Crazy new shit

Question 1

What are economies of Scale?

Answer 1

• as a business and their output increases, they commonly benefit from a reduction in average costs of production. Total costs will increase as output increases.
• However the cost of producing each unit falls as output increases. This fall in average costs as output increases indicates that a business is benefiting from economies of scale. This reduction in average costs is what gives larger businesses advantage over smaller businesses.
• Economies of scale are an important aspect of efficiency in production. Economies of scale can defined as;
  The reduction in average costs of production that occur as a business increases its scale of production.

Question 2

What are purchasing economies?

Answer 2

• ## As businesses grow they increase the size of orders for raw materials or components. This may then result in discounts being given and the cost of each individual component purchased will fall. This will therefore reduce the average cost of production.

Question 3

What are Internal economies of scale?

Answer 3

• Purchasing
• Financial
• Marketing
• Managerial
• Technical

Question 4

What are Technical economies?

Answer 4

• As businesses grow they will have access to a wider range of finance. As the assets of businesses grow, they are able to offer more security when seeking to borrow money - reducing the risk to the lender. As a result, larger businesses can often negotiate more favourable rates of interest on any money they do borrow

Question 5

What are financial economies?

Answer 5

• As businesses grow they will have access to a wider range of finance. As the assets of businesses grow, they are able to offer more security when seeking to borrow money ; reducing the risk to the lender. As a result, larger businesses can often negotiate more favourable rates of interest on any money they do borrow.

Question 6

What are Managerial economies?

Answer 6

• As businesses grow they are able to employ specialist managers. These managers will know how to get the best value for each pound spent in the business whether it is in production, marketing or purchasing.
• This will increase efficiency and thereby reduce the average costs of producing goods and selling the goods or services on offer.

Question 7

What are marketing economies?

Answer 7

• As businesses grow each pound spent on advertising will have greater benefit for the business. Imagine a chain of local supermarkets: a TV advertisement is placed to cover the region. If there were 10 stores in the chain the cost of the advert must be borne by each of the 10 stores. However if they have 20 stores, then the cost of the advert would be spread across each of the 20 stores and the benefit of the advert applies to each of the 20 stores.

Question 8

What are external economies of scale?

Answer 8

• Financial services
• supplier
• educational

Question 9

What are supplier economies?

Answer 9

• A network of suppliers may be attracted to an area where a particular industry is growing. The setting up locally of supplier businesses, often in competition with one another, reduces buying costs and allows the use of systems such as JIT

Question 10

What are educational economies?

Answer 10

• Local colleges will set up training schemes suited to the largest employers’ needs, giving an available pool of skilled labour. This reduces recruitment and training costs for those businesses who make up the industry concerned.

Question 11

What are financial economies?

Answer 11

• financial services can improve, with banks and other financial institutions providing services that may be particularly geared towards a particular industry.
  E.G. for an industry where cash flow may be a particular problem, debt factoring services may be made available at competitive rates.

Question 12

What are diseconomies of scale?

Answer 12

• The factors that cause higher costs per unit of output when the scale of an organisation continues to increase - the causes of inefficiency in large organizations.

Question 13

What are the internal diseconomies of scale?

Answer 13

• coordination issues
• communication
• motivation issues

Question 14

Diseconomies of scale: coordination issues

Answer 14

• The larger an organisation becomes, the more difficult it is to coordinate. Inevitably there is a good deal of delegation and this empowerment of more and more managers to make their own decisions can result in different departments heading in different directions. To counter this, numerous management meetings have to be held.
• The time that managers spend in meeting, in an attempt to ensure better coordination within large organisations, can be viewed as a significant overhead cost.

Question 15

Diseconomies of scale: Communication issues

Answer 15

• As an organization grows and levels of hierarchy increase, the efficiency and effectiveness of communication breaks down.
• This leads to increasing misunderstanding and inefficiency as each level of hierarchy grows further and further apart and messages become distorted, resulting in increasing average costs.

Question 16

Diseconomies of scale: Motivation issues

Answer 16

• With larger businesses it is harder to satisfy and motivate workers as many may feel that their views are ignored, as they distanced from the organisation’s decision makers. This means that they may not give off their best as they are not focused on the organization’s aims and objectives.

Question 17

What are the external diseconomies of scale?

Answer 17

• overcrowding in industrial areas

- increased price of resources

Question 18

Diseconomies of scale: overcrowding in industrial areas

Answer 18

• traffic congestion may occur; resutling in late deliveries and staff arriving late for work. Local residents may resent this and public relations may suffer

Question 19

Diseconomies of scale; Increased price of resources

Answer 19

• More businesses in an area means increased demand for labour to work in that industry and the best employees may be harder to recruit and keep. Land, services and materials may all become more expensive as the industry grows and demand for such resources increases.

Question 20

How do small businesses survive and compete with larger businesses?

Answer 20

• Target market size; sometimes the potential sales are suited to small businesses, for example dog grooming services or kennels
• Population density; Large businesses need large target markets, if these don’t exist then the market is left to small businesses
• Quality of service; often it is this added value aspect of the business that justifies the higher prices charged
• Customer loyalty; even in the modern retailing environment there are customers that remain loyal to local shops and service providers
• niche markets; sometimes the segment the small business is targeting is just too small to be worthwhile to big business or the product is legally protected for a period.

Question 21

What are market orientated strategies?

Answer 21

• Businesses are market orientated when they produce what the market wants.
• This means that a market orientated business will set a price at the level the market is willing to accept.

Question 22

What are cost based strategies?

Answer 22

• Businesses are product orientated when they produce goods without in depth reference to the needs of consumers.
• With regard to price, this means that a product orientated business will set a price relate to the cost of producing or supplying the product.

Question 23

What are some market orientated pricing strategies?

Answer 23

• psychological pricing
• market skimming
• market penetration
• loss leader pricing
• destroyer pricing
• going rate pricing

Question 24

What is Market skimming?

Answer 24

• Market skimming means charging a high price to maximise profits on each item sold for a limited period.
• The aim is to gain as much profit as possible for a new product while it remains unique in the market.
• The ability to skim depends on having either a technological advantage based on brand image.

Question 25

What is Market Penetration?

Answer 25

• In this case the objective is to gain market share. It involves pricing a product at a low level so that retailers and consumers are encouraged to purchased the product in large quantities.
• This pricing strategy can help establish brand loyalty- when the price of the product does rise from the initially low level, customers will continue to purchase it.
• However, if the price is set too low, customers may take the view that the product is low quality and therefore they will not purchase it in the first place. A business may infact lose revenue initially, by using this method.

Question 26

What is Going rate pricing?

Answer 26

• For many small business accepting the current market pricing structure is all they are able to do. When this is the only option there is a strong element of being a price taker.
• They must sell their goods or services at a price broadly in line with the price charged by their competitors.
• Normally as new entrants enter the market, the price charged will have to be similar to that of the market leader.

Question 27

What is Psychological Pricing?

Answer 27

• Using this strategy, prices are set at the level that matches what consumers may expect to pay. Consumers perceive that they are receiving value from the price paid.
• Convinces consumers they are getting value for money.

Question 28

What is loss leader pricing?

Answer 28

• This strategy involves the selling of products at a loss, with the expectation that this will generate further sales of some form, elsewhere in the business. The additional sales that occur will hopefully recoup the initial loss and subsequently make a profit for the business.

Question 29

What is destroyer pricing?

Answer 29

• This is also known as predatory pricing.
• This involves setting a price low enough to drive competitors out of the market. This type of pricing is not only used by the largest businesses on a national scale, but it can also appear battles between local businesses.
• This strategy is illegal as it is seen as anti competitive.

Question 30

What are some cost based pricing strategies?

Answer 30

• Businesses which concentrate on internal costs when pricing products are known as product orientated businesses.
• Pricing strategies used are based around the costs of production.
• Cost plus pricing
• Full cost pricing
• Contribution pricing

Question 31

What is Cost plus pricing?

Answer 31

• A profit percentage is added to the average cost of producing the good.
• This is known as adding a mark up.
  Therefore if the production costs of the good are 1 pound, and the business adds a profit % of 40%, then the business will sell the good at 1.40 pounds.
• ADV; firstly, it changes in costs can be passed directly on to the buyer and secondly, every good sold is sold at a profit.
• DISADV; actions of competitors are often totally ignored. This can lead to loss of sales of profits if a higher price could be charged because of little or no competition. ALso, for exporters, this method makes no allowance for currency changes that will affect the price of goods and order levels.

Question 32

What is Full cost pricing?

Answer 32

• This is similar to Cost plus pricing but it takes the concept further.
• Now all the costs of the business are taken into consideration.
• This means that each good will bear its proportion of overhead costs such as marketing and administration.
• ADV; same as full cost pricing, however with disadvantages, there is added complexity.

Question 33

What is Contribution pricing?

Answer 33

• In this case, price is based on the variable costs plus a contribution towards overheads and profits.
• This method can give flexibility because orders can be accepted on a different basis or different products.
• This flexibility allows pricing strategies, such as price discrimination between different buyers, to be used.

Question 34

What are the criticisms of Cost based pricing?

Answer 34

• Doesn’t take customers needs or wishes into account
• If prices are set too high, then sales will suffer
• can be time consuming and complex if business sells numerous products.
• doesn’t take marketplace into account.

Question 35

What is added value?

Answer 35

• The difference between the cost of purchasing raw materials and the price for which the finished good is sold for.

Question 36

How can value of a good/service be increased?

Answer 36

• Purchasing cheaper raw materials, however, care must be taken that quality is not compromised when doing this.
• Improving the efficiency of the production process, e.g. buy up to date machinery.
• Achieving brand status for a product can create added value.
• offering additional services with a product can result in added value.
• Improving customer access or inconvenience is a well proven method of adding value. Drive through fast-food outlets and home delivery pizza are typical examples.

Question 37

What are the objectives of Promotion?

Answer 37

• To provide potential customer with readily available information about the product so that the consumer knows the benefits of using the product and where to access the product. This is often the for new product launches
• To increase sales or market share by targeting existing and new customers
• To give the products an image, or to establish a brand identity.
• To establish a corporate image. Some advertising does not sell a specific product or range of products; instead the objective is to establish the right image of the producer or retailer within the mind of the consumer.
• To enable long term business planning to take place. Promotion is part of the whole process of bringing a product or service to market. Effective promotion allows life cycles to be developed and prolonged. This then enables production and investment to occur with greater confidence.

Question 38

What factors affect the choice of media in promotion?

Answer 38

• Target market; who is the business trying to sell to
• Cost; this affects small businesses in particular.
• The reach of media; who reads the magazine or watches adverts
• The product itself; is the product suited to a certain type of promotion? e.g. is the best way to promote plastic food containers through personal selling door to door or by an advert in the local paper?

Question 39

What’s below-the-line promotion?

Answer 39

• Below-the-line promotion offers a wide range of alternative promotional strategies and these are often used to support above the line promotion
• Below-the-line promotion targets consumers directly
• Examples include:
• personal selling
• packaging
• sales promotions
• direct mailing
• exhibitions and trade fairs
• public relations

Question 40

What factors impact promotional strategy?

Answer 40

• Product differentiation
• the marketing budget available
• the stage in the product life cycle
• cultural sensitivity
• target market
• competitor actions

Question 41

How does Product differentiation affect promotional strategy?

Answer 41

• Many markets are highly competitive.
• It is important that promotion provides a method of product differentiation
• the role of promotion is to differentiate its product in the market and make it stand out from the crowd.
• the focus here remains on those features, functions or benefits that may not be offered by a competitor or may not be offered so well.

Question 42

How does the marketing budget available affect promotional strategy?

Answer 42

• it is normal to set a total budget for promotional activities based on the objectives of the business, the availability of cash and actions of competitors.

Question 43

How does the stage in the product life cycle affect promotional strategy?

Answer 43

• during the introduction and growth stages of the product life cycle there may be a more informative approach, in order to raise customer awareness
• during the maturity and saturation stages a more persuasive approach may be adopted to reinforce customers allegiance.

Question 44

How does cultural sensitivity affect promotional strategy?

Answer 44

• If a product is to be launched in a new international market or translated across markets, it becomes imperative to take into consideration local affiliations and sensitivities.
• These include both cultural and religious considerations. Often, these issues may even be present themselves within one country

Question 45

How does the target market affect the promotional strategy?

Answer 45

• The people who make up the target strategy need to be considered before committing to a promotional strategy. If a market is not tech savvy, then more traditional means may need to be employed.
• Conversely, the younger generation, used to accessing information on a daily basis via their iphones etc

Question 46

How do Competitor actions affect Promotional strategy?

Answer 46

• the promotional strategies a competitor uses need to be taken into account as well.
• If a competitor is about to launch a campaign which targets a segment of the population not previously targeted then perhaps a business needs to react in order to protect market share.

Question 47

What are the advantages of Branding?

Answer 47

• To create increased consumer loyalty - this is important when competition is intense
• to separate the product from the herd - especially in markets where there is otherwise little differentiation and products are marked by their similarities rather than their differences
• to increase price inelasticity of demand - this gives greater control over pricing strategies
• to ease customer choice; brand identity makes recognition of products easier, making purchase more likely

Question 48

What are the disadvantages of Branding?

Answer 48

• High cost of advertising; brands must be constantly kept in the consumers eye
• loss of brand value for one product can affect a whole range of similarly branded products
• brands invite competition - often from copycat manufacturers
• High cost of research and development in ensuring that the brand continues to develop and lead the market.

Question 49

What is USP?

Answer 49

• Unique selling point

- this means the product or service has a feature tat can be used to separate it from the competition.

Question 50

What is product differentiation?

Answer 50

• Making your products different from the competition is important.
• This separates your brand from competitor brands.
  This can be done through;
• methods of promotion; creating a personality for the product
• packaging; eco packaging
• form; making your products look different from the competition
• the provision of add ons; kia cars have a seven year warranty
• quality and reliability; these are features which can be emphasised (for example, BMW and rolls royce cars)

Question 51

What are the different stages in a products life cycle?

Answer 51

• Introduction
• Growth
• Maturity
• Saturation
• Decline

Question 52

Stages of product life: Introduction

Answer 52

• The product is new to the market and few potential consumers know of its existence
• price can be high and sales may be restricted to early adopters (those that must have new technology, gadgets or fashions first). Profits are often low as development costs have to be repaid and advertising expenditure can often be high.

Question 53

Stages of product life: Growth

Answer 53

• The product is becoming more widely known and consumed.
• Advertising tries to establish or strengthen the brand and develop an image for the product.
• Profits may start to be earned but advertising expenditure is still high. Prices may fall.

Question 54

Stages of product life: Maturity

Answer 54

• The product range may be extended.
• Competition will increase and this has to be responded to.
• advertising should be used to firm up the image of the product in the consumers minds.
• Sales are at their peak, profits should be high

Question 55

Stages of product life: Saturation

Answer 55

• Very few new customers are gained
• replacement purchases are the trend.
• businesses should try to reduce their costs, so that prices can be more flexible
• The battle to survive is beginning and the market for the product is ‘full’
• profits start to decline

Question 56

Stages of product life: Decline

Answer 56

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