Paper 1 Flashcards
Everything you need to know for paper 1 from the advanced information 2022
What does the term public sector organisations mean?
Public sector organisations are owned and run by the government. They aim to provide services to the public rather than making a profit
What does the term private sector organisations mean?
Private sector organisations are owned and run by private individuals.
They range from small sole traders to huge organisations.
Most private sector organisations aim to make a profit but nonprofit organisations are also part of the private sector
What is unlimited liability?
Unlimited liability means that the business and the owner are seen as one under the law. This means that the business debts become the personal debts of the owner. So traders can be forced to sell personal assets to pay off business debts
What is limited liability?
Limited liability means that the owners aren’t personally responsible for the debts of the business and have separate legal identities to the business
What is a sole trader?
A sole trader is an individual trading in his or her own name or under a suitable trading name. The owner is responsible for all business debts because they have unlimited liability
Give 4 advantages of being a sole trader
– Quick and easy to set up
– simple to run
– easy to close/shut down
– all profit entitled to owner
Give 5 disadvantages of being a sole trader
– Unlimited liability – harder to raise finance – vulnerability, business suffers if the owner becomes ill – limited expertise – long hours
What is a partnership?
Partnerships are started and owned by more than one person up to 25 people. There is a legal partnership agreement which covers areas such as: how profits are shared, how decisions are taken and what happens if a partner wants to leave. Partnerships still have unlimited liability
Give 4 advantages of a partnership
– Simple to run
– expertise an effort of more than one person
– partners can provide specialist skills
– greater potential to raise finance
Give 3 disadvantages of a partnership
– Unlimited liability
– poor decision by one partner can damage the interest of other partners
– complicated to sell or close business
What are the two kinds of limited companies?
There are private limited companies (LTDs) and public limited companies (PLCs)
Who own limited companies and how are they run?
Limited companies are owned by shareholders and run by directors. Shareholders have a part ownership of a company
Give 6 characteristics of a private limited company
– Can’t sell shares to the general public
– don’t have share prices quoted on the stock exchanges
– shareholders may not be able to sell their shares without agreement of other state shareholders
– they are often small family businesses
– there is no minimum share capital requirement
– they end their name with the “limited” or LTD
Give 6 characteristics of a public limited company
– Can sell shares to the general public
– their share prices can be created on stock exchanges
– shares are freely transferable and can be bought and sold through stock brokers, bank and share shops
– they usually start as a private limited company then go public later to raise more capital
– They need over £50,000 of share capital and if they are listed on the stock exchange, at least 25% of this must be publicly available
– they always have the initials PLC in their name
What is ordinary share capital?
Ordinary share capital is the original value of shares sold
What is market capitalisation?
Market capitalisation is the current total value of all the ordinary shares issued by a company
Formula for market capitalisation
Number of issued shares X current share price
Give 4 advantages of being a limited company
– Limited liability
– easier to raise finance
– stable form of structure – business continues to exist even when shareholders change
– less tax
Give three disadvantages of being a limited company
– Greater admin costs
– public disclosure of company information
– legal duties to follow
What is a not-for-profit organisation?
And not-for-profit organisation runs for the benefit of the community and have social aims. Examples include charities, housing associations and community development trusts
What is a shareholder?
Shareholders anyone who owns at least one share in the company
Who usually buy shares in a public limited company?
Individuals, companies and institutions (such as pension funds)
Who usually buys shares in private limited companies?
Family and friends of the original owners
Give 6 reasons why a shareholder would invest in a company
– To achieve a capital gain
– Shareholders may be paid a dividend in return for their investment
– Shareholders want to be involved in the running of the business
– They believe in the aims and objectives of the company and want it to succeed
Invest in order to help the company grow or survive
– Venture capitalist
Give 5 reasons why share prices fluctuate
– Performance of the company – speculation of rumours of new product launches and cost saving initiatives – current share prices – interest rates – State of the economy/external factors
What does “rights issued” mean?
– When a company issued existing shareholders the right to buy additional shares
– the company will offer the shareholder specific number of shares at a specific price
– the shares are often offered at a discounted price to encourage existing shareholders to take the company up on their offer
– if not wanted, they will sell using the stock market as ordinary shares
Define business environment
Business environment incorporates all of the internal and external factors that affect how the company functions including employees, customers, management, supply and demand and business regulations
What are 6 external factors that influence costs and demand?
– Competition – market conditions – Incomes – interest rates – demographic factors – Environmental issues and fair trade
What are the 4 market conditions that affect costs and demand?
– Political factors
– labour supply
– incomes and economic factors
– seasonal demand and supply
How do political factors affect costs and demand?
– If demand in the economy is too low, governments try to increase it. They cut taxes so people have more to spend and increase their spending in the economy
– Government to try to reduce demand if it’s too high by raising taxes so people have less money to spend and cuts to government spending
– The government can also influence demand for a particular product by using taxes, for example sugar tax
How does labour supply affect costs and demand?
– When unemployment rates are high, there is a good supply of labour. Businesses can hire staff easily and won’t have to pay high wages and people in work will have to be extra productive to protect their job
– a lower rate of unemployment could mean that there is a shortage of labour. The people available for employment might not have the skills needed for the role, so will need training. This can increase costs for a business
How do incomes and economic factors affect costs and demand?
- In a recession, businesses need to reduce costs and lower incomes mean people have less money to spend on products, so demand decreases.
- In an economic boom, wages rise and more people are employed. This may lead to greater costs due to increased wages. However, higher incomes mean that people have more money to spend increasing demand for products.
- Changing incomes affect demand for some products more than others (income elasticity of demand)
How does seasonal demand and supply affect costs and demand?
- There are variations in demand and supply throughout the year, this is called seasonality.
- Businesses must have strategies to deal with it for example; after Christmas, demand for retail goods drops, so shops cut prices to boost demand and get rid of stock
How does competition affect costs and demand?
Competition can reduce demand and increase costs.
How do interest rates affect costs and demand?
- Interest rates determine the cost of borrowing money and the return on savings.
- High interest rates mean most customers have less money to spend – people with existing borrowing have to pay back more money in interest, so they have less disposable income and so market demand goes down.
- Low interest rates means customers have more disposable income and there is less reward for saving, so demand goes up.
How do businesses respond to demographic changes?
- The structure of a population changes over time in terms of age, sex and race – this is demographic change.
- Demographic change is important to businesses because it has an impact on demand for products.
- Different demographics of consumers tend to buy different things, so businesses need to adapt the amount and type of products they are producing.
- Demographic changes can mean that certain types of business are more in demand, this might allow existing businesses to expand or new businesses to be set up.
How do environmental and ethical factors increase business costs?
Consumers are becoming increasingly concerned with the effect that their purchasing has on the environment and the ethical and unethical behaviour of firms. This is forcing businesses to consider the impact on the environment and how ethical they are being. Most of the time this increases costs
What are the two types of decision making?
Scientific and intuitive (hunch)
What are the 6 stages in scientific decision making?
1) set objectives
2) collect data
3) analyse data
4) make decision
5) implement decision
6) review decision
What are the three main things that influence decisions? (Hint: think RRU)
Risk, reward and uncertainty
Define opportunity cost
Opportunity cost is the potential benefits a business misses out on when choosing one alternative over another
What does a square represent in a decision tree?
Decision point
What does a circle represent on a decision tree?
Alternative outcomes
What do decision trees help set out?
Decision trees show which course of action is probably best from a financial point of view
Give 2 advantages of decision trees
- visual representation of outcomes
- allow managers to quantify options
Give 2 disadvantages of decision trees
- they are only quantitative
- probabilities are hard to accurately predict
Give 2 internal stakeholders
- owners/ managers
- employees
Give 5 examples of external stakeholders
- customers
- suppliers
- local community
- government
- creditors - people the business owes money to
What analysis technique takes into account the power and interest of stakeholders?
Stakeholder mapping
What are the axis variables on a stakeholder map?
Power/ influence (y) and interest (x)
Relationships with stakeholders are important. How can a business keep them satisfied?
1) Adapt to external influences
2) Don’t just focus on one stakeholder at the expense of another
3) Consult all stakeholders before major decisions
4) Keep good communication between the business and their stakeholders
What is the role of marketing?
The role of marketing is to identify, predict and satisfy the needs of the customer in a profitable manner.
The marketing function has 3 basic objectives, what are they?
- Determine what the market wants
- Develop the strategy to achieve the marketing and business objectives
- Deliver the marketing actions to achieve the objectives
What are marketing objectives?
Marketing objectives set out what a business wants to achieve from its various marketing activities. They need to be consistent with the overall aims and objectives of the business, this provides focus for the marketing department.
Give 5 examples of marketing objectives
Market size Market share Market growth Sales growth Brand loyalty
Define market size
The number of sales, by value or volume, in a market as a whole.
Define market share
The proportion of total sales that a particular firm controls in a market
Define market growth
The percentage increase in the size of the total market in terms of either value or volume
Define sales growth
The percentage increase in the size of the sales of a firm in terms of either value or volume
Give 3 examples of internal factors on marketing objectives
Corporate objectives
Finance
Human Resources
Give 4 examples of external factors on marketing objectives
Market
Technology
Competitors
Ethical / environmental factors
What does STP stand for?
Segment > Target > Position
What is segmentation?
Segmentation divides a market into groups of buyers. Each group will have different wants and needs and require a different marketing mix
What are the 4 ways you can segment a market?
1) Demographic
2) Geographic
3) Income
4) Behaviour
Why is segmentation useful?
It identifies new customers, markets and products. It can also help to indentify the best way to market a product
What is a disadvantage to segmentation?
It can cause companies to ignore the needs of potential customers. It can be difficult to break the market into obvious segments and even more difficult to find ways of marketing to specific demographics
After segmenting a market, what must a business then do?
Target
What are the 3 approaches to targeting a market?
1) Concentrated marketing
2) Differentiated marketing
3) Undifferentiated marketing
Explain concentrated marketing and what type of companies does this suit?
Involves targeting one or two segments. It is good for small businesses with limited resources. The segment must be big enough for a decent return and have potential growth.
Explain what differentiated marketing is and which companies this suits?
Where several markets are targeted and the product and marketing mix are adapted to appeal to each segment. This is only feasible for large companies with large budgets.
Explain what is undifferentiated marketing is and which types of products is this good for?
It is where segments are ignored and the company tries to reach the entire market with a single product to appeal to each segment. It makes sense for widely used products, eg toothpaste
What are the two markets that businesses can target?
Niche and mass markets
What should a business do after segmenting and targeting a market?
Position
What is positioning?
Positioning is creating an image of your brand or product in the mind of your target customer
Give 3 influences on the positioning of a business
1) State of the market
2) Company’s current products
3) Attributes of the company
List the 7p’s
Price Product Place Promotion People Physical environment Process
A business’ marketing mix must be…
Integrated
Give the 3 types of consumer product
Convenience
Shopping
Speciality
What is a convenience product?
Inexpensive, everyday items bought regularly by lots of people
What are shopping products?
These are things like clothes, computers and washing machines that are bought less regularly than convenience products. They are more expensive and are sold in fewer places than convenience products
What are speciality products?
These are products that are unique in some way. Percieved image and quality are more important to consumers than price for speciality products, so higher profits can be made from them
What does the Boston matrix analyse?
Product portfolio
What does the x-axis represent on a Boston matrix?
Relative market share
What does the y-axis on the Boston Matrix represent?
Relative market growth rate
What are the 4 quadrants of the Boston Matrix?
Stars
Question marks
Cash cows
Dogs
Give 3 reasons why it is beneficial to develop new products
1) Bring in new customers
2) They give a competitive advantage
3) They allow companies to maintain a balanced product portfolio
What are the 5 stages of the product life cycle?
1) Research and development
2) Introduction
3) Growth
4) Maturity
5) Decline
What extension strategies can a business implement to prolong the life of a product?
1) Product development
2) Market development
3) Change the distribution channels
4) Change the pricing strategy - offers and competitions
5) Promotions - new ad campaign
Give some factors that affect pricing decisions
1) Value of costs / mark ups
2) How price sensitive customers are
3) Price elasticity of demand
4) The stage of the products life cycle
5) Corporate objectives
6) The price of competitor products
Give the 7 types of pricing strategies
1) Price skimming
2) Price penetration
3) Predatory pricing
4) Competitive pricing
5) Psychological pricing
6) Loss leaders
7) Price discrimination
What is price skimming? And give an example
When new and innovative products are sold at high prices when they first reach the market. Consumers will pay more because the product has scarity value, and the high price boosts the products image and increases its appeal. An example of this is the launch of PS5
What is price penetration?
The opposite of skimming. It means launching a product at a low price in order to attract customers and gain market share. It is especially effective in markets that are price-sensitive
What is predatory pricing?
When a business deliberately lowers prices to force another business out of the market (this is illegal under EU and US laws)
What is competitive pricing?
When companies monitor their competitors’ prices to make sure that their own prices are set at an equal or lower level
What is psychological pricing?
Basing prices on customers expectations. A high price may make people think the product is high quality.
What are loss leaders?
Products that are sold at or below cost price. These products will lose money but they’ll make a profit for the business indirectly by enticing customers into the shop where they will buy full priced items
What is price discrimination?
When a company sells its product at different prices to different groups of consumers, eg theme park ticket prices will vary according to the age of the customer
What is the purpose of promotion?
Promotion is designed to inform customers about a product or service or persuade them to buy it
What is the difference between industrial promotion and consumer promotion?
Industrial promotion tends to be informative, whereas consumer promotion tends to be persuasive
Excluding advertising, what are the other types of promotion?
1) Merchandising
2) Direct mail
3) Personal selling
4) Relationship marketing
5) Event sponsorship
6) Shopping channels
What are the 4 types of distribution channels?
1) Direct selling (0 level channel)
2) Indirect selling (1 level channel)
3) Direct selling through an agent (1 level channel)
4) Indirect selling (2 level channel)
Describe the direct selling channel
Manufacturer => Consumer
Describe the indirect selling channel (1 level channel)
Manufacturer => Retailer => Consumer
Describe the direct selling through an agent channel
Manufacturer => Agent => Consumer
Describe the indirect selling channel (2 level channel)
Manufacturer => Wholesaler => Retailer => Consumer
The fewer intermediaries in the distribution chain, the more _ _ _ _ _ _ _ a business has over how its products are sold
Control
What are 5 examples of things that are included in physical environment?
1) Decor and appearance
2) Appearance of the website
3) Appearance of staff
4) Layout
5) Practicality and safety
Job production
Production of one-off items by skilled workers
Flow production
Mass production on a continuous production line with division of labour
Batch production
Production of small batches of identical items
Cell production
Production divided into sets of tasks, each set completed by a work group
Define capacity
Capacity is maximum output with the resources currently available
What is capacity utilisation?
Capacity utilisation is how much capacity a business is using
What is known as the most efficient capacity utilisation?
80%-90%
Give 5 ways of increasing capacity
– Facilitate more of the working week
– invest in more machines
– increase staff levels by employing temporary and part-time staff or get staff to work overtime
– increase productivity and employee motivation
– subcontract work
What does under-utilisation increase?
Under-utilisation increases costs because it causes fixed costs to be spread over fewer units of output, so unit costs increase
What is the difference between productivity and efficiency?
Productivity is measured as the output per worker in a given time period.
Efficiency is all about getting more outputs from a given amount of inputs
Lean production
An approach to management that focuses on cutting out waste, whilst insuring quality. This approach can be applied to all aspects of the business - from design, through production to distribution
Give 5 types of waste
– Overproduction – waiting time – transport – stocks – defects
What is time based management?
A general approach that recognises the importance of time and seeks to reduce the level of wasted time in the production processes of a business
Give 3 benefits of effective time management
– Quicker response times to meet changing market and customer needs
– faster new product development
– reduction in waste, therefore greater efficiency
Give 2 requirements for time based management
– Flexible production methods
– trained employees
What is simultaneous engineering?
An approach to project management that helps firms develop and launch new products more quickly. All parts of the projects are planned together. Everything is considered simultaneously rather than separately
Give 3 benefits of simultaneous engineering
– New product is bought to the market much more quickly
– business may be able to charge a premium price that will give a better profit margin and help recoup research and development costs
– a greater sense of involvement across business functions improve staff commitment to the project
Give 4 benefits of cell production
– Closeness of cell members should improve communication
– workers become multi skilled and more adaptable
– greater employee motivation, from variety of work, team working and responsibility
– quality improvements as each cell has ownership for quality on its area
Give 4 drawbacks of cell production
– Business may have to invest in new materials handling and ordering systems suitable for cell production
–Cell production may not allow a firm to use its machinery as intensively as in traditional flow production
– Allocation of work to sales has to be efficient so that employees have enough work but not so much that they are unable to cope
– Recruitment and training of staff must support this approach to production
What is just-in-time production?
Just-in-time aim is to ensure that inputs into the production process only arrive when they are needed
How does just-in-time work?
– Based on a pull system of production - customer orders determine what is produced
– requires complex production scheduling
– supplies delivered to production line only when needed
– requires close cooperation with high-quality suppliers
Give 3 advantages of just-in-time
– As stock is only obtained when it is needed, less working capital is tied up in stock
– lower stockholding means a reduction in storage space
– less likelihood of stock perishing, becoming obsolete or out of date
Give 3 disadvantages of just-in-time
– There is little room for mistakes as minimal stock is kept for reworking faulty product
– production is highly reliant on suppliers
– there is no spare finished product available to meet unexpected orders because all product is made to meet actual orders
What is Kaizen production?
Kaizen (or continuous improvement) is an approach of constantly introducing small incremental changes in the business in order to improve quality and efficiency
How kaizen works
– Leaner production is based on making many small changes
– small improvements are less likely to require major capital investment
– ideas come from the talents of the existing workforce as opposed to using R&D, consultants or equipment
– Kaizen encourages employees to take ownership for their work, can help reinforce team working and improve motivation
What are the 2 main types of technology?
- robotic engineering
- computer engineering
Give 5 advantages for a business using technology
1) increased productivity and quality
2) more effective and efficient delivery of goods and services to the customers
3) more effective marketing campaigns that target the right customers
4) reducer administrative and financial costs
5) better communication both internally and externally
Give 4 disadvantages to a business of using technology
1) initial costs may be high
2) technology requires maintenance and constant updating, which can be expensive
3) staff need to be trained to use the new systems
4) replaces some manual work so technology can lead to redundancies
What does a capital-intensive firm use?
A capital-intensive business used more machinery and relatively few workers
Are capital-intensive firms typically large or small companies?
Larger firms tend to be more capital-intensive than smaller companies. E.g Morgan motor company use lots of labour and BMW uses more robots and machinery
Give 4 advantages of capital-intensive production
- cheaper than manual labour in the long term
- more precise and gives consistent quality levels
- ability to work 24/7
- machines are easier to manage than people
Give 4 disadvantages of capital-intensive production
- high set up costs
- machines are usually only suited for one task which makes them inflexible
- machines can break down, which leads to long delays
- fears of being replaced by machines can decrease motivation of the workers
What does a labour-intensive firm use?
A labour-intensive firm uses more workers and less machinery
What public sector organisation is very labour intensive?
NHS
Give 4 advantages of labour-intensive production
- People are flexible and can be retained
- Cheaper for small-scale production
- Cheaper where low cost labour is available
- Workers can solve problems that arise during production
Give 4 disadvantages of labour-intensive production
- It is harder to manage people than machines
- People can be unreliable
- People can’t work without breaks or holidays
- Wage increases mean that the cost of labour can increase over time
What does poor quality lead to?
Poor quality leads customer dissatisfaction and a bad reputation for the business
Many customers are aware that cheaper products have lower quality compared to an expensive good, but what do customers expect for a product to be?
Fit for purpose
Define quality control and who usually carries out quality control?
Quality control means checking goods as you make them or when they arrive from suppliers to see if anything is wrong with them. It’s often done by specially trained quality inspectors
Define quality assurance
Quality assurance means introducing measures into the production process to try to ensure things don’t go wrong in the first place. This could be checking the product for quality at every stage of production
Comparing quality assurance and quality control, which is more motivating for employees?
Quality assurance because employees are empowered to self-check the quality of their work.
What does TQM stand for?
Total quality management
What is total quality management?
TQM means the whole workforce is committed to quality improvements. The idea is that every department focuses on quality in order to improve the overall quality of the products and services
Give 3 advantages of TQM
- bonds employees as a team
- boosts a company’s reputation for providing quality goods and services
- leads to fewer faulty products being produced so the business creates less waste
Give 3 disadvantages of TQM
- takes a long time to introduce TQM
- can demotivate staff as it can be a lot of effort
- usually expensive to introduce as investment is required for training of all staff
What are financial objectives?
Financial objectives are financial goals that a business wants to achieve. Businesses usually have specific targets in mind, not just profit maximisation, and a specific time period for completion
Who sets financial objectives?
Financial managers
What can financial objectives be based on to ensure that they are relevant?
Past financial data
What are the 3 types of financial objectives?
- Revenue objectives
- Cost objectives
- Profit objectives
What is cash flow?
Cash flow is all the money flowing in and out of the business on a day to day basis
Why are cash flow objectives put in place?
To prevent cash flow problems
What does ROI stand for?
Return on investment
What does ROI measure?
Return on investment measures how efficient an investment is - it compares the return from a project to the amount of money that’s been invested
ROI formula
(ROI / Cost of investment) X 100
What does capital structure refer to?
Capital structure refers to the way a business raises capital to purchase assets
What combination makes up capital structure?
Capital structure is a combination of debt capital and equity capital
What are two internal factors that influence financial objectives?
- The overall objectives of the business
- The status of the business
What are 5 external factors that influence financial objectives?
- The availability of finance
- Competitors
- The economy
- Shareholders
- Environmental and ethical influences
Explain the influence the economy has on financial objectives
In a period of economic boom, businesses can set ambitious profit targets. In a downturn, they have to set more restrained targets and they might set targets that minimise costs.
Percentage change in profit formula
(Current year’s profit - previous year’s profit) / previous year’s profit) X 100
What are the 3 types of profit?
- Gross profit
- Operating profit
- Profit for the year (net profit)
Gross profit formula
Gross profit = sales revenues - cost of sales
Operating profit formula
Operating profit = gross profit - operating expenses
Profit for the year formula
Profit for the year = operating profit - net finance costs - tax
Gross profit margin formula
(Gross profit / sales revenue) X 100
Operating profit margin formula
(Operating profit / sales revenue) X 100
Net profit margin
(Net profit / sales revenue) X 100
Give examples of cash inflows
- Sales revenue
- Payment from debtors (recievables)
- Sale of assets
- Owners’ capital invested
- Sources of finance
What is the difference between credit sales and cash sales?
Cash sales appear in the month of sale and credit sales usually appear in the month after
Give examples of cash outflows
- Purchasing stock
- Wages
- Paying debts
- Purchasing assets
What is the difference cash payments and credit payments?
Cash payments appear in the month of purchase and credit purchases appear in the month of cash outflow
What 2 things is the length of the cash flow cycle depends on?
- The type of product - this determines the length of time it’s takes to produce and how long it’s held in stock
- Credit payments
Give 6 ways that businesses can improve cash flow
1) Overdrafts
2) Hold less stock, so less cash is tied up in stock
3) Try to reduce the time between paying suppliers and getting money from customers
4) Credit controllers keep debtors in control
5) Debt factoring
6) Sale and leaseback
What are cash flow forecasts?
Cash flow forecasts show the amount of money that managers expect to flow into the business and flow out of the business over a period of time in the future
Why isn’t cash forecasting always accurate? (Think about the two main reasons)
- Cash flow forecasts can be based on false assumptions about what’s going to happen
- Business environment can suddenly change and costs and demand can change rapidly
Give two reasons why a cash flow forecast is useful to someone setting up their own small business
- They can use it to support themselves when applying for loans and sources of finance
- It can give them an idea of when they will have large payment months (e.g when bills are paid quarterly or yearly)
What is a budget?
A budget is a financial plan for the future
What are the three types of budget?
- income
- expenditure
- profit
What are budget holders?
Budget holders are people responsible for spending or generating the money for each budget.
For example, the budget holder of the expenditure budget for marketing could be the head of the marketing department
Give 3 advantages of budgeting
- help achieve targets
- control income and expenditure
- assists managers to review their activities and make decisions
Give 3 drawbacks of budgets
- can cause resentment and rivalry if departments have to compete for money
- restrictive
- time-consuming to set and review the budget
What are the two methods used to set budgets?
Zero-based budgeting and historical budgeting
What is zero-based budgeting?
When businesses develop their budgets from scratch
Define liquidity
Liquidity is the ability of a firm to pay its short term debts
What is variance?
Variance is the difference between actual figures and budgeted figuress
What does a favourable variance lead to?
Increased profit
What does an adverse variance lead to?
Reduced profits
What are the two types of variance?
Adverse and favourable
Give 3 external influences that cause variance
- competitor behaviour
- changes in the economy
- the cost of raw materials
Give 3 internal influences that cause variance
- improvements in efficiency
- overestimated/ underestimated budgets
- changes in selling price
What are 3 examples of decisions based on adverse variances?
- changing the marketing mix
- streamlining production
- motivate employees
What are 3 examples of decisions based on favourable variances?
- set more ambitious budgets
- improve responsibility of employees to be able to set higher targets in the next budget
- increase production
What is the break-even output?
The break even output is the level of sales a business needs to cover its costs
What is contribution?
Contribution is the difference between the selling price of a product and the variable costs it takes to produce it
Contribution per unit formula
selling price per unit - variable costs per unit
Total contribution formula
total revenue - total variable costs OR contribution per unit X number of units sold
Break-even output formula
fixed costs / contribution per unit
Margin of safety formula
Actual output - break-even output
Give 3 advantages of break-even analysis
- Easy to carry out
- Quick way to find out break-even output and margin of safety
- Forecasts how variations in sales will affect costs, revenue and profits
Give 3 disadvantages of break-even analysis
- Assumes that variable costs always rise steadily
- The analysis is for only one product and the majority of businesses sell a whole portfolio of products
- It only tells you how many units you need to sell and not how many you are actually going to sell
Give two types of internal sources of finance
Retained profit and rationalisation (sales of assets)
What is retained profit?
Profit kept within a business from profit for the year to help finance future activities
Give two advantages of retained profit
– Avoid interest repayments
– does not dilute the business ownership
Give two disadvantages of retained profit
– Only an option if sufficient retained profit exists
– may cause shareholder dissatisfaction if this is at the expense of dividend payments
– reduces the security blanket of keeping profit for emergencies
What is rationalisation?
Sales of assets
Give an advantage of rationalisation
Quick and easy
Give two disadvantages of rationalisation
– Small amount if the asset is old
– replacing the asset is usually more expensive
Give six examples of external sources of finance
– Debt factoring – overdraft – share capital – loans – venture capital – crowdfunding
What is debt factoring?
Selling debts owed to a business to a financial institution. Businesses will receive funds immediately but at a reduced rate, all of the money will be returned but the company will keep a fee
Give two advantages of debt factoring
Guaranteed payments and saves time
Give one disadvantage of debt factoring
The business doesn’t get all of the payment because the factoring company will take a percentage of it
Is debt factoring short term or long term?
Short term
What does an overdraft allow for?
An overdraft allows for the facility to overspend on a current account up to an agreed sum
Give two advantages of overdrafts
– Good for small businesses and emergencies they face
– only borrowed when required allowing flexibility
Give two disadvantages of overdrafts
– Interest is changed on the overdrawn amount day to day
– only available from a current bank account
Are overdrafts short term or long term?
Short-term
What is share capital?
Finance raised from selling shares
Give three advantages of share capital
– Good for large businesses
– quick access to large sums
– no interest repayments
Give four disadvantages of share capital
– Only for LTDs and PLCs
– complex and costly process
– pay dividends
– dilutes ownership
Is share capital short-term or long-term?
Long-term
What is a loan?
A set amount borrowed from the bank, to be repaid with interest over a set period of time
Give three advantages of loans
– Large sums of money
– improve cash flow
– no loss of ownership
Give two disadvantages of loans
– Interest is added on top of the repayment
– can be more expensive than other financing options
Are loans short-term or long-term?
They can be both
What is venture capital?
Investment from an established business into another business in return for a percentage of equity in the business
What is venture capital also known as?
Private equity finance
Give three advantages of venture capital
– Potential for large sums of money
– gain of expertise
– makes it easier to attract other sources of finance
Give three disadvantages of venture capital
– Venture capitalists look for a high rate of return in a specific time period
– long and complex process
– partial loss of ownership
Is venture capital short-term or long-term?
Long-term
What is crowdfunding?
Raising finance from a large number of people each investing different, often small amounts of money
Give two advantages of crowdfunding
– No interest
– way to get large sums quickly
What is the biggest disadvantage of crowdfunding?
The investor is only tied into their promise contribution if the total amount is raised, otherwise they will have to return all the money if the projected amount isn’t raised
Is crowdfunding short term or long term?
Can be both
What is hard HRM?
Staff are treated as a resource that must be managed in order for the business to control costs and output
What is soft HRM?
Staff are treated as an asset to the business that can contribute and help the business achieve its objectives
Formula for labour productivity
Labour productivity =
Output per period
————————————
Number of employees
Formula for labour cost per unit
Labour cost per unit =
Total labour cost
—————————————
Number of units produced
Formula for employee costs as a % of turnover
Employee costs as a % of turnover =
Employee costs
————————— X 100
Sales turnover
Formula for labour turnover
Labour turnover =
Number of staff leaving
————————————- X 100
Total number of staff
What are some external causes of high labour turnover?
External causes of high labour turnover include changes in regional unemployment levels, and the growth of other local firms using staff with similar skills.
What are some internal causes of high labour turnover?
Internal causes of high labour turnover include poor motivation of staff, low wages, and a lack of opportunities for promotion. Staff will join other firms to increase their pay and job responsibilities.
Benefits of high staff turnover
– Constant stream of new ideas through new staff
– firms can recruit staff who have already been trained by competitors which saves money
– if sales fall, firm can reduce workforce through natural wastage rather than a costly redundancy
– enthusiasm of new staff influences other workers
Disadvantages of high staff turnover
– Lack of loyal and experience staff who know the business
– firm loses staff it has trained, often to direct competitors
– training costs money and productivity drops one new staff get trained
– recruitment costs are high
Formula for absenteeism
Number of staff absent for a time period —————————————— X 100 Total number of staff days worked per time period
What is the link between labour retention and labour turnover?
The higher the labour turnover the lower the labour retention rate
What does an organisational chart set out?
An organisational structure chart is the simplest way to show how a business is organised. It sets out who has authority and responsibility to make decisions within a business by organising job roles into a hierarchy, spans of control, line management and chain of command.
What is a tall organisational structure?
Tall organisational structures have long chains of command due to a lot of levels of hierarchy. Tall structures can affect communication because messages take a long time to get from the top to the bottom or vice versa. Decisions can take a long time and there is a lot of paperwork to deal with.
What is an organisational structure?
An organisational structure is the way in which the workforce within a firm is organised including job roles and communication flows
Describe what a flat organisational design is.
Flat organisations only have a few levels in the hierarchy. People are given more responsibility and freedom. Flat structures can lead to managers getting overwhelmed by too many people reporting to them.
Define span of control and in a flat structure decide whether a manager has a narrow or wide span of control
The span of control is a number of subordinates that a manger or supervisor is directly responsible for. Managers in flat structures have wide spans of control this means they have a lot of workers answering to them.
Define chain of command
Chain of command is the order of authority and delegation within a business
Define delegation
Delegation is where the responsibility for carrying out a task or role or decision making is passed onto someone else in a business
Give three advantages of delegation
+ Reduces management stress
+ Subordinates are empowered
+ Good method of on-the-job training
Give three disadvantages of delegation
– Depends on experience of subordinates
– harder in a smaller firm
– may increase workload of subordinates
Define delayering
Delayering is there a removable of one or more layers of hierarchy from the management structure of an organisation
Give three advantages of delayering
+ Better delegation, empowerment and motivation
+ Improved communication (smaller chain of command)
+ Encourages innovation
Give three disadvantages of delayering
– Not all organisations suit a flat organisational structure
– can cause job losses
– causes disruptions
Define authority
Authority is the power of a person to use and allocate the resources efficiently, to take decisions and to give orders.
What is a centralised structure?
Centralised structures keep authority for decisions at the top and all decisions are made by senior managers
Give 3 advantages of centralisation
+ Business leaders have lots of experience of making business decisions
+ Managers get an overview of the whole business, so decisions are consistent throughout the business
+ Senior managers aren’t biased towards one department so they can make the best decisions for the whole business
Give three disadvantages of centralisation
– Not many people are expert enough to make decisions about all aspects of the business
– excluding employees from decision-making can be demotivating
– the organisation reacts slowly to change, allowing its competitors to get ahead. This is because the senior managers who make the decisions don’t spend time on the shopfloor, so they are slow to notice consumer trends
What is a decentralised structure?
Decentralised structure is share out the authority to make decisions to more junior employees.
Give three advantages of decentralisation
+ Involvement in decision-making motivates employees
+ Employees can use expert knowledge of the sector
+ Day-to-day decisions can be made quickly without having to ask senior managers
Give three disadvantages of decentralisation
– Junior employees may not have enough experience to make decisions
– inconsistencies may develop between the divisions in a business
– junior employees may not be able to see the overall situation and needs of an organisation
Define recruitment
Recruitment is the process of actively seeking out, finding in hiring candidates for specific position a job
Define selection
Selection is the process of choosing the most suitable candidate for the vacant position in the organisation
Define internal recruitment
Internal recruitment takes place when a business looks to fill the vacancy from within the existing workforce
Define external recruitment
External recruitment occurs when a business invites applicants for vacant posts from any suitably qualified candidates
Give three advantages of internal recruitment
+ Candidates already know the business and the business now is the candidates
+ Short and cheap process
+ Motivate workers to go for a promotion
Give two disadvantages of internal recruitment
– Leaves a vacancy in another department
– can cause resentment among colleagues who aren’t selected
Give three advantages of external recruitment
+ Brings in fresh new ideas
+ Brings an experience from other organisations
+ Large number of applicants
Give three disadvantages of external recruitment
– Long and expensive process
– candidates will need a longer induction process
– have only seen a candidate at recruitment - might not be representative of what they’re like at work
If a company decides it does indeed have to take on a new worker, it must go through a logical and ordered recruitment and selection process. What is this process?
1) Identify vacancy
2) Write a person specification and job description
3) Draft in place advertisement of job
4) Issue application forms/requesting CVs and letter of application
5) Shortlist the most suitable candidates
6) Interview most suitable candidates
7) Appoint and select the most suitable candidate
What does a job description contain?
Job descriptions relate to the position rather than the person. Typically, job descriptions might contain the following information: job title, job purpose, responsibilities, location and hours, and company details
What does a person or job specification include?
A person or job specification sets out the qualifications and qualities required by an employee these include: qualification requirements, experience and skills required, sensory demands and personal attributes
Give eight ways of advertising vacancies
– Radio advertisements/TV adverts – posters – social media – job fairs – billboards – websites – newspapers – recruitment agencies
What is an employment agency?
Employment agencies provide employees with details of suitable applicants for a post they may have a vacant. Agencies usually charge a considerable fee for recruiting candidates for businesses
What is the psychometric assessment? And when is it used?
Psychometric test reveal the personality of a candidate and they are used in addition to a job interview
Give three advantages of on-the-job training
– Easy to organise
– lower cost of training
– training is job specific
Give three disadvantages of on-the-job training
– Trainer and trainee are not productive during training
– bad practices are passed on
– no new ideas are brought to the business
Give three advantages of off-the-job training
– Trainers are specialised
– new ideas about the business
– No job distractions during training
Give three disadvantages of off-the-job training
– Can be expensive
– no benefit to the business while training
– training might not be specific to their day-to-day job
Internal factors that can influence HR plans
– Corporate, marketing and production plans. For example if production is expanding they will need to recruit more staff and offer more training
– changes in production style may lead to retraining, recruitment or redeployment of staff
External factors that can influence HR plans
– Employment legislation protects employees rights and restricts companies ability to to dismiss or transfer workers
– new technology might change the number of staff and the skills needed – businesses might have to re-train their staff
– labour market trends like migration and the ageing population have an affect on the supply of workers
Define job enrichment
Job enrichment attempts to give employees greater responsibility by increasing the range and complexity of tasks they are called upon to complete and giving them the necessary authority
Define job enlargement
Job enlargement involves the addition of extra and similar tasks to a job
Define empowerment
Empowerment involves giving people greater control over their working lives
Define team working
A way of organising work that involves people working in separate teams to do different tasks
Job design is focused on the person not the job. What model is this based on?
Hackman and Oldham is model. It states job design is key to motivation.
What are the five key elements in Hackman and Oldham’s model of job design which lead to work a motivation, more worker involvement, higher performance, lower staff turnover and lower absenteeism?
– Skill variety – task identity – task significance – autonomy – feedback
What is the critical physiological state caused by skill variety, task identity and task significance?
Workers have experienced meaningfulness of work
What is this critical physiological state caused by autonomy?
Workers have experienced responsibility for work outcomes
What is the critical physiological state caused by feedback?
Employees know how well they are performing and aim to improve
What does autonomy mean?
Autonomy means giving work as the freedom to make their own decisions
What are the effects on workers caused by the Hackman and Oldham’s model?
– Motivation is improved
– workers feel involved
– quality of work is improved
– workers are more satisfied with their work and are more committed to the business
What is a flexible workforce?
A flexible workforce is a workforce that can perform a variety of different functions due to different types of employment within the business
Define outsourcing
Outsourcing is the delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes to an agreed standard
Define downsizing
Downsizing is the reduction of the size of a firm to make it more responsive to market conditions
In a shamrock organisation, what is the most important resource within an organisation?
Charles Handy believed that employees were the most important resource within an organisation, rather than the hierarchical structures which controlled them.
Give 4 advantages of a flexible workforce
– Increase productivity and effectiveness
– talent retention and engagement
– more employment opportunities for greater talent diversity
– resource efficient
Give three disadvantages of a flexible workforce
– It is hard to organise meetings and conferences
– it is harder to train employees as each role is different
– employees may be less cohesive as they may not be together much
Define balance sheets
Balance sheets provide a snapshot of the assets and liabilities of a business at a point in time
What are balance sheets also referred to as?
Financial statements
What is an asset?
What the business owns
What are liabilities?
What the business owes
What are non-current assets (fixed assets)?
Assets that provide a benefit for the business in the long term
Give 2 examples of fixed assets (non-current assets)
Buildings and machinery
What is a current asset?
Assets that will be used up or sold in the short term and the cash balances kept in the business
Give 3 examples of current assets
Stocks, Debtors and cash
What are current liabilities?
What the business owes in the short term
Give 2 examples of current liabilities
Creditors and bank overdraft
What are non-current liabilities?
What the business owe in the long term
Give 3 examples of non-current liabilities
Loans, mortgage and car finance
What is working capital?
The money available for the day to day runnings of a business
Working capital formula
Current assets - current liabilities
Net assets formula
Net current assets + non-current assets - long term liabilities
What is capital employed always equal to?
Net assets = capital employed
Capital employed formula
non-current liabilities + total equity
What is a creditor?
An individual or business that has lent funds to a business and is owed money
Define income statement
A financial statement showing a businesses revenues and costs and thus its profit or loss over a period of time
What are the 6 types of financial ratios?
- Current ratio
- Gearing
- ROCE
- Payables days
- Receivables days
- Inventory turnover
What is the current ratio?
Current assets : current liabilities
Gearing formula
[Non current liabilities / (total equity + non current liabilities)] X 100
What does ROCE stand for?
Return on capital employed
ROCE formula
[Operating profit / (total equity + non current liabilities)] X 100
Payback period formula
(Income required / net cash flow from next year) X 12
Average rate of return formula
(Average annual profit / initial cost of investment) X 100
Net present value formula
Sum of (Net cash flow X discount factor) = Net present value
Give three benefits to financial analysis
1) Useful for comparing a business’s current performance to its competitors performance
2) Helps managers make decisions based on the company’s financial strengths and weaknesses
3) Potential investors and lenders can use the analysis to decide if they want to invest or lend to the business
What is the biggest disadvantage to financial analysis?
Financial analysis doesn’t cover anything that is qualitative
What are the two things that gearing shows?
Shows where a business gets its capital from and how vulnerable a business is the changes in interest rates
What are core competences?
Core competences are the capabilities of a business that are unique to that business and give it a competitive advantage over its rivals. They are capabilities that rivals do not have
What are the 2 models that are used to measure overall performance?
- Kaplan and Norton’s Balanced Scorecard
- Elkington triple bottom line
What are the four perspectives of the balanced scorecard?
Financial
Customer
Internal processes
Learning and growth
What does KPI stand for?
Key performance indicator
The balanced scorecard looks at 4 persepctives, what does it measure within in these perspectives? And how are they all linked?
Efficiency and effectiveness is measured within each and they are linked to the overall strategy and vision of the business
For each perspective on the balanced scorecard, what is considered when analysing it?
Objectives
KPIs
Targets
Initiatives are identified that are key to success
How is the balanced scorecard model balanced?
Improvements in one area cannot be made at the expense of improvements in another.
However, improvements in one area often have a positive impact on another area.
What are the 3 p’s in Elkington’s triple bottom line model?
People
Profit
Planet
What is represented by the overlapping area in the centre of the triple bottom line model?
Sustainability
How is sustainability achieved in the triple bottom line model?
Sustainability is achieved when there is an ideal balance between social, environmental and financial performance
What is the mission of a business?
The mission of a business is its overall purpose
What influences the mission of a business?
It’s influenced by what are the owners want the business to achieve, their personal values and beliefs, and what market opportunities there are
What are the four main factors that influence corporate objectives?
- Ownership - the form of the business and whether it’s for profit or nonprofit
- Short termism
- Internal environment – size, culture and resources of the business
- External environment - PESTLE
What is an example short termism? (Think: shareholders)
Shareholders can demand a quick return on their investment, which leads to short-term objectives to increase profit that don’t necessarily benefit the business in the long-term
What is a strategy?
A strategy is a medium to long-term plan of action developed to achieve a businesses objectives.
When can a strategy be put into place?
Strategy can only be put into place when is an organisation has outlined its aims and objectives
What are tactics?
Tactics are short term plans for implementing strategy, so are more focused on day-to-day activities
What does SWOT stand for?
Strengths
Weaknesses
Opportunities
Threats
What three things does the competition law state?
1) Businesses cant conspire to fix prices - where an agreement is made to keep the price of a product above a fixed amount
2) Businesses can’t conspire with competitors to limit production so that higher prices can be charged due to the shortage
3) Businesses can’t divide the market to avoid having to compete
What are the 3 laws that stop businesses abusing their dominant position?
1) Dominant businesses can’t demand exclusivity
2) They can’t demand that retailers must buy a second type of product in order to buy the popular products they actually want
3) Businesses can’t sell goods at a loss to for smaller competitors out of the market
What do the laws that stop businesses abusing their dominant position prevent?
Monopolisation of a market
What is a monopoly?
When one business has complete control over the market. There is no competition and if customers need the product they have to pay whatever price the monopoly sets
Who can prevent monopolies occurring?
The CMA can prevent monopolies from occurring by stopping takeovers and mergers
What are 3 examples of laws and legislation that protect the environment?
- Landfill tax
- Climate change act
- The EU’s Emission Trading System
What laws protect customers?
- Trade descriptions act 1968
- Sale of goods to consumer regulations 2002
- Consumer protection act 1987
- Data protection act 1998
What is the name of the labour law that controls what rights employees have?
The equality act 2010
What does the equality act 2010 do/protect?
The equality act 2010 protects employees from discrimination based on age, gender, race, religion, disability, pregnancy etc. These things are known as protected characteristics
What are the two types of discrimination?
Direct and indirect discrimination
What is direct discrimination?
Direct discrimination is treating someone less favourably because they have a protected characteristic
What is indirect discrimination?
Indirect discrimination is when everyone is treated the same but it has worse effects on one group of people than on others
What is a contract of employment?
A contract of employment is a legally binding agreement between employer and employee about what duties and rights of the employee and the employer are, including hours, salary, holidays, etc
What is strategic direction?
Strategic direction is the general path of business takes, based on its missions and achieving its objectives
What are the key factors in settings to change direction?
Key factors in settings to change direction of the choices of which markets to compete in, what products to offer and which direction the business should grow in
What five factors influence the choice of market?
Type of product Level of competition External factors Internal resources Attitude to risk
What are five factors that influence products?
Research and development Competitors Technology Finances available External factors
What is Ansoff’s matrix used for?
Ansoff’s matrix is a tool for comparing the level of risk involved with the different growth strategies and it helps managers to decide on a direction for strategic growth
What are the two axes labelled as on the Ansoff matrix?
Products (existing and new) and markets (existing and new)
What are the four quadrants of the Ansoff matrix?
Market penetration
Product development
Market development
Diversification
What is market penetration? (Ansoff matrix)
Market penetration means trying to increase your market share in your existing market
What is product development? (Ansoff matrix)
Product development is selling new products in your existing markets
What is market development? (Ansoff matrix)
Market development is selling existing products to new markets
What is diversification?  (Ansoff matrix)
Diversification means selling new products to new markets. This is the most risky strategy
What is strategic positioning?
Strategic positioning means choosing how to compete with the other businesses in the market. A business says positioning strategy is part of the marketing strategy – the choice influences the general direction a business develops in and affects all areas of the business
What are the two types of competitive advantage that Porter identified?
Cost advantage and differentiation advantage
What is cost advantage?
A business can get a competitive advantage by selling a similar product at a lower cost than its rivals
What is differentiation advantage?
Selling better products at the same or a slightly higher price compared to competitors creates a competitive advantage. Offering a product that consumers see as different from competitors products can make consumers think it’s better
What are the 4 generic strategies that Porter suggested to gain advantage?
Cost leadership
Cost Focus
Differentiation
Differentiation focus
What does Porter’s strategic matrix help decide on?
Porter strategic matrix helps decide on a competitive strategy
What does Bowmans strategic clock show?
Pricing and differentiation strategies
What does position 1 in the Bowmans strategic clock correspond to?
Position 1 corresponds to a strategy of low-priced products with low added value – this will only be successful if the product sell in a high volume
What does position 2 on Bowman’s strategic clock correspond to?
Position 2 corresponds to the cost leadership section of Porter’s strategic matrix
What does position 3 on Bowman’s strategic clock represent?
Position 3 is the hybrid area – modest prices with a relatively high perceived added value
What do positions 4 and 5 on Bowman’s strategic clock correspond to?
Position 4 corresponds to the differentiation section of porters strategic matrix and position five corresponds to the differentiation and focus section
What do positions 6 to 8 (the grey area) represent on Bowman’s strategic clock?
Positions 6 to 8 combine a high price with fairly low perceived added value. Unless a company has a monopoly, if it adopts these positioning strategies it will ultimately fail
What are the four types of internal economies of scale?
Technical
Managerial
Purchasing
Marketing
What are technical economies of scale?
Technical economies of scale are related to production. Production methods for large volumes are often more efficient
What are managerial economies of scale?
Large businesses can employ managers with specialist skills to manage specific departments. They oversee plans and strategies which can result in work being done more quickly and efficiently
What are purchasing economies of scale?
Purchasing economies of scale are to do with discounts. Big businesses can negotiate discounts when buying supplies in large quantities. They can get bigger discount and longer credit period than their smaller competitors and they can also borrow money at lower rates of interest than a small business
What are marketing economies of scale?
Marketing costs are usually fixed, so a business with a large output can spread the cost over more units
When do external economies of scale happen?
External economies of scale happen when industries are concentrated in a small geographical area
Describe what the experience curve is?
In general, the production of any goods or services will follow the experience curve. As the total units produced by business increases, the cost per unit decreases at a constant rate
What are economies of scope?
Economies of scope arise when a business produces multiple products instead of specialising in one.
It’s cheaper for one business to produce many products than it is for many businesses to produce one product each
What are diseconomies of scale?
Diseconomies of scale make unit costs increase as the scale of production increases
Why do diseconomies of scale occur?
They happen because large firms are harder to manage than small ones.
How does a business prevent diseconomies of scale?
Strong leadership, delegation and decentralisation can all help prevent diseconomies of scale and keep costs down
What is retrenchment?
Retrenchment means that the business will have to downsize in some areas
How can a business retrench?
– Cut jobs
– reduce output
– withdraw from markets
– demerging (splitting the business up)
What is organic growth?
When a business grows from within
Give 4 advantages of organic growth over external growth
– Can maintain current management style, culture and ethics
– Less risk as it’s expanding what the business is good at and it’s usually financed using profits
– It’s easy for the business to manage internal growth and control how much the business will grow
- Less disruptive changes mean that workers efficiency, productivity morale remain high
Give 3 disadvantages of organic growth compared to external growth
– It can take a long time to grow a business internally
– Market size isn’t affected by organic growth. If the market isn’t growing, the business is restricted to increasing its market share of finding a new market to sell products to
– Businesses might miss out on opportunities for more ambitious growth if they only grow internally
Give 5 problems of growing in size
– Large companies can suffer from diseconomies of scale
– Growing companies find it more difficult to manage cash flow
– Fast growth increases the risk of overtrading
– When a company grows in size it will often change from LTD to a plc which can make the running of the company more complicated
– Businesses have to avoid growing so much that they dominate the market and become a monopoly
Give 4 reasons why a business owner may choose to restrict growth or retrench
– They may want to maintain the culture
– The business will become more complicated to manage as it gets bigger
– Growth requires the business to secure additional financial resources which can be complicated
– They may not want to put too much strain on their cash flow position
Who came up with a model for Growth?
Greiner
What are the 5 crisis’ stated in Greiners model of growth?
Leadership Autonomy Control Red tape Growth
What are the 5 types of growth in Greiners model of growth?
Creativity Direction Delegation Coordination Collaboration
What is a franchise?
A franchise is an agreement which allows a new business to use the business idea, name and reputation of an established business
What is the franchisor?
The franchisor is the establish business which is willing to sell, or license, it’s idea, name and reputation
What is the franchisee?
The franchisee is the business which buys into the franchise.
They usually pay the franchisor an initial fee plus ongoing payments – usually a percentage of their revenue or profit
Why is franchising good for growth?
Franchising allows a franchisor to grow quickly as most of the costs and risks are taken on by the franchisee
What are the three main types of external growth?
Mergers, takeovers and ventures
What is a merger?
Mergers are when two companies joined together to form one company. They might keep the name of one of the original companies or come up with a new name. The shares of the merged company are transferred to the shareholders of the old companies
What is the main motive for mergers?
Synergy – this is where the business after the merger is more profitable than all the businesses before the merger. This is a result of the merged business generating more revenue or cost savings than the independent businesses could between them
What is a takeover?
Takeovers are when one business buys enough shares in another so it has more than 50% of the total shares. This is called a controlling interest and it means the buyer will always win in a vote of all shareholders.
What are takeovers also known as?
Acquisitions
What are the two types of takeovers?
Agreed and hostile
When do hostile takeovers occur?
Hostile takeovers occur when one plc buys a majority of the shares in another plc against the will of the directors of the company. It can do this because the plc shares are traded on the stock exchange and anyone can buy them
When does an agreed takeover happen?
Agreed takeovers happen when shareholders or other types of owners such as sole traders agree that they’ll sell the business to someone else. This is usually because the owners believe it would be beneficial for the survival of the business
What are ventures?
Ventures or small businesses or projects that are set up by existing businesses in the hope of making a profit. They are often set up to try and meet the needs that are not being met in the current market.
What is a joint venture?
If more than one business investor then it’s called a joint venture. In a joint-venture, businesses share their resources but there is no change of ownership for the businesses involved. When the joint-venture is terminated, bills are paid off, profits are shared and the businesses remain separate
What’s the advantage of a joint venture?
A joint venture can be a good way to set up a new business if you don’t have the capital to do it yourself and it can also be a good way for businesses to access markets in different countries
What is the main disadvantage of ventures and why are joint ventures often preferable?
Adventure often involves a lot of risk to the business setting it up – a joint venture is often preferable because the risk can be spread among the businesses involved
What are the four types of integration?
Horizontal
Forward vertical
Backward vertical
Conglomerate
Describe horizontal integration
Horizontal integration happens when a firm combines with another firm in the same industry at the same stage of production process
Describe vertical integration
Vertical integration occurs when a firm combines with another firm in the same industry but at a different stage of the production process
What are the two types of vertical integration?
Forwards and backwards
Describe forward vertical integration
Forward vertical integration is when a business combined with another business that is further on in the production process.
For example, a manufacturer merging with the outlets where its products are sold
Describe backward vertical integration
Backward vertical integration is when a business combined with another business at an earlier stage of the production process.
For example, a retailer taking over its suppliers
Describe what a conglomerate merger is
Conglomerate mergers are between unrelated firms – they aren’t competitors of each other and they aren’t each other suppliers or customers
Give three benefits of using digital technology for innovation
A digital technology can lead to innovative new products, can you make the production process more efficient and give businesses new opportunities such as e-commerce
Give three disadvantages of technology for innovation
– Very expensive to develop new products that are based on new digital technology
– New technology needs to be updated regularly
– Problems with digital technology can be difficult to diagnose
What opportunities does e-commerce provide?
– Greater access to international markets
– Manufacturers can sell directly to consumers
– Companies can keep track of online order history and make personal recommendations to improve customer satisfaction
– Interact directly with the customers through social media
– Businesses are able to deal with customer complaints more efficiently by switching from telephone services to online assistance
What is ERP and how does it benefit each department?
Enterprise resource planning is business management software that allows the business to monitor activities in every department through the collection in and interpretation of data
How does ERP help the HR department?
It can help the HR department to track the work rate of staff to see who needs extra training when productivity drops
How does ERP help the finance department?
The finance department might use data from previous infrastructure changes to budget for upcoming changes
How does ERP help the marketing department?
It helps the marketing department to keep track of how well their promotional products are selling and compare sales before an after promotion
How does ERP help the operations department?
ERP can be used to track stock levels, distribution networks and productivity in order to see how well the operations department is functioning and if any improvements are needed
Give examples of internal factors that cause change
– Change in leadership/management – Better-than-expected performance – Poor financial performance – Business growth – The type of business can influence the amount of change
Give examples of external factors that cause change within a business
– New technology – Changes in consumer taste – The economy – Changes in legislation – Changes in ethical views and social awareness – Changes in competition
Give the two extremes of change
Incremental and disruptive
Describe incremental change
Incremental change is gradual. It is usually the result of a strategic plan being put in place and often attempts to minimise disruption. Managers decide a timescale for the necessary changes and then timetable strategies for cheering them
Describe disruptive change
Disruptive change is sudden and forces firms to suddenly do things in a different way to usual. They may have to close or sell off subsidiary companies, spend heavily on promotions to raise customer confidence or totally restructure the way the firms organised
What does a force field analysis show?
A force field analysis shows a plan of action, the forces supporting the plan and the forces opposing the plan
What is a force field diagram used to analyse?
It’s used to analyse forces for and against change
What is restructuring?
Changing the organisational structure of a business
Why do businesses restructure?
The main reason for restructuring is to maximise the efficiency of decision-making, communication and division of tasks in the businesses current situation. Restructuring can also reduce costs which makes the business more competitive
What is delayering?
Delayering means removing parts of an organisations hierarchy – this is usually a layer of middle managers
Why do businesses delayer?
Delayering reduces costs, improve communication and give more responsibility to employees at lower levels of hierarchy
After delayering, what type of structure do you end up with?
A flatter structure with wider spans of control. Flatter structures usually have quicker communication, as there are fewer people to pass messages through. This can help with decision-making in changing environments
How does delayering help a business respond to changes?
Delayering can help a business to respond to changes, such as a difficult economic condition. If it can carry out a delayering strategy quickly, then it can gain a competitive advantage – by cutting costs, it can keep its price is lower than competitors can
What is the biggest disadvantage to delayering ?
Delayering leads to job losses – the business risks losing some vital skills and experience which could reduce the flexibility of the business in the future. The job losses could also lead to bad publicity
What are the two types of basic business structures and which is better suited to change?
Mechanistic and organic structures
Organic structures are better suited to change than mechanistic ones
Describe the typical characteristics of a mechanistic structure
– centralised structure with a well defined hierarchy of power
– tall structure
– suited to businesses that don’t need to adapt to change very often
– employees are specialised in certain tasks and tend to work separately on them
Describe the typical characteristics of an organic business structure
– Decentralised structure meaning employees get more say in decision-making
– Flat structure which allows for fast communication
– best suited to an uncertain changing environment
– employees usually work within teams rather than having a strict single role each
What does knowledge and information management refer to?
Knowledge and information management refers to the collection, organisation, distribution and application of knowledge and information within a business
What is the most common barrier to change?
Resistance
Give five examples of barriers a business will face when implementing change
Organisational structure Resources Poor management Passive resistance Active resistance
How can organisational structure be a barrier to change?
Some structures can make it difficult to manage to change – e.g. if the business has a tall structure it can be difficult to communicate the change and the reasons for it to the lower layers
How can resources be a barrier to change?
Businesses need to have the correct resources in place before making a change – e.g. a business shouldn’t introduce new machinery into the employ someone who can operate it
How can poor management to be a barrier to change?
When managers are unable to communicate effectively and engage workers – this is usually the result of a lack of trust between the manager and the worker
What is passive resistance?
When people carry on with their old ways despite being aware of the new needs and being shown the new processes. Passive resistance is the most common in employees and suppliers
What is active resistance?
When people argue against the change and challenge motives for the change.
How do workers show active resistance?
Workers can organise themselves for their trade union and refuse to carry out tasks
How do customers show active resistance?
Customers show active resistance by refusing to make further purchases from the company
Who came up with 4 reasons for resistance to change?
Kotter and Shlesinger
What are the four reasons for resistance to change that Kotter and Schlesinger came up with?
Self-interest
Misunderstanding
Low tolerance of change
Different assessment of the situation
Why can self interest be a resistance to change?
People are more concerned with their own situation rather than the success of the business – if they can’t see how to change directly benefits them, they will resist it
How can misunderstanding be a resistance to change?
People resist change when they don’t fully understand what it means for them. They will usually think that they have more to lose than gain until they are told otherwise
How do businesses prevent misunderstanding resistances?
Businesses need to have a high level of trust between employees and managers to prevent misunderstandings
Why do people resist changes due to having low tolerance for change?
People get used to completing tasks the way they know – they will resist change if they fear that they won’t be able to develop the new skills required after the change. They may believe that they won’t perform as well in the situation and they will lose their job security
How do different assessments of the situation become a resistance to change?
The key stakeholders may have strong disagreements over the reasons for change and therefore they may be an inability to accept the need for change
Who identified six ways of overcoming resistance to change?
Kotter and Schlesinger
What are the six ways of overcoming resistance to change?
Education and communication Participation and involvement Facilitation and support Negotiation and agreement Manipulation and co-option Explicit and implicit coercion
How do managers use education and communication to overcome resistance to change?
Managers need to raise awareness of the reasons for change and how it will be carried out. The education process usually involves discussions, presentations and reports. They should clearly communicate the reasons behind the planned change and identify the benefits for the business and individuals
How does participation and involvement overcome resistance to change?
Key stakeholders should be involved in the design and implementation of change. If they participate in the decision-making process they will feel more engaged and their ideas form part of the change. If people become part of the process, it will be more difficult for them to resist a change
How does facilitation and support overcome resistance to change?
Listening to the concerns of the workforce by holding regular meetings will help workers to adjust as they will feel supported. Support groups can help workers to overcome their anxiety about the changes. Businesses should also provide training from work as he will be required to gain new skills
How does negotiation and agreement help to overcome resistance to change?
Giving stakeholders opportunities to negotiate and compromising over key sticking points can lead to full agreement over the proposed change. Financial or non-financial incentives may need to be offered by the business in order to gain full acceptance of the change.
If full agreement can’t be made them voluntary redundancy or early retirement maybe offer to employees who are resisting the change
How does manipulation and co-option assist in overcoming resistance to change?
An employee who is resisting change may be given a desirable role in the decision-making process in order to gain their cooperation. This can be a risky strategy as these roles often give the worker little power and they can feel tricked into agreeing to the change. Alternatively, a manager may manipulate the information regarding the change e.g. they may exaggerate the extent of a financial crisis and states there is no other alternative
When is explicit and implicit coercion used to overcome resistance to change and how does this coercion overcome the resistance?
As a last resort, in order to speed up the process, a person may be threatened to comply with the planned changes or face consequences. The consequences of resistance could be clearly stated or just implied. These could be redundancies, losing out on promotion opportunities or transferred to other departments etc
What are 4 specific types of organisational structure of business can use?
Functional
Product based
Regional
Matrix structures
How are employees organised in a functional structure?
Functional structures organise staff by department
How are employees organised in a product-based structure?
Product-based structures organise staff by product
How are employees organised in a regional structure?
Regional structures organise staff by geographical location
How are employees organised in a matrix structure?
Matrix structures organise staff by two different criteria
The matrix structure ensures that the staff are pursuing clearly defined objectives and encourages departments to build relationships with one another
Give the formula for total float of an activity
Total float = LFT – duration – EST
Give 4 advantages of critical path analysis
– Helps firms forecast their cash flow
– Find the shortest time possible for completing a complex project
– It can be used as a visual aid to communicate with employees
– It can be used to review progress on individual tasks
Give 4 disadvantages to critical path analysis
– Relies on estimates of how long each task will take
– Constructing and amending the network will require a significant amount of planning and time
– The network analysis sets tight deadlines – employees may cut corners in the rush to meet deadlines
– There is no information about costs or how good the project is going to be
What is a planned strategy?
Planned strategy is planned out before action is taken to implement it
What is an emergent strategy?
Emergent strategy develops over time, as a businesses actions lead to patterns of behaviour. Emergent strategy can be adapted as the business learns what works in the current environment
What is strategic drift?
Strategic drift is what happens when a strategy becomes less and less suited to the business environment. It happens when a business is strategy doesn’t do that to keep up with the changes in the environment
