Core Knowledge and Reasoning Flashcards
1
Q
Porters Generic Strategies - Differentiation
A
- increased differentiation…
- make the product/ service unique
- persuading customers to buy it over competitors
- making the product less price elastic
- consumers less sensitive to a change in price
- the business can charge higher prices and therefore increase gross profit margin
2
Q
Porters Generic Strategies - Low cost strategy
A
- Lower variable/fixed costs
- Increased gross/operating profit margins
- Therefore able to reduce the selling price
- Become more price competitive within a price elastic market
- Leading to a significant increase in demand
- Therefore increasing output, allowing the business to benefit from economies of scale
3
Q
Price Elasticity Line Of Analysis
A
- Due to poor customer service for example a business’ products may become price elastic
- Leading to customers being less loyal to the brand
- Therefore if the price increases there will be a significant fall in demand
- Leading to pressure to keep prices low
- Leading to lower revenue
- Reducing gross profit margin
- Reduce the operating profit
- Reduce the retained profit
- Reduce the total equity
4
Q
Price Inelastic Line Of Analysis
A
- Differentiate from competitors
- Customers are loyal to the good or brand
- Therefore if the price rises they continue to buy the product meaning there will only be a small fall in - demand
- Therefore businesses can charge higher prices in order to generate more revenue
- Leading to an increase in gross profit margin
- Potentially increasing operating profit which can be retained to improve liquidity or invested in non-current assets to increase scale.
5
Q
Income elasticity - Luxury Goods
A
- If a business only sells luxury goods then they are vulnerable to changes in average incomes
- Therefore if many people within a country lose their jobs then there will be a fall in incomes
- This will lead to a significant fall in demand for a business’s goods as consumers switch to cheaper alternatives
- Leading to a fall in revenue resulting in a fall in gross profit
- This could lead to them making an operating loss putting them under pressure to reduce their expenses
- This could involve selling their non-current assets such as stores and factories
Reducing scale
6
Q
Income elastic - Inferior Goods
A
- When unemployment is high then incomes will be lower and therefore the demand of inferior goods will increase
- The business may then need to be flexible to be able to respond to an unexpected change in income so they can increase production of a good to meet the new demand
- This will lead to an increase in gross profit.
- This flexibility will also help them reduce production when incomes rise again
- This will ensure that they can reduce operating expenses when demand falls therefore avoiding a loss
7
Q
Purchasing EOS
A
- If sales increase.
- There will be an increase in volumes ordered from suppliers (use the case study to identify what they will be buying more of – be specific - E.g. plastic and metal).
- Leading to a potential discount from bulk buying.
- Leading to lower average cost of sales/variable costs.
- Resulting in increased gross profit margin.
8
Q
Marketing EOS
A
- When businesses have increased sales.
- Increase sales volume. * Meaning the fixed costs of marketing e.g…. a) Market Research b) Advertising c) Research and development
- Can be spread over more units.
- Lower unit fixed costs.
- Making the above more affordable and can therefore can do more of it.
- Link to the advantages of doing more of the above – improved product development, increased brand awareness, improved innovation.
9
Q
Financial EOS
A
- Large businesses have significant non-current assets.
- Meaning they have more collateral for loans
- Lower risks for banks.
- Lower interest rates.
- Lower fixed costs (interest payments are a fixed cost).
- Lower unit fixed costs
10
Q
Technical EOS
A
- As businesses grow they begin to make better use of capital/machinery or have the resources to invest in more.
- Further/increased use of machinery will improve productivity and further increase output.
- Spreading fixed costs of production (labour, rent, utilities) over more units.
- Lowering unit cost of producing a product.
- Allowing business to lower selling price / increase profit margin (choose one).
11
Q
Distribution - Multiple intermediaries
A
- A business may choose to distribute its products through multiple intermediaries, eg – multiple retailers/online.
- This improves the accessibility of the product as it will be more widely available.
- Therefore, more customers may purchase the product.
- Leading to an increase in sales for the business.
- Link to EOS, increased capacity utilisation, lower cost per unit.
12
Q
Distribution - Direct Distribution
A
- A business may choose a more traditional distribution channel and sell their products directly.
- This gives the business more control over the customer experience.
- Improved customer service.
- Makes business more differentiated.
- Business become more price inelastic.
- Increase selling price and not experience significant fall in demand.
- Higher revenue.
13
Q
High Liquidity - Benefit
A
- High liquidity – (current ratio between 1.5-2 or acid test above 1)
- High amount of cash reserves/ working capital
- Therefore can keep up with payments to suppliers and banks (loans and mortgages)
- Unlikely to be forced to sell non-current assets in order to pay day-to-day bills
- Therefore likely to have uninterrupted business operations
- Leading to a reduced risk of failure and a higher chance of success
14
Q
Low Liquidity - Drawback
A
-Low liquidity (Current ratio below 1 and acid test below 0.75)
-Low level of cash reserves
-Will struggle to pay suppliers and the bank
-May be forced to sell non-current assets to pay day to day bills
-This may lead to a disruption in business operations
-Leading to a high risk of failure
15
Q
Balance sheet LOA
A
- Increased cash outflows there will be lower net cash flow
- This will lead to lower cash reserves
- Reduced current assets
- Reduced current ratio
Putting the business at risk as they may not be able to pay for current liabilities - Leading to the sale of NCA to pay for current liabilities
- Disruption to operations
16
Q
Income Statment LOA
A
- Increased sales
- Leads to increased gross profit
- Leading to increased operating profit
- Increased net profit
- Which can be retained
- And invested in…
17
Q
Taylors - Motivation Theory
A
- Through Taylor’s, scientific management staff are given effective training to do a very specific job
- This means they will become more skilled in that given area
- This will mean that they will be able to produce more and will be motivated to do so if they are paid for every item they produce
- This will lead to increased output per worker and therefore lead to increased productivity
- Leading to fixed costs being spread over more units leading to lower unit fixed costs
18
Q
Mayo - Motivation Theory
A
- Through having more managers there will be more supervision
- This will lead to employees feeling like their actions are valued as the manager is showing an interest in their work
- This is argued by Mayo to an effective motivational factor as workers produced more when watched called the hawthorn effect
- This will lead to increased productivity
- Leading to fixed costs being spread over more units leading to lower unit fixed costs
19
Q
Maslow - Motivation Theory
A
- Empowerment refers to giving employees more control in their work and more responsibility in decision making.
- Therefore, by empowering employees it is likely to improve their levels of motivation as they will feel trusted to make the right decision without having to consult with a superior.
- This will mean that employees’ esteem needs are met according to Maslow’s hierarchy of needs.
- This may ensure that NHS staff become more satisfied in their job. A higher level of job satisfaction will improve staff members’ wellbeing.
- Therefore, by empowering staff and improving job satisfaction it is likely to reduce labour turnover
- A lower labour turnover will then ensure that the NHS does not experience significant recruitment costs
20
Q
Herzberg - Motivation Theory
A
- By having increased profits the business can make investments into working conditions
- This will mean that they can expand office spaces to avoid workers being cramped and the office space being too noisy
- This will help meet one of Herzberg’s Hygiene factors
- This will provide a foundation in which to motivate staff by other factors such as employee recognition
21
Q
High Capacity Utilisation - Manufacturing Business - Benefit
A
- Through improving worker motivation or advancements in production technology
- Increase productivity
- Increase output
- Improved capacity utilization
- Fixed costs of production (rent, wages, insurance)
- Spread over more units
- Lower fixed unit costs
- Increase operating profit
22
Q
High Capacity Utilisation - Service Business - Benefit
A
- Through exceptional customer service or a high level of differentiation
- Business will have high sales volume
- Increased number of seats filled
- Improved capacity utilization
- Fixed costs of providing service (rent, wages, insurance)
- Spread over more units
- Lower unit fixed costs
- Increase operating profit
23
Q
High Capacity Utilisation - Service Business -Drawback
A
- Operating with high capacity
- Will mean that employees may be working for long periods
- To ensure the business has a strong brand reputation
- And high percentage of seats full
- Employees may feel overworked
- Safety needs will not be met(Maslow)
- Employees become demotivated
24
Q
High Capacity Utilisation - Manufacturing Business -Drawback
A
- Operating at a high capacity
- Will mean that machines are working for long periods
- To produce high levels of output
- Increased chance of machine failure
- Disruption in the process
- Increased expenses as the business will need to spend on repairs
- OR poor customer service as longer lead time
25
Q
Low Capacity Utilisation - Manufacturing Business - Benefit
A
- Operating with low capacity utilisation
- Will mean that the business has time to service machinery between production
- To reduce the chance of machine failure
- As machinery will not need to be constantly in operation as capacity utilization is low
- Reduce expenses OR will retain a positive brand image due to no delays
26
Q
Low Capacity Utilisation - Service Business - Benefit
A
- Operating with low capacity utilisation
- Employees not working for long periods
- Service may not be as busy
- Improving working conditions
- Ensuring safety needs are being met
- Ensuring employees remain highly motivated
- And deliver exceptional customer service
- Increase level of differentiation (porter)
- Service become more price inelastic
27
Q
Low Capacity Utilisation - Service Business - Drawback
A
- Operating with low capacity utilisation
- Will mean that the business is not utilising full resources
- Low percentage of seats filled
- Lower sales volume
- Fixed costs of providing service are spread over less seats (rent, wages, insurance)
- Increased unit fixed cost
- Lower operating profit margin
27
Q
Low Capacity Utilisation - Manufacturing Business - Drawback
A
- Operating with low capacity utilisation
- Will mean that the business is not utilising full resources
- Low levels of productivity
- Reduce output
- Fixed costs are spread over less units
- Increased unit fixed cost
- Lower operating profit margin
- Less profit to retain and reinvest
28
Q
Stronger pound benefit
A
The pound buys more foreign currencies
Fewer pounds are required to buy foreign currency
Therefore, fewer pounds are required to buy foreign goods
Cheaper to import raw materials
Lower cost of sales
Can lower the price
Higher gross profit
