Paper 1 Flashcards
Business
A business is an organisation that exists to provide goods and services on a commercial basis to customers.
Benefits of a business to society?
• Create employment and develop human capital.
• Drive innovation through R&D and new products.
• Pay taxes on profits earned and collect taxes for government.
• Create wealth by providing returns on investment.
Enterprise
The skills and abilities to take risks and create profits.
The creation of a business to meet the needs and wants of customers.
Entrepreneur
A person who organises, operates and assumes the risk for a business venture.
A person who takes the risk of starting a new business.
Role:
• Spots business opportunities.
• Takes calculated risks in order to gain possible future returns.
• Acts as catalyst for creation and growth of new business enterprises.
Start-up
A new business enterprise, formed by one or more entrepreneurs.
The importance of business ideas to entrepreneurship?
- Solve a problem.
- Offer a better, cheaper way.
- Simple and practical.
- Can be delivered quickly.
- Have a clear focus.
- Anticipate trends and exploit growing markets.
What are popular sources of business ideas?
• Business experience.
• Personal experience.
• Observations.
• Brain storming.
• Innovations.
• Budget research: market mapping.
Advantage and disadvantage of brain storming?
+ Could generate a remarkable new innovation.
- Brilliant ideas come to nothing if they are not based on understanding the market.
Advantage and disadvantage of personal experience?
+ The insight of an individual consumer could start a new way of doing things.
- A business cannot be built around one customer’s good or bad experience.
Advantage and disadvantage of business experience?
+ Insight into mismatch between customer expectations and supplier delivery.
- The original business would surely be able to do the same as its ex-employee.
Advantage and disadvantage of analysis of an opportunity?
+ Research into a market, its segments and its rivals could identify a big opportunity.
- Looking too closely at what exists may lead to unoriginal developments.
Market mapping
The use of a grid showing two features of a market, such as price and consumer age. Individual brands or businesses are added to the grid to show potential niches or gaps in the market.
Advantages of market mapping?
• Helps spot gaps in the market.
• Useful for analysing competitors - where are their products positioned?
• Encourages use of market research.
Negatives of market mapping?
• Subjective - your own opinion.
• Just because there is a gap doesn’t mean there is demand for the product.
• Not a guarantee of success.
Skill
Ability to do something well.
Characteristic
Feature or quality (personality based)
Intrapreneurship
Intrapreneurship involves people within a business creating or discovering new business opportunities, which leads to the creation of new parts of the business or even new businesses.
Features of Intrapreneurship
• Takes risks.
• Solves problems.
• Drives innovation.
• Understands trends.
How could you encourage intrapreneurship in an organisation?
• Train employees in innovation.
• Make risk-taking and failure acceptable.
• Give employees time outside the confines of they job description.
• Reward entrepreneurial thinking and activity.
Barriers to entrepreneurship
- Lack of self esteem.
- Fear of failure.
- Lack of start-up capital.
- Lack of investment.
- Taxation.
- Market entry regulations.
- Unstable political landscape.
Rewards for enterprise?
- Profits (made by the business).
- Capital gains (made by selling the business).
- Self esteem.
- Personal development.
- Sense of control.
- Satisfaction from building something.
Risk
The probability that things will not go as well as planned.
There may be a possible negative impact to some characteristic of value that may arise from a future event.
How successful entrepreneurs deal with risk?
-Take calculated risks (i.e. understand them) rather than gamble.
-Spread risk by diversifying (don’t put “all eggs in one basket”)
-Look for higher returns to take account of the risks.
-Keep going despite adversity - persistence is a key quality.
Uncertainty
When businesses are unable to predict external shocks or future events.
How to protect a business from uncertainty?
- Excess cash supplies.
- Reduce number of creditors increase number of debtors.
- Reduce number of payable days given. Increase payable days to suppliers.
- Diversify.
- Foster agility in decision making and actions.
Mission statement
• The overriding goal of the business.
• The reason for its existence.
• A strategic perspective.
• A vision for the future.
What makes a good mission statement?
• Excites, inspires, motivates and guides.
• Differentiates the business from its competitors.
• Defines the markets or business in which the firm wants to operate.
• Is relevant to objectives and therefore enables progress towards them to be measured.
Mission
A qualitative statement of the businesses aims.
Aim
A long term-plan from which business objectives are derived.
Objectives
Targets which the business adopts in order to achieve its overall corporate aims.
All business objectives should be smart.
Purpose of objectives?
• Motivate employees.
• Provide a clear focus for decision making.
• A means of measuring performance.
• Targets for individual and group achievement.
• A focus for all activity.
• Reduce uncertainty.
• Provides a sense of unity.
Cooperate and functional objectives?
Corporate = The overall business targets.
The corporate objectives translate down to each department or function.
What are the different functions of a business?
Marketing
Human Resources
Finance
Operations
Common business objectives?
• Survival
• Profit maximisation
• Sales maximisation
• Market share
• Cost efficiency
• Employee welfare
• Customer satisfaction
• Social objectives
Factors influencing wether or not objectives are fulfilled?
• Competition
• State of the economy
• Age of the business
• Size
• Legislation
• Market conditions
• Social attitudes
• Political factors
• Ownership (investment)
• Views of owners and managers
• Risk and attitude to risk
• Corporate culture
Sole trader
Owned by self-employed individuals.
Advantages and disadvantages of sole traders?
+ Easy to start up - no registration is needed.
+ Owner can be there own boss.
+ Owner keeps all of the profits.
- Requires a wide range of skills and flexibility.
- Hours are likely to be long.
- Unlimited liability.
Partnership
A business owned by two or more individuals.
Advantages and disadvantages of partnership?
+ Joint ownership of running a business.
+ A contract of relationship will be set up through a deed of partnership.
+ Shared responsibility in decision making.
+ Share costs and risks of setting up and running the business.
+ More variety of skills and ideas.
- All have to agree on business decisions which can lead to stress and conflict.
- Any profits need to be shared between o
Public Limited Company
- Public Company offered to the general public.
- Shares can be freely sold and traded on the stock exchange.
- Owned by shareholders.
- Must have 2 directors.
- No need to consult the owners for selling and buying shares.
- Shares can be transferred freely.
Advantages of a public limited company?
+ Huge amounts of money can be made through stock market flotation.
+ Finance easier to raise through issuing shares - increases value of company’s shares.
+ Size makes it easier to gain economies of scale.
+ Can dominate the market because of their size - raises the company’s public profile and increase its visibility with customers, suppliers and potential investors and grow its customer base.
+ Risks are spread among a larger group of shareholders.
+ Company will have a board of directors made up of independent directors and representatives from major shareholders. This can extend decision making process and bring in additional expertise.
Disadvantages of a public limited company
- Accounts openly available to the public.
- Shareholders expect dividends.
- Less control over decision making and possible takeover.
- Board of directors is accountable to external shareholders.
Private Limited Company
- Private company not offered to the general public.
- Has at least one director.
- Number of shareholders is unlimited, liability is spread among multiple owners rather than just one.
- Shares are sold to close friends and others and that can only be done if all of the shareholders agree.
- Shares cannot be sold freely.
Advantages of a private limited company
+ Shareholders have limited liability.
+ Easier to raise capital through internal shareholders known to the business.
+ Owners may pay less tax than if they operate as a sole trader.
Disadvantages of a private limited company
- Cannot raise large amounts through selling shares publicly.
- Accounts published and publicly available.
- Profits are shared between more members.
- Harder to set up than sole trader or partnership.
Franchising
A contractural relationship between a franchisor and a franchisee that allows the business owner to use the franchisor’s brand and method of doing business to distribute products or services to customers.
Benefits and drawbacks for a franchisor
+ Effective way to grow the business.
+ Franchisor gets set up fee and royalty payments.
- Risk of franchisee damaging brand if not run effectively.
Benefits and drawbacks of being a franchisee
+ Franchisees receive a ‘business in a box’ - plans, products, marketing and a recognised brand.
+ Franchisees are provided with training and support from franchisor.
- Expensive set up fees and little freedom to change business format.
- Royalty payments - a share of sales to back to the franchisor.
Social enterprise
A business that trades for a social and/or environmental purpose. They trade in order to benefit the community. These businesses have social aims as well as financial.
Not a charity; they achieve a social aim through donations and grants not through trading.
Lifestyle business
The aim of lifestyle business is to provide a great quality of life for the owner. Owners start a business hoping to sustain a certain level of income. They may start a business doing something they really enjoy, it allows an entrepreneur to live how they want and still run a business.
Online business
Could be run as any legal form, but providing products and/or services solely through the internet - e-commerce. Available to the customer 24/7. Can be managed from anywhere, owner doesn’t need to be sat in an office.
Business choices
Every business faces limited resources (scarce) and therefore have to make choices.
Resources that are typically scarce in a business
- Finance
- Time
- Capacity
- Skills and capabilities
Opportunity cost
The cost of missing out on the next best alternative when making a decision.
Opportunity cost examples
Personal:
- Entrepreneur may miss out on a regular income as a consequence of starting their own business.
- Long hours could be worked at the expense of family time.
Developing business ideas:
- One idea is chosen, whilst another idea is sacrificed.
- Cost of launching idea at the expense of further development.
What factors are considered when making a decision?
- Potential sales from each idea.
- Cash/financial commitment required.
- Wether the timing is right.
- Wether the decision fits the skill set/wether posses staff with the right skills.
- Competitive landscape.
- Market research.
Trade-off
A negative consequence/compromise of a choice made by a business.
Trade-off examples
- Less market research (lower cost) –> Less successful new product launch (lower sales).
- Higher quality standards to build reputation –> More quality control and assurance costs.
Market
A market is the only place that buyers and sellers come together to exchange goods or services. There will normally be an exchange of money as a set price.
Marketing
The department tasked with targeting the right product for the right target market using the right combination of price, promotion and place (4 p’s).
Marketing is about understanding the needs and wants of customers.
Marketing strategy = A plan of how you’re going to achieve your marketing objective.
Mass market
The attempt to create products or services which is targeted at the whole market e.g. mars bars.
Niche market
The attempt to create products or services which is targeted toward a specific segment of a market e.g. hotel chocolat.
Characteristics of mass markets
• People - Entire market
• Product - Wide appeal, generic - low quality
• Promotion - Mass media
• Price - Competitive
• Production - High output, low cost, economies of scale.
Characteristics of niche markets
• People - smaller, more specifically targeted market.
• Product - specific appeal, medium-high quality.
• Promotion - Generally targeted.
• Price - High premium
• Production - low output, high cost, economies of scale difficult.
Advantages of mass marketing
• Large scale production means economies of scale (low costs).
• Large volume of sales - wide customer base (high revenues, can be reinvested in R&D).
• Less risk as focused on large market.
Disadvantages of mass marketing
• Lots of competition.
• High volume production not flexible to demand changes.
• Products are similar so must be differentiated through marketing which can be expensive.
Advantages of niche marketing
• Less competition
• Can often charge a higher price - profit margins are higher.
• Builds up specialist skill and knowledge = market expertise. Smaller customers easier to target and satisfy: loyalty.
• Small scale production can be flexible and follow trends.
Disadvantages of niche marketing
• Higher unit costs - lack of economies of scale.
• Risk of over dependence on single market/product.
• Very risky as demand may not be constant.
Market size
This is the total value or volume of sales in the market. It can be measured in monetary terms e.g. £20 million or by the amount sold e.g. 1 million cars.
Market size formula
Number of units sold X Price
Market share
This is the proportion of total market sales that a firm has.
Market share formula
Sale of one firm/Total market sales X 100
Dynamic market
A market that is constantly changing. Sellers respond to the changing needs of buyers by improving existing products and services or introducing new ones.
Businesses have to adapt their marketing in response to these changes. A business that fails to keep up with trends in the market will soon loose competitiveness.
Why are markets dynamic?
The environment is dynamic:
• Social trends.
• Changes in technology.
• Competitive environment.
• Consumer tastes.
Stable market
A market in which the pace of change is slow; market size and share are fairly constant with little variation in price. Innovation is rare and may consist of minor changes to existing products.
Changing markets
• Markets have changed due to technological changes, especially the rise of the internet.
• Businesses such as Amazon have change markets due to the wider variety of products.
Online retailing
The process of buying and selling goods and services over the internet. Also known as e-commerce of e-tail.
The impact of online retailing on consumers: positives
• Greater convenience - breaks down geographical barriers.
• Greater choice.
• More price transparency.
• Access to new products/services.
The impact of online retailing on consumers: negatives
• Not all consumers can or will use online retailing.
• Increased risk of fraud.
The impact of online retailing on businesses: positives
• Small businesses can reach global markets.
• Online sales can be added to existing sales channels.
• Cheaper to run as no overheads of running a store.
• Fast opportunities for growth.
The impact of online retailing on businesses: negatives
• Increased competition from global online stores.
• May lose share from conventional area e.g. high street shops.
• May have to reduce prices due to greater consumer knowledge.
• Will need a specialist to setup and maintain the website.
• Transparent to the competition.
Digital economy
The term Digital Economy refers to economic transactions and business operations that are based on digital computing technologies.
3 main areas of the digital economy?
• Supporting infrastructure (hardware,software, telecoms, networks)
• E-business (any process that an organisation conducts over digital networks).
• E-commerce (buying and selling of goods and services online).
How do markets change?
• The digital economy as this affects the consumer and producer.
• Changes in consumer tastes and preferences - Products are wanted that meet specific needs (could be achieved through innovation).
• Government intervention - Increasing legislation in an industry can alter the way the market operates.
- Changing demographics
- The amount of competition
- Changing legislation
Brands
A brand is a product produced by one business using a specific name. Branding involves the creation of an identity for the business that distinguishes that firm and its products from other firms.
• Customers have a perception of what to expect from a particular brand e.g. quality, satisfaction.
• A brand is a trademark that cannot be copied.
• Brands can be: Name, shape, symbol, colour, logo.
Advantages of branding?
• Encourages customer loyalty, leading to repeat purchases and word of mouth recommendation.
• Companies able to charge higher price, especially if brand is market leader.
• Greater consumer awareness.
• Increased sales and market share.
Disadvantages of branding?
• High costs associated with promotion to gain brand recognition in first place.
• Constant promotion is necessary to maintain brand.
• A single bad event may affect all products the brand sells.
• Brand names have to be protected by being registered world wide.
How competition affects the market?
- The price a business is able to charge.
- The buying power of the customer.
- The selling power of the supplier.
- Availability of substitutes.
- Willingness and ability of new firms to enter the market.
Degree of competition
The number of firms that exist within a market. This can range from a monopoly (where one firm dominates the industry) to where there are any buyers and sellers.
Porter’s Five Forces
- Competitive rivalry - Number of competitors, quality differences, other differences, switching costs, customer loyalty.
- Threat of new entry - Time and cost of entry, specialist knowledge, economies of scale, technology protection, barriers to entry.
- Supplier power - Number of suppliers, size of suppliers, uniqueness of service, your ability to substitute, cost of changing.
- Threat substitution - substitute performance, cost of change.
- Buyer power - number of customers, size of each order, differences between competitors, price sensitivity, ability to substitute, cost of changing.
How can businesses adapt to changes in the market?
- Offensive = Try to increase sales or develop new markets.
- Defensive = React to the competition and try to maintain their market share.
- A mixture of both.
1) Being flexible in the way that they operate.
2) Carrying out market research to have a better understanding of their customers.
3) Invest in staff training, new products and processes.
4) Innovate and improve to be better at what they do
Product innovation
Occurs when new technologies make it possible to create completely new products.
Process innovation
Means using new technology to improve production methods, so that costs are reduced without a loss in quality. This could also be through distribution channels, stock control systems and supply chains.
Factors which cause uncertainty?
- The market: Dynamic markets are constantly changing. Rivals are trying to take market share.
- The economy: The business cycle, unemployment, inflation, exchange rates or interest rates.
- The government: Taxation, Government spending, legislation or trade negotiations.
- Geopolitical events: Events in other countries, e.g. wars, floods, trade wars, famine or effects on commodities.
Market research
The collection and analysis of data and information to inform a business about its market.
Reasons for market research?
Data collected and analysed is used to:
- Identify and anticipate customer needs and wants.
- Quantify likely demand.
- Gain insight into consumer behaviour.
Primary market research (field)
Involves the collection of first hand data that did not exist before and therefore it is original data.
Secondary market research (desk)
Research that has already been undertaken by another organisation and therefore already exists.
Examples of primary research
- Focus groups
- Interviews
- Surveys
- Questionnaires
- Observation
- Product testing and trials
Examples of secondary research
- Internet.
- Newspapers and magazines.
- National and local government e.g. office for national statistics.
- Market research organisations e.g. MORI, MINTEL
- Professional bodies e.g. ACCA
- International bodies e.g. EU
- Academic organisations e.g. Universities
Focus group
A form of qualitative research in which a group of people are asked about their perceptions, opinions, beliefs, and attitudes towards a product, service, concept, advertisement, idea, or packaging.
Benefits of focus groups
+ Easy to measure customers reaction.
+ Face to face interactions provide richer insights.
+ More unique and personalisable.
Drawbacks of focus groups
- Can be costly and time consuming.
- Small groups (do they represent range of opinions)
- Possible that members may not give honest opinions.
Primary research benefits
+ Up to date
+ Tailored to precise business needs.
+ Rivals do not have access to this data.
Primary research drawbacks
- Expensive
- Time consuming to collect
- Some methods e.g. focus groups require certain skills
Secondary research benefits
+ Quick and available immediately
+ Free or very cheap
+ More flexible and adaptable
Secondary research drawbacks
- Out of date
- Might be inaccurate
- Rivals can access this data
Quantitative research data
Based upon numerical data, measures things and produces statistical information.
For example a survey: telephone, posts, face-to-face and online.
Based on larger samples and is therefore more statistically valid.
Qualitative research data
Based upon feelings, attitudes and opinions. It aims to identify why consumers behave the way the do e.g. how customers feel about a new product.
Focus groups and interviews.
Qualitative research benefits
• Essential for important new product development and launches.
• Focused on understanding customer wants = very useful insight for a business.
• Can highlight issues that need addressing e.g. why customers won’t buy.
• Effective way of testing elements of the marketing mix - e.g. new branding, promotional campaign
Qualitative research drawbacks
• Expensive to collect and analyse - requires specialist research skills..
• Based around opinions - always a risk that sample is not representative.
Quantitative research benefits
• Data relatively easy to analyse.
• Numerical data provides insights into relevant trends.
• Can be compared with data from other sources (e.g. competitors, history).
Quantitative research drawbacks
• Focuses on data rather than explaining why things happen.
• Doesn’t explain the reasons behind numerical trends.
• May lack reliability of sample size and method is not valid.
Market orientation
An outward looking approach to new product development where the key focus is on what the customer wants.
• It is informed by market research.
• The business concentrates on understanding the needs of the consumer and then adapting or producing products to meet those needs.
• It reduces, but does not eliminate, the risk of new product development.
Product orientation
An inward looking approach to new product development where the key focus is on what products can be made and the production process.
• Informed by scientific research and technical development (R&D).
• The business will concentrate on producing high quality products and then later look to create a market for them.
• Most common with technologically advanced products where the consumes doesn’t have the technical knowledge or insight to realise that this product could exist or that they would want it.
Market segmentation
When the marker is split into subgroups of consumers with similar characteristics.
This helps to identify different type of consumer and their respective needs and wants.
Segmentation methods
1) Demographic
2) Geograohic
3) Income
4) Behavioural
Demographic segmentation
Identifies subgroups of the population based on their demographic profile or characteristics.
Age, gender, level of education, race, religion, family size and stage in life.
Geographic segmentation
Defines market categories based on where people love e.g. regions, cities or neighbourhoods.
People in different geographical areas display different characteristics and needs.
Income segmentation
Identifying subgroups of the market based on their levels of income and profession.
A common method uses socio-economic groupings. These include;
A - Higher managerial
B Intermediate managerial (solicitors, accountants lawyers)
C1 - Supervisory, clerical or junior professional.
C2 - Skilled manual
D - Semi and unskilled workers (window cleaner, garbage collector)
E - Pensioners, casual workers, students and unemployed.
Behavioural segmentation
Characterises sub groups based on the behavioural patterns of the consumer rather than their characteristics.
This might include:
• Reasons for making purchase E.g. needs, emotional, rewards
• Frequency of purchase e.g. heavy user or light user.
• Time of purchase E.g. seasonal, weekly, late night.
• Brand loyalty
• Method of purchase E.g. online
• Triggers e.g. response to digital marketing
What are the benefits and drawbacks of market segmentation?
+ Advertising can be targeted at specific market segments so that advertising spend is more effective.
+ The most profitable and least profitable customers can be identified,
+ It helps the firm improve existing products and customer service.
- Research and development and production costs might be high as a result of marketing several different product variations.
- Promotional costs may be high as advertisements and promoted might be needed for different segments.
- Production and stock holding costs will be high than for the option of just producing and stocking one differentiated product.
- May be difficult to identify a segment and consumers can belong to multiple segments at the same time.
- Not everyone within a segment will behave in the same way.
Use of ICT to support market research?
• Websites
- Invite feedback through blogs.
- The number of times visited and timings of visitors.
- Online polls and surveys.
- Cookies.
• Social networking
- Reviews, blogs, likes/dislikes, viral marketing and customer feedback.
• Databases
- Data mining and trends.
What are limitations of market research?
• Gathering and processing data can be very expensive.
• Organisations may lack the expertise to gather primary data and also lack the funds to pay specialist market research agencies.
• Data may not be accurate - leading questions, unrepresentative samples, biased interviews.
• Time constraints - don’t have long time to collect research as they need to make decisions as quickly as possible in order to maintain or improve their position in the market.
Market positioning
How individual products or brands are seen in relation to their competition by consumers. This may stem from pricing, marketing or quality,
Market mapping
The use of a grid showing two features of a market, such as price and consumer age. Individual brands or businesses are added to the grid to show potential niches or gaps in the market.
Benefits of market mapping
• Enables a business to spot gaps in a market.
• Can help a business differentiate its products from competition.
Drawbacks of market mapping
• It can sometimes be hard to categories the same products and services.
• Identifying a gap doesn’t mean there is need for a product. More market research must be done.
Added value
The value of the finished food or service over and above the cost of achieving it. This is achieved when a business increases the worth of its factor inputs by creating new output.
Added value can be measured in terms of financial worth.
Factor inputs
4 factors of production:
• Land
• Labour
• Capital
• Enterprise
Ways to add value
• Manufacturing - higher quality materials, more experienced workers.
• Branding
• Marketing - advertising
• Customer service
• Unique selling point
• Technology
Benefits of added value
• Charging a higher price.
• Increased profit.
• Increased market share.
• Creating a point of difference from the competition.
• Protection from competitors trying to steal customers by charging lower prices.
• Focusing a business more closely on its target market segment.
• Better brand image/reputation.
Competitive advantage
Means having an edge over rival products. It may be based on low costs and prices, an innovative design feature or a reputation for customer service.
Product differentiation
Having a unique feature that makes a product stand out from other products in the marketplace.
Unique selling point
A feature that distinguishes a product from its competitors.
Porter’s generic strategy
A firm can enjoy a competitive advantage if it is either lowest cost or highest differentiation.
• Porter’s basic premise is to be one thing or the other and not stuck in the middle. He emphasises the danger of the middle ground where there is little protection from rival firms.
• He believes that firms must put their flag in one camp and remain clearly focused on this.
• Marketing messages must be clear and non-contradictory.
What will a business be if they have lowest cost in a mass or niche market?
Mass market = Cost Leadership
Niche market = Focused cost leadership
What will a business be if they have highest differentiation in a mass or niche market?
Mass market = Differentiation
Nice market = Focused differentiation
Cost leadership
Means being able to offer your product or service at the lowest cost possible.
• Both operational and financial objectives must focus on cost minimisation.
• A firm that operates with the lowest cost can charge the lowest prices but doesn’t necessarily have to.
