time as trends are not shown and data cannot be extrapolated

Question 5

What are the benefits of using a bar chart?

Answer 5

-Bar charts allow data to be presented in a clear format where key values can be highlighted very quickly
-They are particularly useful to summarise a large amount of data in a visual format
-They are used widely throughout the business world to show key financial data

Question 6

What are the drawbacks of using a bar chart?

Answer 6

-Bar charts can oversimplify data and further explanations may be needed to give an accurate analysis of the data
-Data can also be manipulated to show false results and patterns

Question 7

What are the benefits of using a histogram?

Answer 7

-It shows the shape of the distribution for a large set of data
-Histograms are excellent when displaying data which has chronological categories or numerical groupings
-Using histograms to display data also helps depict large differences in shape or symmetry of the data collected

Question 8

What are the drawbacks of using a histogram?

Answer 8

-They cannot be used for exact values as the data is grouped into intervals
-The effectiveness of data decreases when the range of data is too wide. What would be the point of a histogram used to analyse the age of a magazine’s readership if the range was 0-20 years old, 21-40 years old and so on?
-The data is perhaps less meaningful if the groups are very large

Question 9

What are the benefits of using a line graph?

Answer 9

-Line graphs can also represent data for a number of different categories
-Line graphs are a very useful presentational tool for businesses, a vast range of market, economic and financial data can be presented to a number of stakeholders to show business performance and to analyse market trends

Question 10

What are the drawbacks of using a line graph?

Answer 10

X

Question 11

What are the benefits of using a map?

Answer 11

-represent a useful way of presenting information visually

Question 12

What are the drawbacks of using a map?

Question 13

What are the benefits of using index numbers?

Answer 13

-One advantage of using index numbers is to compare changes over time and to make the value of these changes clear

Question 14

What are the drawbacks of using index numbers?

Question 15

What is market analysis?

Answer 15

Market analysis is concerned with collecting and interpreting data about customers and the market so that businesses adopt a relevant marketing strategy

Question 16

What questions based on qualitative data based on market research will allow a business to gather and interpret these and answer them?

Answer 16

-Does a market exist and what is the size of the market for the business’s products and services?
-What are the demographics of the target market?
-What segments exist within the target market?
-Are segments large enough to be a worthwhile target?
-What is the level of brand awareness that exists in the target market?
- What are customers’ buying habits?
- In what ways is the target market evolving

Question 17

What questions based on quantitative data will allow a business to explore these and answer them?

Answer 17

-What are customers’ motivations when purchasing a product?
-What are customers’ views on competitor products?
-What was the impact on viewers’ feelings in response to a visual marketing campaign?
-How attitudes of existing and potential customers changed in response to a marketing strategy

Question 18

What does data analysis allow a business to do?

Answer 18

Data analysis follows the collection of data in the market analysis process, in order that a business arrives at relevant deductions, which informs their marketing strategy

Question 19

What are the PED categories?

Answer 19

Price elastic, price inelastic and unitary elastic

Question 20

What is meant by price elastic?

Answer 20

-More than 1
-This means that a change in price will cause a more than proportional change in the quantity demanded.
-The level of demand is sensitive to a change in price.
-If price increases, demand falls dramatically.
-If price decreases, demand increases dramatically

Question 21

What is meant by price inelastic?

Answer 21

-Less than 1
-This means that a change in price will cause a less than proportional change in the quantity demanded
-The level of demand is not sensitive to a change in price
-If price increases, demand falls just a little
-If price decreases, demand increases just a little

Question 22

What is meant by unitary elastic?

Answer 22

-Value of 1
-This means that a change in price will cause an equal and proportional change in the quantity demanded

Question 23

What happens in price elastic products and markets?

Answer 23

-In markets approaching perfect competition, elasticity of demand is likely to be highly elastic. Given the conditions of near perfect competition, where goods are largely undifferentiated, this impact of the change in price on demand levels is quite predictable (for example with bread, cereals, chocolate bars). Why should people buy a higher priced good when a virtually identical good is immediately available at a lower price?
-Price elastic products are more likely to be luxury products (such as sports cars, exotic holidays, organic bread); if they become more expensive, less people will demand them and vice versa.

Question 24

What happens in price inelastic markets and products?

Answer 24

-Inelastic price elasticity of demand is likely to occur when the levels of competition are low, when there are few substitutes or the goods are necessities or perhaps addictive. In these circumstances the business involved has much more control over the price than companies in highly competitive markets. Strong branding can also make a product more inelastic.
-Price inelastic products are more likely to be necessity products (such as water, power, petrol, basic foods, and addictive goods, such as cigarettes); if they become more expensive, most people will still demand them and vice versa

Question 25

What is the PED formula?

Answer 25

PED= %change in price /%change in quantity demanded

Question 26

How is price elasticity used for sales revenue?

Answer 26

-PED is important when deciding on a pricing strategy. This is because the price of a product affects sales revenue.
-If demand is price elastic, then putting up the price will lead to a fall in sales revenue. The increase in price will be more than offset by a decrease in sales. Conversely, lowering price when demand is price elastic will lead to a rise in sales revenue. The fall in price will be more than offset by an increase in sales.
-If demand is price inelastic a rise in price will lead to a rise in sales revenue. A fall in price will lead to a fall in sales revenue.
-Changing the price can therefore affect sales revenue. But the exact effect, and whether it leads to an increase or decrease, depends on the price elasticity

Question 27

How is price elasticity used for profit?

Answer 27

-Price elasticity also has an effect on profit. Profit is calculated as sales revenue minus costs. Costs are likely to change with sales, the more that is produced, the higher the costs.
-If demand is price inelastic, a rise in price will lead to lower sales but increased sales revenue, but the lower sales will mean lower variable costs. So profits will increase, not just from higher sales revenue but also from lower costs.
-If demand is price elastic, an increase in sales revenue can be achieved by lowering price and raising sales.
-But higher sales also mean higher costs. In this situation, higher profits will only occur if the increase in sales revenue is greater than the increase in costs.

Question 28

What is the YED formula?

Answer 28

YED= %change in income /%change in quantity demanded

Question 29

What are the different categories of YED?

Answer 29

Income elastic, income inelastic and negative income elasticity

Question 30

What is meant by income elastic?

Answer 30

-More than 1 (positive and high)
-This means that a change in income causes a more than proportional change in the quantity demanded
-The result usually applies to luxury goods and services. For example, if income decreases then demand for exclusive holidays and designer handbags might fall

Question 31

What is meant by income inelastic?

Answer 31

-Between 0 and 1 (positive and low)
-This means that a change in income causes a less than proportional change in the quantity demanded
-This usually applies to normal goods and services. For example, if income increases people might be encouraged to buy and consume more fruits and vegetables

Question 32

What is meant by negative income elasticity?

Answer 32

-Less than 0 (any negative number)
-This means that if income rises then demand falls, and vice versa
-This applies to inferior goods and services, whereby if income increases people can afford to buy more superior versions of products so demand for more basic items (inferior) falls. For example, buying Heinz Baked Beans instead of Tesco Value Baked Beans

Question 33

How is PED important when deciding on a pricing strategy? (price elastic)

Answer 33

If demand is price elastic and prices are lowered, the revenue from each item sold falls, but the quantity sold increases more than proportionately which means that total revenue increases. From a business point of view, if demand for the good is elastic then revenues will increase if your price falls, so it can make sense to cut prices. Likewise, if prices are increased then demand will fall more than proportionately to the change in price, leading to a fall in revenue

Question 34

How is PED important when deciding on a pricing strategy? (price inelastic)

Answer 34

If demand is price inelastic, a rise in price will lead to a rise in sales revenue. Likewise, a fall in price will lead to a fall in sales revenue. This means that although sales have increased, the fall in revenue from each item sold results in total revenue falling. From a business point of view, if demand for the good is inelastic, revenues will fall if your price falls, so it rarely makes sense to cut prices.

Question 35

How is PED important when deciding on a pricing strategy? (unitary elastic)

Answer 35

If demand is unitary elastic, any change in price will lead to a proportional change in demand, meaning revenue will demand the same. From a business point of view, it makes sense to cut prices if increased output reduces costs as this will lead to an increase in profits. Furthermore, more units sold could lead to market share increasing

Question 36

How does price elasticity of demand affect profit?

Answer 36

-If demand is price inelastic, a rise in price will lead to lower sales but increased sales revenue, however the lower sales will mean lower variable costs. So, profits will increase, not just from higher sales revenue but also from lower costs
-If demand is price elastic, an increase in sales revenue can be achieved by lowering price and raising sales. But higher sales also mean higher costs. In this situation, higher profits will only occur if the increase in sales revenue is greater than the increase in costs

Question 37

What are the advantages of knowing PED?

Answer 37

There are several reasons why a business may gather information about the PED of its products. Gathering data on how consumers respond to changes in price can help reduce risk and uncertainly. More specifically, knowledge of PED can help the business forecast its sales and set its price. In order to make an informed decision the business will need to know by how much demand will fall or rise as a result of the increase or reduction in price. However, this depends on the validity of the data; it is difficult to gather accurate data on consumer demand

Question 38

What is the impact on revenue for changes in price? (elastic demand)

Answer 38

– If price falls, then businesses see a greater increase in the quantity demanded. Even though the revenue from each product sold has fallen. As the amount sold has increased more than the decrease in price, businesses will achieve higher total revenue levels.
-Businesses can use this information to influence lower pricing strategies, since if prices were to decrease, they will see an increase in revenue through more than proportionate sales. However, if price increases, then quantity demanded will fall more than proportionate, which leads to a fall in revenue

Question 39

What is the impact on revenue for changes in price? (inelastic demand)

Answer 39

– If price falls, then businesses see a less than proportionate increase in the quantity demanded. Therefore, even though sales have increased, the fall in revenue from each item sold is greater than the increase in quantity sold, leading to a fall in total revenue.
-Businesses with an inelastic good would not readily lower prices, all other things equal, because doing so would lead to a fall in revenue since quantity demanded does not change significantly.
-However, if businesses were to increase prices, they will see an increase in revenue since quantity demanded will decrease less than the change in price with goods that have inelastic demand. This results in greater revenue. Arguably, the objective of most businesses would be to make the price elasticity of their products more inelastic (perhaps through increasing consumer loyalty or through advertising to increase brand image) to achieve higher revenues

Question 40

What is the impact on revenue for changes in income?

Answer 40

Knowing the YED of a product may help a business respond to changing economic situations and help the business
to plan ahead. If a business knows the income elasticity of demand for their product(s) they can use this information
to help them develop its strategy and its product portfolio. Many UK businesses are likely to focus on normal and
luxury products as in general terms the economy tends to grow and incomes tend to go up. However, in times of
recession, where incomes may go down, inferior goods could be profitable for businesses as consumers may cut back
on spending and look for cheaper and less quality products

Question 41

How can income elasticity of demand affect decision making?

Answer 41

-Knowing the YED of a product may help a business respond to changing economic situations and help the business to plan. For example, by understanding changes in consumer income, it can help a supermarket manage its stocks better and allocate shelf space accordingly to different products depending on the YED figure.
-If a business knows the income elasticity of demand for their product(s) they can use this information to help them develop its strategy and its product portfolio.
-Many UK businesses are likely to focus on normal and luxury products as in general terms, the economy tends to grow and incomes tend to go up.
-However, in times of recession, where incomes may go down, inferior goods could be profitable for businesses as consumers may cut back on spending and look for cheaper and lower quality products

Question 42

What is sales forecasting?

Answer 42

Sales forecasting is the art or science of predicting future demand by anticipating what consumers are likely to do in a given set of circumstances

Question 43

What are the quantitative sales forecasting methods?

Answer 43

-Time series analysis
-Use of market research data

Question 44

What are the qualitative sales forecasting methods?

Answer 44

-the Delphi technique
-brainstorming
-intuition
-expert opinion

Question 45

What are the factors that should be considered when sales forecasting?

Answer 45

-Economic
-Consumer
-Competition

Question 46

What are the economic factors that should be carried out when sales forecasting?

Answer 46

Unemployment levels, inflation, interest rates, exchange rates, economic growth. For example, if there is an unexpected rise in inflation then this will affect consumer spending and will have an impact on sales forecasts. In this case it will lower the sales forecast. A change in any of these economic variables could reduce the accuracy of the sales forecast

Question 47

What are the consumer factors that should be carried out when sales forecasting?

Answer 47

Consumers’ tastes and fashions are constantly changing, and businesses try to anticipate these changes through market research. However, consumers are notoriously unpredictable, and their preferences can change quickly. Changes in consumer behaviour can be short term or long term. A long-term trend is easier to identify and to take into account when sales forecasting

Question 48

What are the competition factors that should be carried out when sales forecasting?

Answer 48

A business cannot control the actions of their competitors. However, their actions will affect not only the present business performance but the future business performance too. Competitors will have their own strategies and plans for the future and any significant action by competitors could reduce the accuracy of sales forecasting

Question 49

What is an advantage of sales forecasting (qualitative)?

Answer 49

-Involves people’s knowledge of the market and uses their intuition and ‘hunches’, which can provide a greater insight into future trends than statistical data.
-It considers known future conditions

Question 50

What are the disadvantages of sales forecasting(qualitative)?

Answer 50

-It involves people’s perceptions of what might happen, which might be biased to further their own ends.
-Often ‘experts’ disagree completely

Question 51

What is time series analysis?

Answer 51

Time series analysis uses evidence from past sales records to predict future sales patterns. A business can look at its sales over the last few years and try to work out what is happening. The figures may reveal an upward trend, which is encouraging, or a downward trend, which is worrying. In reality past sales are likely to have fluctuated both up and down over a period of time

Question 52

What is seasonal analysis?

Answer 52

sales are measured on a monthly or weekly basis to examine the seasonality of demand. For example, the sales of ice cream will be higher in the warmer seasons and lower in the colder seasons or according to daily weather changes

Question 53

What is trend analysis?

Answer 53

This focuses on long-term data, which has been collected over a number of years. The objective is to determine the general trend of sales - rising, falling or stagnant

Question 54

What are the methods of time-series analysis?

Answer 54

-Seasonal analysis
-Trend analysis
-cycle analysis
-Random factor analysis

Question 55

What is cycle analysis?

Answer 55

As with trend analysis, long term figures are used but now the objective is to examine the relationship between demand levels and economic activity. For example, by asking the question ‘what is the relationship between demand for the product or products and the stage in the economic or business cycle?

Question 56

What is random factor analysis?

Answer 56

This method of analysis attempts to explain how unusual or extreme sales figures occur. For example, if sales of ice creams double for a two-week period, then could this be explained by weather conditions, rather than an effective advertising campaign? Random factor analysis therefore attempts to provide explanations for unusual or abnormal sales activity

Question 57

What is the Delphi technique?

Answer 57

This uses expert opinion to predict the future, on the basis that better predictions are made by human experts than from extrapolating trends

Question 58

What are the advantages of the Delphi technique?

Answer 58

-Experts can reconsider their judgements after reading feedback from other members of the expert group.
-It is flexible enough to be used in a variety of situations and be applied to a range of complex problems.
-Participants have time to think through their ideas leading to a better quality of response
-The Delphi method creates a record of the expert group’s responses and ideas, which can be used when needed

Question 59

What are the disadvantages of the Delphi technique?

Answer 59

-All depends on the content and structure of the questionnaires
-It assumes that experts are willing to come to a consensus and allow their opinions to be altered by the views of other experts
-Expert panels often lose members because of boredom, and disillusionment with the process
-Monetary payments to the experts may lead to bias in the results of the study
-The method will more than likely require a substantial length of time to complete and can be costly in terms of-the researcher’s time

Question 60

What is brainstorming?

Answer 60

Frequently employees who have experience of the market will ‘brainstorm’. They will get together to ‘bounce’ ideas off each other in order to determine their collective best estimate of what is likely to happen in the future. Use might be made of previous life cycles of similar products

Question 61

What is intuition?

Answer 61

An experienced manager is often able to predict sales based on intuition or a ‘hunch’. The use of intuition is cheap, and fast. But gut feeling and experience should not be the only guide.

Question 62

What is meant by moving averages?

Answer 62

Extrapolation involves identifying the underlying trend in past data and projecting this trend forwards. Extrapolation predicts future trends based on what has happened in the past. It assumes that nothing much is going to change

Question 63

What is an advantage of moving averages?

Answer 63

-Helps the business to plan.
-Helps financial planning, including cash flow management.
-Can help with production planning e.g. ordering in the correct number of raw materials.
-Human resource planning, getting the right number and type of staff in the jobs that are needed.
-May motivate managers to reach targets

Question 64

What is a balance sheet?

Answer 64

A balance sheet (statement of financial position) is a statement of a business’s assets (what a business owns) and liabilities (what a business owes) at a specific point in time (usually the last day of a particular trading period, but a ‘snapshot’ can be created at any time)

Question 65

What is a disadvantage of moving averages?

Answer 65

-It uses information from the past and does not consider what might happen in the future (such as a competitor launching a new product or if the economy might go into recession, supplies of raw materials might be disrupted, etc).
-It can only be useful when sales have been stable with no major upsets
-It is only as accurate as the information collected.
-It assumes that consumers will maintain their buying habits.
-Does not account for qualitative issues

Question 66

What are the main components of a balance sheet?

Answer 66

-Fixed (or non-current) assets
-Current assets
-Current liabilities
-Long term liabilities
-Net assets
-Net current assets
-Shareholder funds

Question 67

What are fixed assets?

Answer 67

Includes land, buildings, machinery and vehicles. Fixed assets are expected to be retained in the business for more than a year, therefore having a long term role in the business and are used to produce the output of the business

Question 68

What are current assets?

Answer 68

Includes stock (sometimes called inventory), debtors (also known as “trade and other receivables”) and bank and cash balances. Current assets are expected to change value often, due to the normal course of business trading. Debtors are customers who haven’t yet paid the business for the goods they have received, but since the business has a claim to the money, then the money owed by customers is still considered an asset

Question 69

What are current liabilities

Answer 69

Includes stock (sometimes called inventory), debtors (also known as “trade and other receivables”) and bank and cash balances. Current liabilities are debts that are normally paid within a year. Current liabilities arise normally as part of normal business practice, for example when a supplier agrees to grant a business trade credit or when a business has an overdraft facility that they are making use of. These examples will remain a currently liability until they have been paid

Question 70

What are long term liabilities?

Answer 70

often bank loans and mortgages, which are repaid over more than a year

Question 71

What are net assets?

Answer 71

calculated by adding both fixed and current assets together and then deducting current liabilities and long term liabilities

Question 72

What are net current assets?

Answer 72

difference between current assets and current liabilities

Question 73

What are shareholder funds?

Answer 73

money that has been invested into the business by the owners (through the sale of shares), and also includes retained profit and reserves. Reserves or retained profit is money that has been kept in the business from profits made by the business. The owners (or directors) may decide to reinvest part of profit earned back into the business to help it grow and become more profitable in the future. Reserves are not normally held as cash, but are used for buying assets for the business

Question 74

What is working capital?

Answer 74

Working capital is the money needed in the business to pay for the day-to-day expenses of a business. Working capital is calculated by taking the value of current liabilities from current assets

Question 75

What is the equation for working capital?

Answer 75

current assets - current liabilities

Question 76

What is meant by capital employed?

Answer 76

Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits by a firm or project. Capital employed can also refer to the value of all the assets used by a company to generate earnings

Question 77

What is the equation for capital employed?

Answer 77

Share Capital + Retained Profit + Long-Term Liabilities

Question 78

What is meant by depreciation?

Answer 78

Depreciation is an accounting practice used to spread the cost of a tangible or physical asset, such as a piece of machinery or a fleet of cars, over its useful life. The amount an asset is depreciated in a given period of time is a representation of how much of that asset’s value has been used up

Question 79

What is the equation for depreciation?

Question 80

What is ROCE?

Answer 80

ROCE shows the profitability of the investment by calculating its percentage return. This measures the efficiency with which the business generates profits from the capital invested in it

Question 81

How is ROCE calculated?

Answer 81

Net profit/(shareholder funds+ long term liabilities) x 100

Question 82

What do the values of the ROCE mean?

Answer 82

A ‘satisfactory figure’ for ROCE is 20% or greater. ROCE shows the amount of profit made for every £1 invested in the business. A business’ ROCE can also be compared with the percentage return offered by risk free interest-bearing accounts at banks and building societies. Anything over 3% higher would be considered ‘good’. However, the higher the perceived risk the better the return that would be required by investors.

Question 83

What are the reasons for change in an ROCE?

Answer 83

-increase or decrease in GP or NP margins
-increase or decrease in retained profit or shareholders’ funds
-increase or decrease in long term liabilities

Question 84

What is meant by current ratio?

Answer 84

A liquidity ratio that measures a business’ ability to pay short-term obligations. For most businesses, a ratio between 1.5 and 2 is ideal

Question 85

How do you calculate current ratio?

Answer 85

Current assets/current liabilities : 1

Question 86

What do the values of the current ratio mean?

Answer 86

-A figure less than 1.5 indicates that the business may experience difficulties in meeting its short-term debts (i.e. a liquidity crisis).
-A figure of more than 2 indicates that the business may be holding cash in an unproductive and unprofitable form, and it may be better used elsewhere

Question 87

What are the reasons for change in a current ratio?

Answer 87

-increase or decrease in stock
-increase or decrease in the time it takes to receive monies owed (debtors) or pay money owed (creditors)
-increase or decrease in cash in the bank

Question 88

What is meant by an acid test ratio?

Answer 88

A stringent indicator that determines whether a business has enough short-term assets to cover its immediate liabilities without selling stock. Most businesses seek a value of at least 1.

Question 89

How do you calculate an acid test ratio?

Answer 89

(current assets-stock)/ current liabilities :1

Question 90

What do the values in an acid test ratio mean?

Answer 90

-1:1 is ideal.
-A figure less than 1 indicates that the business may experience difficulties in meeting its short-term debts (i.e. a liquidity crisis).
-A figure of more than 1.2 indicates that the business may be holding cash in an unproductive and unprofitable form, and it may be better used elsewhere

Question 91

What are the reasons for change in an acid test ratio?

Answer 91

-increase or decrease in stock
-increase or decrease in the time it takes to receive monies owed (debtors) or pay money owed (creditors)
-increase or decrease in cash in the bank

Question 92

What is meant by a gearing ratio?

Answer 92

A measure of the business’ capital structure. It measures the proportion of total capital that has been obtained from debt or loan sources rather than from equity sources.

Question 93

What is the formula for a gearing ratio?

Answer 93

Long term liability/capital employed x 100

Question 94

What does the value of more than 50% in a gearing ratio mean?

Answer 94

• > 50% = Highly Geared
  -The higher the gearing of a business the greater the level of risk due to the enhanced exposure to changes in interest rates. Highly geared businesses may experience problems in raising new finance as the business is seen as a risky investment for the ordinary shareholder. However, it may be adventurous in its expansion plans leading to high potential profits in the future

Question 95

What does the value of less than 50% in a gearing ratio mean?

Answer 95

• <50% = Lowly Geared
  -A business with a gearing ratio of less than 50% is said to have ‘low gearing’, since its monthly debt repayments do not form a significant proportion of its monthly outgoings. It can be perceived as a weakness – failing to borrow to expand can indicate an overly cautious management. An investment in a business with low gearing would be safe, but dull. However, there is not much to repay and so not much interest to pay

Question 96

What are the reasons for change in a gearing ratio?

Answer 96

-increase or decrease in retained profit or shareholders’ funds
-increase or decrease in long term liabilities

Question 97

What is meant by liquidity?

Answer 97

Liquidity is the amount of cash a business can get quickly in order to settle its immediate debts.

Question 98

What do liquidity funds consist of?

Answer 98

-cash in hand and at the bank
-short-term investments and deposits
-trade debtors

Question 99

What are liquidity ratios?

Answer 99

Liquidity ratios measure the likelihood of a business falling into insolvency, i.e. being unable to pay its debts as when they are due. The acid test ratio is particularly useful as it excludes stock, which is the least liquid of currents assets and is thus not ideally suited to paying debts

Question 100

What are limitations of ratio analysis?

Answer 100

-A range of ratios is more valid – too much importance should not be attached to any single ratio.
-Major one-off transactions may distort the true performance of a company.
-The financial accounts may have been ‘window dressed’

Question 101

What are the factors affecting the financial accounts of a business?

Answer 101

-Window dressing (internal)
-Economic conditions
-Competition
-Social change and political change

Question 102

What is window dressing?

Answer 102

Window dressing is the manipulation of the financial accounts by a business to improve the appearance of its performance. Rules laid down by statute and the professional accountancy bodies govern the form and content of accounts, the dates by which accounts must be published and how figures are to be presented within the accounts

Question 103

What are the examples of methods of window dressing?

Answer 103

-Overstating the value of brands
-Sale and leaseback
-presentation of data
-Exceptional items
-Hiding poor investments

Question 104

How is overstating the value of brands a method of window dressing?

Answer 104

Brand value is an intangible fixed asset, and therefore increases in brand value, increases the assets of a company and gives the impression that the company is more valuable. The true value of the brands is perhaps in the eye of the beholder which is why valuing brands is subjective and therefore an opportunity for businesses to use brand value as a way of window-dressing their accounts

Question 105

How is sale and leaseback a method of window dressing?

Answer 105

This is where a business sells the fixed asset but still uses it by renting the fixed asset from the new owner. This method will allow the company to increase the amount of cash balance at the end of the year – improving the current assets

Question 106

How is presentation of data a method of window dressing?

Answer 106

An example of how businesses use the presentation of data to window dress an account is by using graphs with distorted scales to give the appearance of bigger or smaller changes in sales. In some instances, businesses might only highlight certain data or use deliberate examples in their reporting documents, for instance highlighting product lines that have done particularly well in an attempt to disguise other areas of the business that have not performed very well. A similar strategy would be to not include any comparative data to be used for analysis of performance, e.g. with previous years’ performance or that of competitors or industry norms

Question 107

How are exceptional items a method of window dressing?

Answer 107

Exceptional items are costs and revenues to the business that arise from normal business activity but are unusual in some way. Exceptional revenues can be used as a method of window dressing because businesses might try to pass these off as normal business revenues. Extraordinary items should be highlighted in the accounts and inserted after the calculation of profit before interest and taxation. To include extraordinary items as normal revenues will, as with exceptional revenue, exaggerate business profits

Question 108

How is hiding poor investments a method of window dressing?

Answer 108

Businesses can disguise poor investments (which result in high levels of expenses) as investment in fixed assets. This will inflate the profits, giving the impression that a company is hugely successful and profitable when in reality they may actually be struggling

Question 109

What are the reasons for using window dressing?

Answer 109

-It may be done to try to improve the share price. If the profits of a business are recorded to be higher because of window dressing, this could improve the share price as investors might be attracted to the business.
-A more valuable business could attract a takeover as the company is seemingly more successful, which could also impact on the price they get. On the other hand, if they don’t want to be taken over then the value of the business could be falsely inflated, e.g. through brand valuations - this makes the business more expensive and might deter take-over bids.
-By making the profits look smaller, a business can reduce the amount it has to pay in taxes.
-A business may wish to improve its credit rating. A business with high profits and higher asset values can gain finance more easily from banks as they seem to pose less of a risk.
-Having a set of good financial accounts could result in praise and financial rewards for managers

Question 110

What are the non-financial measures of performance measure?

Answer 110

-market share
-sales targets
-productivity
-quality
-environmental impact
-customer feedback
-employee attitude

Question 111

How is market share an element of non-financial performance measure measure?

Answer 111

Market share is the proportion of total sales a business has in the market. For example, if a business’s sales are £150m in a market that has total sales of £700m, then market share is 21.4%. Increasing market share is a common, long term aim of businesses. Businesses might invest money in advertising and new product development in an attempt to increase market share, which might reduce profit levels in the short term but will help them achieve a long term aim.

Question 112

How are sales targets an element of non-financial performance measure?

Answer 112

Sales are important to all businesses; after all it is sales that generate profits. Setting sales targets for the future (based on sales forecasting techniques considered in an earlier chapter) might also involve spending money in the short term in order to generate sales revenue, thus reducing profitability. This may involve the use of loss leader products, which result in increased sales in the future

Question 113

How is productivity an element of non-financial performance measure?

Question 114

How is quality an element of non-financial performance measure?

Question 115

How is environmental impact an element of non-financial performance measure?

Answer 115

Increasingly, businesses are becoming more aware of the impact on the environment and try to minimise this impact. Such measures might include recycling or using recycled materials, they may try to ensure suppliers in developing counties get a good deal; they may pay their workers above the market wage. Environmental issues might be considered a long term commitment to a business and an environment audit can assist businesses with assessing their impact on their external environment to highlight where improvement can be made

Question 116

How is customer feedback an element of non-financial performance measure?

Answer 116

Customer satisfaction measures the degree to which customer expectations are met or exceeded e.g. in terms of price and product/service quality. Methods of measuring customer satisfaction or customer attitude is to consider the level of repeat purchases, amount of customer complaints, percentage of products returned and by gathering feedback by questionnaires and focus groups. Once again the focus may be long term by improving customer satisfaction and customer loyalty may follow and then in the long term this will result in increased sales and profit

Question 117

How is employee attitude an element of non-financial performance measure?

Answer 117

Employee attitude surveys are used to find out about the views of workers in regard to their roles in the business and overall business performance. The overall objective of the survey is to discover the needs of the business from the point of view of employees

Question 118

What is a vision statement?

Answer 118

A vision statement is a description of what a business sets out to achieve in the medium to long term. The vision statement should provide a clear guide to senior management of the future direction of the business and help to direct strategic decision-making across the business (i.e. it should answer the question: ‘Where would the business like to see itself in the future?’).

Question 119

What is a mission statement?

Answer 119

A business’s mission statement is a broad statement of its aims and values. It will guide the everyday operations and decision-making of the business

Question 120

What is the difference between a mission and a vision statement?

Answer 120

Since mission statements are focused on the present, business aims are more aligned to vision statements as they are focused on the future. Also remember that vision statements are normally written for internal purposes and mission statements are written for both internal and external purposes. One criticism of mission statements is that they are written as a public relations exercise for marketing purposes to external stakeholders rather than a meaningful and purposeful statement for internal stakeholders

Question 121

What are business aims?

Answer 121

-Survival
-Profit maximisation
-Sales maximisation
-Growth
-Increase shareholder value
-Corporate social responsibility/ Environmental/ Ethics

Question 122

What is survival for a business?

Answer 122

The initial objective of a business might be just to survive the difficult start up phase of gaining customers, establishing a good local name and building a reputation. This aim is particularly prevalent in times of economic boom

Question 123

What is profit maximisation for a business?

Answer 123

The objective of most businesses, especially those operating in the private sector, is to maximise profits. Long term increases in profitability, linked to increasing shareholder value, will be the main factors that create on-going motivation in business owners and managers

Question 124

What is growth for a business?

Answer 124

Growth is often based on reinvesting profits, reducing short term return to owners, but leading to greater market dominance in the longer term. This can result in greater profit margins

Question 125

What is increasing shareholder value for a business?

Answer 125

This is measured by the amount of dividend paid to shareholders and any increases in share price. This objective is concerned with increasing the price of the businesses’ shares on the stock market.

Question 126

What is CSR (corporate social responsibility) for a business?

Answer 126

There are businesses that will try to minimise the impact of their business activities on the environment and consider the needs of society. For example, businesses may try to ensure suppliers in developing countries have fair working conditions, ensure employees are earning a fair wage and sourcing raw materials from sustainable sources

Question 127

What is the SMART objective?

Answer 127

Specific – objectives should specify what the business wants to achieve. They should be clear so that all stakeholders understand what the objective is.
Measurable – objectives should be measured to make sure the objective has been achieved. This measurement should be numeric.
Achievable – are the objectives achievable and attainable? There is no point in setting an unrealistic target, this can be demotivating. Sometimes ‘A’ can be used for Agreed (do all internal stakeholders agree on the objective and whether it is achievable?)
Realistic – is the business likely to achieve the objectives with the resources available?
Time limited or constrained – a timescale needs to be set for achieving the objectives.

Question 128

What are the benefits of a vision statement?

Answer 128

-A clear vision can give the business a clear identity and ethos.
-Can help in setting objectives and support the business strategy.
-Focus senior managers on the tasks to achieve the vision.
-Communicates to employees how they can contribute and can improve employee engagement.
-Commits resources to achieving the vision, mission and objectives.
-Helps to ensure that all stakeholders are clear on the purpose of the business so everyone can be focused on the same goals and objectives.
-Helps with the strategic planning since this should be the starting point.
-Gives some transparency for investors – they understand how their capital will be used.
-Helps customers understand the ethics and objectives of a company

Question 129

What is strategy?

Answer 129

Strategy is the way a business operates in order to achieve its aims and objectives. There are two sides to strategy - the first is formulation and the second is implementation

Question 130

What are the 3 types of strategies a business will take?

Answer 130

-Strategic
-Tactic
-Operational

Question 131

What is a strategic decision?

Answer 131

concern the general direction and overall policy of a business

Question 132

What is a tactical decision?

Answer 132

Tend to be medium term decisions that are less far-reaching than strategic decisions

Question 133

What is an operational decision?

Answer 133

administrative decisions that will be short term and carry little risk

Question 134

What is a corporate strategy?

Answer 134

Corporate level strategy is concerned with the strategic decisions a business makes that affect the entire business. At the corporate level, strategy is concerned with setting objectives for overall financial performance, proposed mergers or acquisitions, long term human resource planning and the allocation of resources to different business divisions

Question 135

What is a strategic direction?

Answer 135

This is a course of action that ultimately leads to the achievement of the stated goals of the corporate strategy. Once the corporate strategy is established then the strategic planning that follows is used to establish the strategic direction i.e. sets out in broad terms how the objectives will be achieved. The strategic plan created will normally contain a clear mission statement but beyond this describes the businesses’ objectives, which divisions or functions need to be focused on to achieve these objectives and makes clear methods of measuring achievement of objectives

Question 136

What is a divisional strategy?

Answer 136

he next level of business strategy is concerned with directing the divisions (often functional or geographical in structure) within the organisation. The overall corporate strategy will be communicated to the divisional managers. This information shapes the plans the divisional managers create. For example, if the corporate strategy focuses on rapid growth in demand for the company’s products or services, the strategies the divisional managers generate would be tailored to meet this demand. In this scenario the sales division strategy may include growth in sales teams, the production strategy including increased need for inputs and production capacity

Question 137

What is a functional strategy?

Answer 137

This relates to a single functional operation such as production, marketing or HRM and the activities involved within each of these functions. The decisions made at this level of strategy are guided and limited by the higher level corporate and divisional strategies and will support these strategies. For example, the business’ marketing strategy, which will be a functional strategy, will be guided by objectives established at corporate level and made clear at divisional level. It is the responsibility of the functional managers to develop the systems and applications that allow the achievement of corporate and divisional strategies

Question 138

What is a corporate plan?

Answer 138

A corporate plan is a statement of organisational goals to be achieved in the medium to long term. It will be based on management assessments of market opportunities, the economic situation and the resources and technologies available to the business. It will make clear measurable objectives and formulate strategies for achieving these objectives. The corporate plan will include methods for monitoring the achievement of objectives and the tactical decisions made to achieve these objectives

Question 139

What does a corporate plan involve?

Answer 139

-strategic thinking and planning shared with employees potential investors other stakeholders
-“joined up” thinking and planning
-common sense of direction

Question 139

What are tactical decisions?

Answer 139

Tactical decisions are medium term decisions made by middle managers. They follow on from strategic decisions and aim to meet the objectives stated in any strategic plan. For example, increase output may be a strategic decision but how to do this, perhaps through recruitment or alternatively through outsourcing increased production, is a tactical decision. A corporate objective may be to grow market share and in order to do this a business may have to widen distribution channels or improve web presence. Again these decisions are tactical in nature. Tactical decisions are also adaptable - the tactical approach can change to adjust to changing market conditions even though the corporate objectives have not changed.

Question 140

What are the limits of a corporate plan?

Answer 140

-slow or limited responsiveness to change
-must be flexible
-cannot predict future
-can limit spontaneity
-cannot avoid the unexpected

Question 141

What is a SWOT analysis?

Answer 141

A SWOT analysis is used to identify and analyse the internal Strengths and Weaknesses of an organisation, as well as the external Opportunities and Threats created by the business and economic environment

Question 142

What does SWOT stand for?

Answer 142

-strengths
-Weaknesses
-Opportunities
-Threats

Question 143

When is SWOT supposed to use?

Answer 143

SWOT is meant to be used during the proposal stage of strategic planning

Question 144

What moments are appropriate for SWOT?

Answer 144

-exploring avenues for new initiatives
-making decisions about execution strategies for a new policy
-identifying possible areas for change in a program
-refining and redirecting efforts mid-plan

Question 145

What are the internal factors of SWOT?

Answer 145

-Financial resources, such as funding, sources of income and investment opportunities.
-Physical resources, such as your company’s location, facilities, and equipment.
-Human resources, such as employees, volunteers, and target audiences.
-Current processes, such as employee programs, department hierarchies and software systems.

Question 146

What are the external factors of SWOT?

Answer 146

-Market trends, such as new products and technology or shifts in audience needs
-Economic trends, such as local, national, and international financial trends
-Funding, such as donations, legislature, and other foundations
-Demographics, such as a target audience’s age, race, gender, and culture

Question 147

What are some strengths a business may have?

Answer 147

-specialist marketing expertise
-new, innovative product or service
patents
-strong brand identity or reputation
-being seen as a price leader
-location of your business
-effective distribution networks
-exclusive access to natural resources
-high levels of productivity
-quality processes and procedures
-high staff motivation
-good industrial relations.

Question 148

What are some weaknesses a business may have?

Answer 148

-lack of marketing expertise
-undifferentiated products or services (i.e. in relation to your competitors)
-limited product range
-poor quality goods or services
-damaged reputation
-high levels of staff turnover
-location of your business
-competitors have superior access to distribution channels
-poor investment record in technology
-failing to achieve industry benchmarks
-bad debt or cash-flow problems

Question 149

What are some opportunities a business may have?

Answer 149

-gaining market share through developing innovative products to meet new market needs
-taking advantage of tax breaks and other incentives such as grants in development areas
-diversifying into developing markets (China, the Internet)
-mergers, joint ventures, or strategic alliances with other businesses
-moving into new attractive market segments
-a new international market
-removal of international trade barriers
-changes in technology and competitive structure of markets
-changes in government policy related to the business’ field such as a loosening of regulations
-changes in social patterns, population profiles, lifestyle changes, fashion tastes

Question 150

What are some threats a business may have?

Answer 150

-a new competitor in their home market
-price wars
-a competitor has a new, innovative product or service
-new technologies being used by competitors
-economic slowdown/recession
-new legal constraints and regulations – e.g. changes to environmental legislation
-increased trade barriers
-taxation may be introduced on your product or service
-demographic changes – changing consumer incomes or tastes which -result in less demand for the product/service
-technological change which means that there is less demand for the product

Question 151

What will an effective SWOT allow a competitor to do?

Answer 151

-build on strengths
-resolve weaknesses
-exploit opportunities
-avoid threats

Question 152

What are porters 5 forces?

Answer 152

-Barriers to entry
-Competition
-Buyer power
-Substitutes
-Supplier power

Question 153

What are the factors that determine supplier power?

Answer 153

-the number of alternative suppliers; competition amongst suppliers
-importance of volume of orders to supplier
-if inputs make up a large proportion of costs
-if inputs (raw materials or components) help create differentiation of products made
-the costs of switching to a new supplier
-availability of alternative (substitute) inputs
-if backward vertical integration exists

Question 154

What are the factors that determine buyer power?

Answer 154

-The amount of bargaining leverage the buyer has - for example, does the customer buy a large proportion of the business’ products/services?
-Whether the customer buys in bulk - the larger the order the greater the level of negotiated discount.
-Whether the buyer has information on costs/availability of alternative suppliers.
-Product USP and exclusivity.
-Brand identity and loyalty of the product bought. If the product is branded, the buyer has less control over price paid, they may even be told the price that they can sell the product at.
-Price sensitivity of the product - how changes in price affect demand levels (PED)?
-If forward vertical integration exists

Question 155

What are the factors that determine barriers to entry?

Answer 155

-cost advantages of existing businesses (gained through economics of scale or effective relationships with suppliers)
-access to factors of production, e.g. raw materials, skilled staff, and components
-high capital/investment requirements
-strong brand identity of existing business’ products and high levels of advertising
-access to distribution networks
-predictable behaviour of existing businesses, e.g. retaliation through short term pricing strategies
-access to technologies used in the industry

Question 156

What are the factors that determine substitutes?

Answer 156

-Rate of change of technology – the faster the rate of change of technology, the more quickly substitutes are likely to occur
-Availability of capital for investment – how likely potential producers of substitutes are to be able to raise the capital required for research and development, and production.
-Switching costs for customers – cost of changing to substitute.
-Level of substitution effect – how close the substitute is, how easily it replaces the original product or service.
-Price-performance trade-off of substitutes – how effective the substitutes are in cost and performance, e.g. at the moment electric cars do not offer an effective substitute for petrol engine cars so few people consider them as effective substitutes.
-The existence of patents and licenses - to operate in the market

Question 157

What are the factors that determine competition levels?

Answer 157

-The level of collusion in the market, i.e. do the businesses act together to control price and share out the market between them?
-Maturity of the market, i.e. is the market stable with established brands and market leaders, or is the market immature, with new entrants being able to join?
-Industry concentration, i.e. is the market a monopoly or an oligopoly with a few businesses dominating the market, or even more like perfect competition with many businesses each having small market shares?
-Product differentiation in the market, i.e. is the market full of virtually identical products (cereals), or are the products identifiably different (car market)?
-Strength of brands in the market (levels of brand loyalty). Are customers easily tempted to switch brands?
-The existence of patents and licenses to operate in the market. Patents can give companies monopolies of production for specific products, and licences offered by governments or regulators will limit the numbers of competitors.
-If horizontal integration exists.

Question 158

What is the cause of an attractive industry that has high profitability?

Answer 158

-new entrants finding difficulty setting up
-few strong competitors – little rivalry
-weak suppliers
-loyal, but passive customers
-lack of competition from substitute products.

Question 159

What is the cause of an unattractive industry that has low profitability?

Answer 159

-many substitutes
-lack of barriers to entry
-strong, well-established competitors
-powerful suppliers
-well-organised and choosy customers

Question 160

What is the Ansoff matrix?

Answer 160

The Ansoff matrix considers a business’s product portfolio from a different point of view to the models such as the product life cycle analysis and the Boston matrix. Instead of focusing on profitability or sales, the Ansoff matrix outlines the options open to businesses if they wish to grow, with a view to increase profitability and revenue. These options indicate how to manage the development of the product range by looking at options according to ‘products’
and ‘markets’. The matrix can help businesses determine their strategy

Question 161

What are the 4 option strategies of the Ansoff matrix?

Answer 161

-Market penetration
-Market development
-Product development
-Diversification

Question 162

What is meant by market penetration ?

Answer 162

Concentrating on the sales of existing products to existing markets

Question 163

What is meant by market development?

Answer 163

Finding and developing new markets for existing products

Question 164

What is meant by product development?

Answer 164

Developing new products for existing markets

Question 165

What is meant by diversification?

Answer 165

Developing new products and new markets

Question 166

What are the strategies for market penetration?

Answer 166

-Attracting customers who have not yet become regular users
-Attacking competitors’ sales
-Increasing consumption amongst existing users

Question 167

What are the strategies for market development

Answer 167

-Identifying users in different markets with similar needs to existing customers
-Identifying new customers who would use a product in a different way

Question 168

What are the strategies for product development

Answer 168

-increase profitability and growth by introducing new products targeted at the existing customer base
-creation and development of new products that are similar to those that the business already sells to existing customers
-innovate and look at new ways of extending the product life cycle of their existing products

Question 169

What are the strategies for diversification?

Answer 169

-Developing new products for new markets
-it involves changes in both the market and the product

Question 170

What is organic growth?

Answer 170

Organic growth, also referred to as internal growth, is the expansion of the business by selling more of its products. In order to grow organically a business will use its existing resources to grow and will not involve any other business. Businesses who follow an organic growth strategy may typically take a longer time to expand the business. Although this strategy is less risky, it can also lead to the business remaining too small to compete with its competitors

Question 171

What are organic growth strategies?

Answer 171

-Expanding the product range: Once a product is established, further related products can be introduced. For example, Ministry of Sound, which was once just a nightclub, now releases CDs, puts its brand on hi-fi equipment, owns a radio station and sells holidays.
-Targeting new markets: This means selling your products to new market sectors. Mobile phones were once just sold to business-people, then the market become all adults, then teenagers were actively targeted.
-Expanding the distribution network: Make your product available in more places such as the internet, more retail outlets, through agents and distributors.
-Benefiting from economies of scale: Economies of scale reduce costs, meaning that prices can be reduced, which should gain new customers.

Question 172

What are the advantages of organic growth?

Answer 172

-it is a less risky form of growth as it is more likely to be funded with retained profit
-there is less threat of brand dilution
-it allows for greater consistency
-growth can be steady
-there is less loss of control.

Question 173

What are the disadvantages of organic growth?

Answer 173

-opportunities may be missed from acquisitions
-the potential for growth may be more limited
-there could be a lack of shared expertise
-a lack of competitiveness could result due to a lack of economies of scale (especially if competitors are growing via external methods)
-there could be dissatisfaction from shareholders if they believe that they are losing out on the return on their investment.

Question 174

What is inorganic growth?

Answer 174

External growth is sometimes called ‘inorganic growth’. External growth is achieved via takeovers (acquisitions) or mergers. It is a quicker method of growth than organic growth.

Question 175

What is a merger?

Answer 175

A merger is the process by which two companies become one. Usually the businesses are of equal size and will agree on the share ownership of the new business. In recent years, the numbers of mergers that have taken place in the global economy have increased.

Question 176

What is a takeover?

Answer 176

A takeover is the acquisition of one business by another, either on an agreed or hostile basis. The vulnerability of a company to takeover depends on who controls the majority of shares, what shares have the voting rights, the value of the shares and the performance of the business

Question 177

What are the types of mergers and takeovers?

Answer 177

-Backward vertical integration
-Conglomerate integration
-Horizontal integration
-Forward vertical integration

Question 178

What is backward vertical integration?

Answer 178

This is when a business merges with or takes over another business at the previous stage in the production process within the same industry. In other words this is when a business merges or takes over a supplier. The objective here is to reduce costs or secure supplies. Examples of backward vertical integration include Starbucks buying a coffee farm in China, and Dunlop owning rubber plantations

Question 179

What is conglomerate integration?

Answer 179

This is when a business merges with or takes over another business with no connection to the product or the market. In other words it is when a business merges or takes over another business that is involved in totally unrelated business activities. Conglomerate integration takes place when businesses wish to diversify. For example a parent company may own a number of subsidiary companies that include concrete producers, a chain of hotels and a
pharmaceutical company, all under the same overall ownership. Conglomerates can arise by the wish of directors to seek rapid growth or asset-stripping a business and selling of assets, or even the desire just to operate in different markets

Question 180

What is horizontal integration?

Answer 180

This occurs when a business merges with or takes over another in the same industry at the same stage in the production process. Examples include the amalgamation of Daimler-Benz and Chrysler (car industry), the food giants Heinz and Kraft merger and Lloyds Bank taking over TSB Bank. Often the objective is to benefit from economies of scale, and so reduce costs and increase profits. Sometimes the word synergy is used in this type of growth –synergy
implies that the 2 merged businesses will be more profitable together than apart. A good example of this synergy was the merger of Guinness and Grand Metropolitan (a hotel chain) to form Diageo. Another benefit for the business is the removal of a competitor so there is a reduction in the competition which can lead to greater market power

Question 181

What is forward vertical integration?

Answer 181

This is when a business merges with or takes over another business at the next stage in the production process. In other words this is when a business merges or takes over a customer. Examples include a manufacturer buying a retailer and oil companies buying up service stations. Forward vertical integration allows the business to be closer
to the end use or consumers, gives the business greater control in the marketplace and can guarantee outlets for its products. The Booker Group (the leading UK food wholesaler) acquired the convenience stores Londis and Budgens for £40million in 2015

Question 182

What are the benefits of vertical integration?

Answer 182

-security of supplies and control of suppliers’ prices improves supply chain co-ordination
-can guarantee the quality of its raw materials
-security of distribution outlet for products
-can determine standard of outlets/shops
-use of outlets to determine brand image
-keeps all profit and removes middlemen; increased profit margins and does not have to buy raw materials from a third party outlets
-control over quality
-possible benefits of economies of scale

Question 183

What are the benefits of horizontal integration?

Answer 183

-the removal of some of the competition, possibly for defensive reasons
-may increase economies of scale
-increases market power to compete with market leaders by spreading the brand
-synergy may result – the two companies joined together may form an organisation that is more powerful and efficient than the two companies operating on their own; it’s a quick way for a business to expand as opposed to growing internally
-increased capital of merged businesses
-opportunity to cut costs – for example combining HR/ICT services
-combination of new ideas/innovation.

Question 184

What are some of the main reasons for mergers and takeovers?

Answer 184

-access to new markets, especially overseas. Increased market share leading to increased market power in the market.
-Diversification
-Acquiring new products and technology. A takeover is one way of acquiring technology that may be protected by patent or may be expensive or time consuming to develop internally.
-Economies of scale are derived from becoming larger.
-Synergy: the idea that 2+2=5. The synergy argument is that by combining two businesses, total profits can be increased by reducing duplicated services such as head office costs, or the two businesses fit together in a way that allows costs to be reduced and profits increased.
-Cost savings: takeovers are often followed by significant numbers of redundancies in the short term. In order to convince shareholders that a takeover is in their interests, managers in the bidding business often promise that cost savings will result from the merger and shedding staff is a principal way in which this is achieved. Currently, this pattern of cost savings through redundancies is most evident in the financial sector where a wave of mergers and takeovers are associated with large-scale job losses.
-Underperforming management teams can be removed giving an immediate boost to performance.
-Higher returns to shareholders.

Question 185

What is franchising?

Answer 185

Franchising is a growth strategy used by some businesses

Question 186

What is a franchise?

Answer 186

A franchise is the legal right to use the brand name, products and business style of an existing business. McDonald’s restaurants, for example, often operate as franchises: a business person has paid McDonald’s a fee to open a franchise of McDonald’s

Question 187

What are the advantages of being a franchisor?

Answer 187

-Fast growth with lower risk. The franchisee finances the growth. Franchisees have to pay the franchisor for the right to join the franchise.
-Economies of scale can happen quickly; the franchisor now is involved in bulk buying for the franchises.
-Increased income from franchise fees, this includes upfront payments and on-going royalty payments.
-Extra commitment from the franchises – the franchisees who are committed to the success of the business and are likely to be hardworking, helping to give a greater chance of successful growth, not least because they have had to pay for the franchise

Question 188

What are the disadvantages of being a franchisor?

Answer 188

-Loss of control – franchisees may be harder to manage than appointed managers.
-Not all profits return to the franchisor, representing an opportunity cost.
-Potential loss of reputation if franchisors act unprofessionally which could result in damage to the firms’ reputation as a result of bad PR.
-Must ensure that the franchise agreements are carefully drawn up or disputes could occur.
-Does not have complete control of the day to day running of the business.
-Growth may occur too quickly, with the possibility of diseconomies of scale.
-Could the franchisor effectively recruit support and service many franchisees? If not, dissatisfaction and poor practice could result.

Question 189

What are the benefits to a franchisee?

Answer 189

-they may be supported by national advertising/promotion
-reduced risk of failure as they are selling an already proven product or service; it makes it easier to get loans from the bank to fund business venture
-support is offered by franchisor e.g. full training, and start-up equipment such as materials
-retaining degree of independence.

Question 190

What are the disadvantages to a franchisee?

Answer 190

-not being able to operate with same level of freedom as an ordinary business because of the franchise agreement
-the franchisee cannot sell the business without the franchisor’s permission
-in some franchises, the franchisor can end the franchise without reason or compensation
-the franchisee has to make regular payments to the franchisor – royalty fee

Question 191

What is rationalisation?

Answer 191

when a business reorganizes its production in order to increase its productivity and efficiency

Question 192

What are the reasons for rationalisation?

Answer 192

-restructuring the business to increase efficiency
-to turn around poor performance
-to focus on core business
-to sell off less profitable parts of business to improve overall performance
-following a merger or takeover to remove duplication of resources

Question 193

What are some examples of rationalisation?

Answer 193

-Closing of branches: Barclays Bank recently closed a number of underperforming rural branches.
-Transferring of production: Ford stopped production of the Fiesta in the UK, instead using its Dagenham factory for engine production only.
-Trimming of product ranges: Growing businesses can end up producing large ranges of products but find that many of these have little profitability. Businesses will discontinue less profitable products and ranges and focus on those that maximise sales. Boots the chemist stopped selling pet food and increased sales space for organic products.
-Incorporation of IT systems to replace paper systems: The government is currently trying to increase efficiency of the NHS by computerising all its patient records.

Question 194

What are the factors affecting regional location/relocation?

Answer 194

-Access to markets
-Cost and nature of factors of production
-Social reasons
-Historical reasons

Question 195

What are the factors affecting international location/relocation?

Answer 195

-Maximising economies of scale
-Access to international markets
-Tax advantages
-Freedom from restrictions

Question 196

What is outsourcing?

Answer 196

Outsourcing occurs when outside suppliers are involved in activities that could be undertaken internally by a business. These suppliers are not directly employed by the business. For example, the outside suppliers or sub-contractors may deal with phone enquiries, computer processing and production of components or even produce finished products

Question 197

What is offshoring?

Answer 197

the transferring activities or ownership of a complete business process to a different country from the country (or countries) where the company receiving the services is located

Question 198

What are the advantages of outsourcing?

Answer 198

-significantly reduced staffing costs
-well-trained staff provided by the outsourcing company will reduce
-HRM costs such as recruitment and training
-existing workload and stress levels reduced; this is very important if a business is operating near or at full capacity
-less investment risk: instead of investing in new production facilities, let the outside supplier take the risk of investing
-capital needs reduced; because there is less investment, there is less need to raise finance
-lower costs increase profits giving more capital for research and development, so speeding the development of new products.

Question 199

What are the disadvantages of outsourcing?

Answer 199

-the potential of poor customer service (call centre related), with communication made difficult because of cultural differences
-existing employees may feel demotivated if they believe their jobs are at risk, especially if previous redundancies resulted from outsourcing — this demotivation can increase staff turnover and reduce productivity
-quality of production/product cannot be guaranteed — quality control systems are now in the hands of producers who may be thousands of miles away; even if quality is maintained, it may be more difficult to keep up with improvements in quality from competitor companies
-more difficult to implement JIT systems
-breakdown in communication in the production chain — it is often difficult for functional departments to talk to each other when they are in the same building; speedy and effective communication becomes much more difficult when the person you need to talk to is on another continent and speaks a different language
-loss of security of data — there have been cases where customer data has been made available to external organisations from subcontracting businesses; in the worst cases, the information has been passed to competitors or even criminal gangs
-lost tax revenues to the home government when offshoring is used

Question 200

What are the types of decisions a business can make?

Answer 200

-Strategic
-Tactical
-Operational

Question 201

What are tactical decisions?

Answer 201

Tactical decisions are not as far reaching as strategic decisions – they tend to be medium term. They should aim to implement strategic decisions. Tactical decisions are less complex than strategic decisions and are usually carried out by middle management. Tactical decisions can also be more flexible – if it is failing to meets its objective then it can be changed

Question 201

What are strategic decisions?

Answer 201

Strategic decisions are long term and will affect the direction the business takes. These decisions will affect the entire business and will be made by the owners or senior management. Strategic decisions are often complex and may result in major organisational change internal to the business or in the markets, or new markets they operate in. Strategic decisions may also involve a large financial commitment in order to carry out the decision. It may take a few
years, and a few million pounds, to see if strategic decisions have had the positive affect anticipated by the business

Question 202

What are operational decisions?

Answer 202

Operational decisions are the day to day decisions made in a business. These are lower level decisions that tend to be short term and have little risk. A business will make hundreds of operational decisions in a typical day by a range of employees, as they do not need the careful thought and planning of strategic and tactical decisions. Many decisions at this level are routine and can be taken fairly quickly

Question 203

What are the two different approaches for decision-making?

Answer 203

Scientific and intuitive

Question 204

What is scientific decision making?

Answer 204

-Scientific decision-making involves the systematic use of facts and data to arrive at a logical and evidence-based decision. The structured, scientific approach will involve:
1.clearly identifying the objective/objectives or problem to solve
2.collecting all relevant information needed to make the decision – this can include primary or secondary data and could take some time to gather
3.analysis of the information to identify possible ways forward
4.making and implementing the decision
5.monitoring and reviewing the decision and change, if needed.

Question 205

What is intuitive decision making?

Answer 205

Intuitive decision-making uses experience and intuition (gut feeling) to make a decision. This has proved successful for many entrepreneurs and managers who use their experiences and emotions to make decisions. There is often no data or systematic approach to back up this decision. Intuitive decisions can be made quickly and are often useful for operational decisions. However, at the strategic and tactical levels, there is a large risk on relying on intuitive decision-making alone

Question 206

What are decision trees?

Answer 206

Decision trees are a form of diagrammatic analysis used to help businesses with making decisions where there are a number of different options from which to select. Decision trees are particularly useful in situations where chance (or probability) plays an important role in likely outcomes. Decision trees build probability of success and failure into the decision-making process, which helps to provide an effective and clear structure for presenting options through the
‘expected values’, which are the financial returns that can be gained for each option, taking into account both success and failure of each course of action

Question 207

What are the components of a decision tree?

Answer 207

-Square decision nodes
-Circular chance nodes
-Lines representing a decision, or probability
-Values of outcomes in £
-Probability of outcomes in % or decimal point

Question 208

What are the benefits of using a decision tree?

Answer 208

-Clearly lay out the problem so that all options can be considered
-Allow managers to analyse fully the possible consequences and risks of a decision
-Provide a framework to quantify the values of outcomes and the probabilities of achieving them

Question 209

What are the disadvantages of using a decision tree?

Answer 209

-Use probabilities which only gives an estimate, these may be inaccurate
-Can oversimplify a decision and focus too much on the financial outcome
-Don’t include other factors such as manpower considerations, managers’ opinions and marketing issues
-Can be time consuming to construct and may be interpreted with bias.

Question 210

What is critical path analysis?

Answer 210

Critical path analysis (CPA) is a method of planning and controlling large projects and is used to make decisions on the management of resources and time. Businesses carry out many tasks, some small and some large, such as building a bridge, or installing new machinery in a factory. These tasks or activities are inter-related (i.e. one task is dependent upon another previous task being completed). These tasks have to be carried in out in a certain order within a
network, using network diagrams and through network analysis, critical path analysis enables a business to plan the activities involved in completing projects, so that the overall project is completed in the most efficient manner possible

Question 211

What are the advantages of using a CPA?

Answer 211

-CPA is an effective management tool for planning and
controlling complex projects. Critical activities can be
identified. Forces managers to think about the process
and supports a systematic approach to planning
activities. Problems can be highlighted early so that whole projects are not delayed
-Allows effective management of resources, allocating
factors, such as labour, to where they are needed and
can be most effective. Supports the transferring of
resources for different tasks, if required
-Reduces the need for working capital, parts used in the project can be ordered exactly when they are needed. Allows the use of just-in-time production
-Improves cash flow – as a result of reduced need for
working capital. Also helps with cash flow forecasts
-Can be used to check on efficiency of individual
activities and identify if new resources are needed or if
employees need training
-Improves overall management of projects – managers
understand what is involved and what needs to be
done and when it needs to be done by.
-Can be used to give a business a competitive advantage by being more efficient and supports time-based management

Question 212

What are the disadvantages of using CPA?

Answer 212

-Information can be distorted or poor methods of (over
optimistic) estimation of activity times can be used.
Lack of experience of those preparing CPA leads to
inaccuracies.
-CPA can give the wrong results, or fail to allow for
external factors that will influence the total time taken.
-Sub-contractors, who may be completing some of the
activities on a project, can be outside the control of the
project manager
-Supplies may be delayed; they may be of the wrong type or of poor quality
-Critical path analysis only identifies the critical activities; it does not ensure these are done on time. Close supervision may be needed which may reduce employee morale.
-Requires ongoing checking of activities, changes may be required if there is a delay. The construction of critical path analyses can be time consuming.
-Critical path analysis does not ensure quality – the focus is on time and meeting deadlines

Question 213

What is a cost benefit analysis?

Answer 213

-Cost benefit analysis (CBA) is a method for measuring, in financial terms, the costs and benefits of an investment project, but includes a consideration of the external costs and benefits to society as well as the costs and benefits to just the business.
-Cost benefit analysis is often used by governments when they are considering a public project, such as the building of
a new motorway, rail bridge or hospital. A number of different options can be ranked in order.

Question 214

What are private costs?

Answer 214

-These are costs that the business making the investment has to accept.
-They include training and recruitment costs, purchase of new capital equipment, marketing costs etc

Question 215

What are public costs?

Answer 215

These are costs external to the business making the
investment.A building company will have an environmental impact as it builds houses – increased traffic, noise etc. A farm extracting water from a river to irrigate its crops leaves less water further downstream for fishing. A new factory may involve the loss of open space, increased traffic congestion and so on.

Question 216

What are private benefits?

Answer 216

These are benefits that the business gains from as a
result of making the investment. These benefits will include things such as increased productivity, increased sales, brand values and increased profits.

Question 217

What are public benefits?

Answer 217

These are benefits external to the business that result
from making the investment. An obvious external benefit from a large scale investment would be jobs created by the business. Other public benefits include further jobs created outside the business as a result of increased business activity and an increase in tax paid by employees to the government. In areas where unemployment is high, crime and social problems might be reduced.

Question 218

How do you calculate cost benefit analysis?

Answer 218

Social Benefit (private benefit + public benefits) – Social Cost (private costs + public costs)

Question 219

What is the CBA process?

Answer 219

1.calculate private benefits and costs
2.Calculate public benefits and costs
3.Calculate social benefit and cost
4.Consider qualitative factors
5.Decide if the project goes ahead

Question 220

What are the advantages of a CBA?

Answer 220

-Takes into account a wide range of benefits and costs
-Impacts on society and the community are included
-Puts a value to external benefits and costs that would normally be ignored by private sector businesses
-Can be used to rank possible major projects in order of public cost.

Question 221

What are the disadvantages of a CBA?

Answer 221

-The valuation of intangibles will be difficult – how do you put a value on the effect of pollution or the improve traffic flow of a new road?
-Valuations will often include value judgements – one person’s or manager’s calculation of an intangible
benefit is likely to differ from another person’s calculation, who has a different set of views on what is
important for a business
-If the social costs and benefits are incorrectly calculated then the wrong choice may be made
-Will all stakeholders be included in the calculation of social costs and benefits?

Question 222

What role does information technology play in decision making?

Answer 222

-Computer technology can be used by businesses to make many day-to-day decisions. Decisions on when to order new stock, how to manage deliveries, or on staffing levels can be calculated and implemented by IT systems.
-Information systems can collect inputs from several sources, organise the data and then distribute the data to make the most efficient decisions. For example, IT systems in an ice-cream factory can monitor sales in supermarkets, through Electronic Point of Sale (EPOS) systems, forecast future sales and weather data, and from this determine levels of production, organise staff shifts and arrange delivery schedules.
-Management information systems (MIS) provide managers with information to make tactical and strategic decisions. MIS continuously collects and processes data and makes it available for managers to use in their decision-making

Question 223

What is investment appraisal?

Answer 223

-Investment appraisal is a technique used to evaluate planned investment by a business, and measure its potential value to the business.
-The investment made can be autonomous (for the replacement of worn out goods) or induced (new investment arising from expansion). Investment can also arise from the availability of new technology. Large amounts of money are often invested in the hope that this will give a profitable return on the investment. However, there is risk with investment as there is no certainty that it will result in increased profits and could even result in a reduction of future revenue.

Question 224

What is the payback period?

Answer 224

The payback period is the time it takes for the project to pay back the initial outlay.When there are a number of different investment options for a business, the payback period method will select the one that returns the initial cost of the investment in the shortest time frame. In other words, this is the amount of time taken for the net cash flow resulting from an investment to match or equal the initial cost of the investment

Question 225

What are the advantages of using PBP?

Answer 225

-Simple to use
-Easy to calculate
-Effective to use when technology is changing at a fast rate, such as hi tech projects, in order to recover the cost of investment as quickly as possible
-Helps with managing cash flow

Question 226

What are the disadvantages of using PBP?

Answer 226

-Ignores flows of cash over the lifetime of the project
-Ignores total profitability, the focus is just on the speed to which the initial outlay is repaid

Question 227

What is the average rate of return?

Answer 227

The average rate of return method measures the average net return every year with the cost of the investment. The ARR is expressed as a percentage allowing for a straight forward comparison between different investment options. The option/project that has the highest average rate of return is chosen

Question 228

What are the advantages of using ARR?

Answer 228

-Shows the profitability of the option/project
-Includes all the project’s cash flows
-Easy to compare different projects
-Allows comparison with costs of borrowing for
investment

Question 229

What are the disadvantages of using ARR?

Answer 229

-Ignores the timing of the cash flow
-Does not allow for effects of inflation on values of future cash flows

Question 230

What is discounted cash flow?

Answer 230

The discounted cash flow method of investment appraisal takes into account the time value of money (i.e. the realisation that the value of money changes over time). The discounted cash flow method calculates the net present value (NPV) of alternative options/projects. The NPV is the value of future money if you had it now (takes into account inflation and the potential for earning interest on investment capital or cost of finance on raising investment capital). In other words money in the future is worth less than the same amount today

Question 231

What are the advantages of using DCF and NPV?

Answer 231

-Allows for future earnings to be adjusted to present values
-Easy to compare different projects
-Allows for impact of inflation on value of future cash flows
-Discounts can be changed to take into account changes in the economic and financial climate
-Allows for effect of risk on estimated future cash flows

Question 232

What are the disadvantages of using DCF and NPV?

Answer 232

-It is difficult to calculate
-Discount factors could be incorrect which makes the NPV inaccurate
-Difficult to set discount factors far into the future, the longer into the future we go the less reliable the discount factor

Question 233

What do businesses need to think about before deciding what investment appraisal method to use?

Answer 233

-Is the investment high-tech? If so, a short payback may be required since technology is fast evolving.
-Is short term cash flow important? This may rule in or out short payback times.
-Is inflation likely to be stable? Will the NPV figures be reliable?
-How much risk is involved?

Question 234

What are the qualitative factors that need to be considered before going through with investment appraisal?

Answer 234

-Impact on staff. Can staff handle the changes brought about by investment? Can staff be trained to use new
technology? Will there be redundancies as a result of the investment?
- Impact on existing products. Will managers concentrate on new products/ investment to the detriment of existing output?
-Does the investment match the strategy and objectives of the business?
-The state of the economy. Is the economy booming? Or is there a recession, which is likely to reduce demand, on the way?
-Action of competitors. Are they investing/ improving their products?
-Does the investment have any ethical considerations? Would the investment damage the environment?
-Is there sufficient funding available to invest in the project? Would the investment put the business at risk by reducing cash flow or increasing borrowing?
-Availability of new technology. New technology is one of the main factors that encourage further investment.
-Confidence of managers. Optimistic managers are more likely to invest.

Question 235

What are special orders?

Answer 235

Occasionally, businesses may receive orders for their products that differ in terms of the profile of their regular orders. This difference is often based on price paid, the quantity ordered or the lead time. These special orders can be one-off or they could be a new buyer establishing a relationship with the supplier. The decision to accept a special order depends upon the potential immediate and future quantitative and qualitative benefits that result from the order.
A special order can involve:
-Selling the same product lower than the normal sales price
-Selling a modified product at a higher price.

Question 236

What are the qualitative factors a business should consider before accepting a special order?

Answer 236

Capacity - has the business the spare capacity or is this the best way to utilise the spare capacity?
Labour demands – would the special order be completed in normal hours or would extra hours have to be paid to workers?
Future orders – could the special order lead to a more regular order?
Existing customers – will the special order upset existing customer who pay a higher price?
Product adjustment – would the special order require a product slightly different to the regular product?

Question 237

What are the positives of accepting a special order?

Answer 237

-Further orders may follow. Some businesses will accept an unprofitable special order if there is a possibility that it will result in a profitable regular and long term order.
-Spare capacity is used, increasing return on capital
invested.
-The new order may give access to new markets and new opportunities e.g. is it from overseas leading to new export markets or is it in a different market?
-Increasing production can have HRM benefits, such as
increased wages for workers and payment of bonuses
-Also it can be useful to keep workers busy if the
normal orders are not sufficient due to poor economic
conditions. Special orders can help keep workers in their jobs

Question 238

What are the negatives of accepting a special order?

Answer 238

-Working at near or at full capacity can put pressure
on quality. If the business is already operating at full
capacity how can it cope with existing customers in
addition to the special order?
-What if existing customers discover the discounted
price offered to the new customer? Will they demand
the same? They may become resentful and could look
for a new supplier
-Will the new customer demand even lower prices in the future and will there be a requirement to prioritise the new order over existing customers? This could have an adverse effect on loyal and long term customers.
-The new customer may undercut existing customers
when selling the finished product. This could impact on
their sales, which could then impact on future orders