Mr Slattery Business Flashcards
Factors of production (definition)
The inputs available to supply goods and services to the economy
Factors of production
Land, Labour, capital, enterprise
What are the sectors of the economy?
Primary (raw materials)
Secondary (manufacturing)
Tertiary (service based)
Adding value
Additions or improvements to something which makes it worth more than the cost of doing it
How can value be added?
High quality, craftsmanship, prestige design, unique and different, convenience, branding
Why is adding value important?
It allows the entrepreneur to make a profit
This gives the entrepreneur the incentive to be creative
It allows the business to charge a higher price
Makes you different and better than the competition
Private sector
The part of a country’s economic system that is run by individuals and companies, rather than a government entity
Public sector
The proportion of the economy composed of all levels of government and government-controlled enterprises
Third sector
Voluntary and community group, charities, social enterprises, cooperatives
Advantages of operating as a sole trader
Keeping all profit
Make all decisions
Self satisfaction
Remain private
Disadvantages of operating as a sole trader
Unlimited liability
Hard work
Harder to raise finance
Can pay a higher % tax
Advantages of operating as a partnership
Shared skills/ideas/resources
Easier to raise finance
Shared workload
Disadvantages of operating as a partnership
Conflict over decision making
Shared profits
Unlimited liability
No continuity
How is a private limited company different (Ltd) from a public limited company (PLC)?
A private limited company only sells shares to family and friends whereas a public limited company sells shares to anyone from the public who wants to buy them
Advantages of operating as a limited company
Limited liability
Easier to raise finance
Separate legal entity
Continuity
Pays corporation tax rather than income tax
Disadvantages of operating as a limited company
Must be incorporated at Companies House (requires a fee)
You cannot set one up if you are bankrupt
Multinational corporations (MNC)
A business which operates in many countries
What do MNCs bring?
Job opportunities
Boosts the economy
Improves the skills of the workplace
Economies of scale
Improve local infrastructure
Better prices
What problems do MNCs cause?
Sweat-shop Labour
Local businesses can’t compete
Increase pollution
Import skilled labourers
Don’t always leave profits local
Can remove jobs from their own countries
Unethical
Franchise
A business based upon the name, logo and trading methods of an existing company
Franchisee
The person that buys into the franchise
Franchisor
The owner of the franchise
Advantages of franchises
The franchisee receives ongoing training and support
The franchisee is setting up a business that is already established
Allows for growth
The franchisor receives investment for marketing and growth
What are the costs involved in buying a franchise?
Initial franchise fee
Total investment
Royalties
Marketing fund
Building
Co operatives
It is owned and run by its members
Profits are shared among members (not a charity or not-for-profit organisation)
Advantages of cooperatives
It is legally straightforward
Cheap to set up
All involved are working towards a common goal (and so have motivation)
Limited liability for members
Disadvantages of cooperatives
Capital may be small (members)
Lenders may be reluctant to sell
Weak management is possible
Large amount of decision makers (members)
What are the function areas?
Marketing
Production/operations
Human Resources
Finance
Market segmentation
The process of dividing a broad consumer or business market into sub-groups based on some type of shared characteristics
Roles in the marketing function
Producing promotional materials
Monitoring and managing social media
Conducting customer and market research
Roles of the Human Resources department
Recruitment, training, administering employee benefits, firing employees, health and safety, onboarding, HR compliance
Retention
The ability to prevent employee turnover
Recruitment
The process of finding, screening, hiring and eventually onboarding qualified job candidates
Wages
Hourly or daily payments for work done during the day
Salary
A fixed, agreed sum, payable at regular intervals
What does the finance department do?
Estimate capital requirements, manage cash flow, analyse business performance, managing operations systems, preparing budgets, accounting, paying employee wages
What does the production/operations department do?
Ensuring good quality
Managing logistics
Managing stock
Logistics
Receiving deliveries and sending out finished goods
Stock control
Maintaining stock levels and ensuring that the cost of holding the stock is minimised
Ways of defining business size
Number of employees
Amount of capital invested
Sales turnover
Market share
Brand name and history
Assets
Profits
Horizontal integration
When firms in the same industry and at the same stage of production combine
Forward vertical integration
When you integrate with a business in front of you
Backward vertical integration
When you integrate with a business behind you
Vertical integration
Occurs when a firm expands by combining with an existing business in the same industry but at different stages of production
Advantages of vertical integration
Reducing your own costs
Controls the quality and delivery of raw materials
More powerful against competitors
Disadvantages of vertical integration
Increase in costs (ie may need to appoint staff to run the business)
Inexperience in the new business
Diversification (also called a conglomerate)
Integration with a totally unrelated industry
Why diversify?
To spread the risk
To obtain other sources of finance
To increase the range of products they make or sell
Joint venture
A business arrangement where two or more parties agree to pool their resources for the purpose of achieving a specific task. The businesses remain separate in legal terms.
Advantages of a joint venture
Shared investment
Shared expenses
New market penetration
New revenue streams
Improved economies of scale
Disadvantages of a joint venture
Risk of disagreements
The objectives of each partner may change, leading to conflict
There is likely to be an imbalance in levels of expertise, investment or assets
Strategic alliance
Where two or more businesses work together, but it’s not a legally enforceable contract
Benefits of strategic alliance
Reach a broader audience
Reduced costs
Provide a distribution system
Enter new markets
Share expertise and resources
Both grow market share
Aims
The overall long term goals of the business
Objectives
The specific and measurable results the business is trying to achieve
Strategic objectives
The longer term specific objectives
Tactical objectives
The short term specific objectives
Operational objectives
The objectives of each functional area
What does SMART stand for?
Specific
Measurable
Achievable
Realistic
Time-related
Mission statement
The overriding goal of the business and the reason for its existence
Why innovate (and invent)?
It grows your business
To adapt to change
To stay ahead of competition
To charge a higher price
Problems with innovation (and invention)?
Very costly
Time consuming
Can end up wasting resources developing something that doesn’t sell
Risk of failure
Resistance to change to new ways of thinking
Employees may not be motivated to innovate
Stakeholder
Anyone with an interest in the business
Internal stakeholder
Anyone within the business (eg employees)
External stakeholder
Anyone outside the business (eg customers)
Job production
Making a unique and specific product to the customers order
Batch production
Making a specific quantity of a product
Mass/flow production
Making very large quantities of the same product on one machine
Advantages of job production
Can meet specific wants and needs
Businesses can charge high prices
Motivated staff
Disadvantages of job production
Time consuming
May be a while before customers pay you
Have to employ skilled workers/train staff
Have to break customer loyalty to other businesses
High cost of production
Only specific customers
Advantages of batch production
Can make a wide variety of products
Greater quality control
More interesting for workers as there is variety
Producing in smaller quantities can reduce waste
Useful for seasonal items
Machinery isn’t continually active which reduces running costs
Disadvantages of batch production
Errors with the batch will result in wasted time and costs
The product cannot be personalised to the individual customer
Time consuming to change between batches
Training costs
Periods of downtime when altering machinery
Advantages of flow production
No downtime
Produce a high number of products at a low cost
Production can happen 24/7
Economies of scale
Cheaper staff as they are lower skilled
Reduced human errors
Disadvantages of flow production
Difficult to alter the production process
All products have to be very similar or standardised
High cost of machinery
Repetitive and boring for workers -> lack motivation, low retention
Have to have a lot of storage available
Maintenance costs
Cell production
The flow production line is split into a number of sections and each team or ‘cell’ is responsible for several parts of the finished product
Specialisation
Where a business focuses on one type of product
Division of Labour
Specialisation of Labour into separate tasks to ensure higher productivity per worker
Advantages of specialising staff
Jobs are done efficiently
May be quicker at their job
Jobs are done to a higher standard
Organised workplace
Higher productivity
Workers have a defined skill set
Less waste
Disadvantages of specialising staff
Have to train staff
May not be able to carry out other tasks
Harder to employ new staff with the same skill set
Boring and repetitive work
Free float
The amount of time that an activity can be delayed without delaying the start of the next task
Free float equation
Next tasks EST - this tasks EST - duration
Total float
The amount of time that an activity can be delayed without impacting on the completion date of the whole project
Total float equation
This tasks LFT - this tasks EST - duration
Dummy run
A task that needs completing, but it’s delay has no impact anywhere
Advantages of CPA
Reduces the risk and costs
Help spot which activities have some slack (‘float’)
Links well with other aspects of business planning such as cash flow
Disadvantages of CPA
Reliability of CPA based on accurate estimates
Does not guarantee the success of a project
Resources may not be as flexible
What does PERT stand for?
Program
Evaluation
Review
Technique
Calculation for estimated duration of a project
((Optimistic time) + (4 x likely time) + (pessimistic time)) / 6
What is a Gantt chart?
A graphical layout of tasks including start and finish times and when tasks can overlap
Advantages of Gantt charts
Easy to schedule tasks
Easy to understand
Clear and visual representation of time frames
Helps manage resources
Allows you to balance multiple projects
Disadvantages of Gantt charts
Difficult to prepare and manage
Updating the chart can be time consuming
All tasks are not visible in a single view
They don’t designate priorities
Don’t offer much detail
Productivity
The ability to maximise the use of your inputs (workers and machines)
Equations for productivity
Number of products / average number of employees
Number of products (output) / capital
Sales revenue / staff
Capacity utilisation
The percentage of your potential capacity that you are currently using
Capacity utilisation equation
(Actual output / potential output ) x 100
Advantages of operating at high capacity
More output
Justifies wages and equipment
Disadvantages of operating at high capacity
Breakages
Staff illness / stress
Types of internal economies of scale
Purchasing
Production / technology
Marketing
Managerial
Financial
Risk bearing
Purchasing economies of scale
Getting a discount for buying in bulk
Production / technology economies of scale
Spreading the cost of production over more output
Marketing economies of scale
Promoting the brand name
Managerial economies of scale
Employing best specialist managers
Financial economies of scale
Borrowing at cheaper rates of interest
Risk bearing economies of scale
Spreading the risk over a range of products
External economies of scale
When the average costs fall for the entire industry together
Diseconomies of scale
When becoming a very large business eventually makes your costs go up
Examples of diseconomies of scale
Staff morale
Staff working poorly in a big team
Communication problems
Poor cooperating between departments
Office politics
Impersonal relationship with customers
Lean production
Ensuring everything is done to the best quality and produced as efficiently as possible
Benchmarking
Identifying the best and trying to match it
Continuous improvement (kaizan) / marginal gains
Improving everything by a small amount so that, over a period of time, overall performance is improved
Total quality management (TQM)
Everybody is involved in checking quality where they work. The product will only move down the line once it passes quality checks
Advantages of TQM
Eliminates defects and waste
Higher productivity
Reduced costs
Allows you to make the best products possible
Improves quality reputation
Ability to adapt to changing market conditions
Can spot errors quickly
Could set higher price
Disadvantages of TQM
All of the company has to commit to quality improvement
Staff may need more training
Time consuming
May require more staff
May reduce output
Have to design the system
A fault could slow / stop production
Jidoka
Technology which automatically stops production if a fault is spotted
Ergonomics
Laying out the factory so workers, machines and tools are efficiently close and in the best place
Just in time stock control
Involves keeping stock to an absolute minimum and the raw materials are ordered only when they are needed
Advantages of just in time
Less warehousing
Less time consuming
Improves cash flow
Disadvantages of just in time
Could run out of stock
Deliveries may be late
May have mistakes with orders
Problems with having too much stock
Could get stolen / damaged / spoiled / lost
Expensive to store
Pay for extra insurance
Reduces available cash flow
Takes up a lot of room
Calculation for average stock level
(Maximum level + minimum level) / 2
Other stock control methods
Last in first out (LIFO)
First in first out (FIFO)
Electronic point of sale (EPOS)
Kanban - automatic re-ordering of minimum stock needed
Automation
The use of robotic equipment in a manufacturing process
Benefits of being automated
Fewer human errors
Having to employ fewer workers
Higher productivity
Reliability
More efficient use of materials
Time saving
Reduced training costs
Improved safety
Disadvantages of being automated
Having to train staff to use the technology / employ specialist staff
High initial costs
Any errors would be time consuming
Expensive to replace / update / maintenance
Lose human interaction
May become dependent on technology
Inability to tailor / customise the product
Redundancy costs
Customer service
Providing services to customers before, during and after purchase, to standards that meet their expectations
Benefits of good customer service
Attracts repeat customers (customer loyalty)
Receive a good reputation
Can charge a higher price
Improve employee happiness (higher retention)
Remain competitive in the marketplace
Customer recommendations
Increase sales
Increase market share
Examples of good customer service
Knowing your customers
Well-trained staff
Warrantees
Selling online
External quality award
When a recognised awarding body gives you a formal award for reaching set measurable standards
Factors affecting location
Rent (cost and availability)
Availability of labour
Close to raw materials
Close to customers
Infrastructure
Government grants
Logistics
Plans, implements and controls the flow (and storage) of goods from the point of origin to the point of consumption
Examples of logistics
Supply chain management
Distribution management
Warehousing
Distribution centres
Procurement
The process of selecting suppliers, establishing the payment terms and negotiating the purchasing of goods
Why do businesses need reliable suppliers?
Supply problems disrupt the business
Helps develop better business forecasts for finance and operations
Good and consistent quality is important
Factors that impact decisions on logistics
Time
Reliability of supply
Length of supply chain
Costs
Customer service
Warehousing
The storing of inventory (stock)
Why is warehousing used?
To store more products in bulk before shipping them out to other locations or customers
Problems with warehousing
Storage cost
No full control
Security costs
Requires more staff to operate it
Lack of space in public warehousing
Advantages of warehousing
Improved efficiency and productivity
Safe and secure storage
Flexibility
Cost savings
Enhanced storage
Organised
Corporate social responsibility (CSR)
When a company becomes socially accountable to itself, it’s stakeholders, and the public
Why do businesses use CSR?
Customer retention
Increase employee engagement
Improves reputation
Attracts investment opportunities
Reduce business costs
Business growth
Main examples of CSRs
Reducing carbon footprint
Improving labour policies
Ethical suppliers
Charity
Volunteering in the community
Social investments in the community
Disadvantages of CSR
Can be expensive (for the firm and the customer)
Impacts of being in the public eye
May require skills the business lacks
May discourage certain investors
Less productivity
Might not be appreciated
Virtue signalling (doing something just to look good)
Business plan
A report by a new or existing business that contains all of its research findings and explains why the firm hopes to succeed
Examples of things included in a business plan
Objectives, strategies, sales, marketing and financial forecasts, mission statement, product/service, the company’s leadership team, employees, location, competitive analysis, suppliers
What does a business plan do?
Helps reduce risk
May need to go to the bank for a loan to help with setting up
Provides a guide and a written strategy
To evaluate and update progress
Advantage of business planning
Helps with applying for loans
Helps set targets
Helps monitor performance
Helps evaluate the business
Reduces risk
Disadvantages of business planning
Often changes significantly
Ignores competitor actions
Too optimistic / pessimistic
Time consuming
The plan-do-review model
Ensures that a project is still on track, achieving its aims and responding to any necessary changes
Advantages of the ‘plan-do-review’ model
It forces a strategic approach
Helps to identify good and bad practice
Constant improvements and corrections can be made
It encourages Kaizen
Allows evaluation of the objectives set and methods used
What does contingency planning involve?
Preparing for predictable and quantifiable problems
Preparing for unexpected and unwelcome events
An agreed plan of action is ready to put in place
Why is a contingency plan likely to work well?
Ensures you’re prepared
Minimises the impact of an event
Helps you to get back to normal operations quickly
Porter’s 5 forces model
Examines five forces that determine the competitive intensity of an industry
(How competitive the industry is and if it’s attractive to enter/remain in that market)
The 5 forces examined in Porter’s 5 forces model
Threat of new entrants
Threat of substitutes
Bargaining power of buyers
Bargaining power of suppliers
Degree of rivalry
Benefits of Porter’s 5 Forces Model
Helps to understand your competitive environment
Helps with decision making
Disadvantages of Porter’s 5 Forces Model
The model only provides a snapshot
The results only focus on the short term
The model doesn’t give you an action plan
Examples of non-financial measures of business performance
Productivity
Customer satisfaction
Employees
Conversion rate
Retention rate
Customer reviews
Company reputation
Customer relationships
Policies (eg environmental, equality)
Examples of financial measures of performance
Final accounts (accounts to illustrate profit or loss)
Ratio analysis (interprets key performance indicators)
Gearing (ratio of debt to equity)
Cash flow
Budgets (financial plan for the future)
Variance analysis (difference between actual and budget figures)
Gross / net profit margin
Return on equity
Turnover
Examples of qualitative forecasting
Delphi technique (expert opinion)
Brainstorming (bringing together a team of experts)
Consumer opinion / expectations
Leading academic opinions (university professors)
Frontline staff opinions (often sales staff)
Advantages of qualitative forecasting
Flexibility to explore opinions, judgement and intuition from experts
Intuition when sales data is lacking
Can integrate various kinds of information
Valuable insight
Can choose an expert
Disadvantages of qualitative forecasting
Errors in judgment
May be unexpected changes
May be biased
Can be too optimistic / pessimistic
No statistics to support it
Time consuming
Time series analysis
Calculates the average over a period of time
Elements of time series analysis
Raw data = looks at trends over time
Cyclical variations = looks at economic booms and downturns
Seasonal variations = takes into account seasonal factors (eg hotels at Christmas)
Random fluctuations = unexpected changes in trends (eg water shortage leads to boom in bottled water sales)
