Paper 2 Flashcards

Question

Internal sources of finance examples

Answer 1

Retained profit Selling assets Owners capital

Answer 2

Money left after all costs to the business have been paid, which is re-invested into business growth.

Answer 3

+ Don't have to pay it back + No interest charged + No loss of ownership.

Answer 4

- May not have any or enough. - May reduce the profit used as a reward for the business owner.

Answer 5

Money invested by the business owner such as personal savings.

Answer 6

+ No interest to pay, or repayments to make. + Will generate a high level of commitment from the owner to protect their investment.

Answer 7

- Amount available likely to be limited. - Can cause friction when multiple owners do not invest same amount.

Answer 8

Money gained from selling something that the business owns, but which is no longer needed, such as old machinery or property.

Answer 9

+ No interest charged. + Can allow a business to dispose of an asset no longer required. + Reduce costs of maintenance or upkeep of the asset.

Answer 10

- Unlikely that the amount received will be a true reflection of the asset value. - Can increase costs in long run if asset needs to be leased back. - May not have assets to sell.

Answer 11

- To start up - To expand - Day-to-day trading How much, when, challenges.

Answer 12

Spending on business resources that can be used repeatedly over a period of time e.g. vehicles, machinery.

Answer 13

Spending on business resources that have already been consumed or will be very shortly e.g. raw materials, wages.

Answer 14

Current assets - Current liabilities Money that you have left after you have paid your short-term debts. Money gained from reducing current liabilities or increasing current assets which can be used to fund day to day running of the business.

Answer 15

Things a business owns which can be turned into cash quickly. Cash from sales, debtors and stock/inventory.

Answer 16

Things a business owes which it needs to pay in the next 12 months. Overdraft.

Answer 17

- Can improve efficiency by reducing waste.

Answer 18

- Reducing current liabilities may affect customer satisfaction because customers will have to pay sooner and won't get much trade credit.

Answer 19

1. What the finance is required for (Long-term assets/short-term increase in stock) 2. The cost of the finance (Interest/dividends-returns) 3. Flexibility of the finance - Repayments and when. 4. Business organisational structure (limited companies find it easier to raise finance than sole traders.)

Answer 20

Where the finance is coming from. The provider. - Family and friends - Banks - Peer to peer funding - Business angels - Crowd funding - Other businesses

Answer 21

How the finance is provided. - Loans - Share capital - Venture capital - Overdrafts - Leasing - Trade credit - Grants

Answer 22

When loans of gifts are given by people known to the owners. Suitable for small businesses who don't require a lot of finance.

Answer 23

+ Don't have to be repaid which reduces the costs of the business. + Can be flexible, with low/no interest.

Answer 24

- Can cause friction with family members if something goes wrong with the business, or if they want to get involved in decisions.

Answer 25

Loans are when someone borrows a set amount from the bank with a fixed repayment term and interest. Can be secured against an asset. Overdrafts are when a business pre-arranges with the bank that it can spend more than it has in its current account. Any business can get a loan and overdraft. High risk projects including new innovations are rarely successful in getting a loan.

Answer 26

+ Loans: Large amounts can be borrowed. Repayments are predictable. + Overdrafts are flexible and only used when needed.

Answer 27

- Interest must be paid wether the business is profitable or not. - Interest payments are usually very high making this a very expensive source of finance.

Answer 28

When other business owners or individuals lend money in return for interest. For established businesses not start-ups.

Answer 29

+ Can raise between 5,000 and 50,000 with repayment terms from 6 months to 5 years. + Quick access to finance.

Answer 30

- Not suitable for very large amounts. - Pay back terms are usually fairly short.

Answer 31

Wealthy individuals who will give businesses finance in return for equity. Any small to medium sized Ltd.

Answer 32

+ Can raise between 10,000 and 250,000. + Business angels can help with decision making and give good advice and contacts - they want to business to succeed as they own part of it.

Answer 33

- Not suitable for very large amounts. - You loose equity, including less share of the profits and less control over decision making.

Answer 34

When lots of individuals give small amounts (pool their money) to businesses who are worth while some way. Start-up businesses usually with a social benefit such as social enterprises.

Answer 35

+ Flexible about how the funders are rewarded e.g. discounts, previews, free goods or equity. + Risky projects can attract funding.

Answer 36

- You may not raise as much as you need.

Answer 37

Businesses with a healthy cash balance may invest in other businesses. For established businesses.

Answer 38

+ May be a good source of cash if on good terms.

Answer 39

- May require repayment with interest. - May have specific terms.

Answer 40

- Share capital is finance raised from the sale of shares in a limited company. - Shareholders are the owners of shares and they are entitled to a share of the company's profit when dividends are declared

Answer 41

- Funds provided by specialist investors (venture capitalists) working on behalf of a venture capital firm in small to medium-sized businesses that have significant potential for growth e.g. in the technology sector - Venture capitalists usually require a stake in the business in return for finance and often expect to exert some control over the business - Businesses that may have been refused finance from other sources may seek the investment of less risk-averse venture capitalists

Answer 42

- An asset such as a piece of machinery or a vehicle by the business in return for regular payments. The business does not own the asset during the period of the lease and so is not responsible for maintenance or repair costs. - Leasing is usually more expensive in the long run than buying an asset.

Answer 43

- An agreement is made with suppliers to buy raw materials, components and stock which are paid for at a later date, typically 30 to 90 days later. - Trade credit is usually interest-free

Answer 44

- Governments and industry trusts may offer grants to businesses that meet specific criteria. - Grants do not need to be repaid. - The business must use the finance for its intended purpose

Answer 45

An investors liability/financial commitment is limited to the total amount invested or promised in share capital. An investors personal belongings beyond this venture are protected.

Answer 46

The owners of a business are responsible for the total amount of debt of the business. The owner may loose their personal belongings, e.g. home and cars, if the value of these is needed to cover the debts of the business.

Answer 47

• LTD = Private limited company - shares only sold to friends and family with permission. • PLC = Public limited company - shares sold on the stock exchange to anybody.

Answer 48

• Share capital • Retained profit • Venture capital • Business angels • Bank loans • Leasing • Trade credit

Answer 49

Sole trader = When there is a single business owner with unlimited liability. Partnership = When there are 2 or more business owners and at least one has unlimited liability?

Answer 50

• Owners capital • Retained profit • Unsecured bank loans • Peer to peer lending • Crowd funding • Grants • Bank overdraft • Leasing • Overdrafts

Answer 51

A business generates revenue by satisfying customer demand.

Answer 52

The amount of a product that customers are prepared to buy.

Answer 53

The number of units sold by a business.

Answer 54

The amount (value) of a product that customers actually buy from a firm. The value of sales in a given time period. Revenue arises through income from the trading activities of a business.

Answer 55

Volume sold X Average selling price (SPPU)

Answer 56

• Prices and incomes (availability of finance) • Tastes and fashions • Competitors actions • Quality • Government decisions

Answer 57

1. Increase quantity (amount) sold. - Perhaps by cutting the price or offering volume-related incentives (e.g. 2 for the price of 1). - Key issues (is demand sensitive to price). 2. Achieve a higher selling price. - Best to add value rather than simply increase price. - Does market research suggest that prices are high enough or too low.

Answer 58

Amounts that a business incurs in order to make goods and/or produce services.

Answer 59

Costs which change as output varies. - Lower risk for a start-up: no sales = no costs Raw materials, packaging, wages, postage/shipping.

Answer 60

VCPU X Volume sold (output)

Answer 61

Costs which do not change as output varies. - Fixed costs increase the risk of a start-up. Rent, marketing, insurance, salaries, interest payments.

Answer 62

Fixed costs (FC) + Total variable costs (TVC)

Answer 63

The reward or return for taking risks and making investments.

Answer 64

Total revenue - Total costs

Answer 65

The difference between sales revenue and total variable cost. • It is used to pay the firms fixed costs. • Once fixed costs are paid, additional contribution generates profit. • Most important to those firms that produce a variety of products.

Answer 66

Selling price per unit - Variable cost per unit Contribution per unit can be increased by either increasing selling price or reducing variable costs.

Answer 67

Contribution per unit X Quantity sold

Answer 68

Total contribution - fixed costs

Answer 69

• Helps allocation of fixed costs to see which products contribute more. • Costing and pricing this way is simple to operate. • Looks at the whole business. • Can be adjusted when changes occur e.g. to vcpu

Answer 70

• Hard to classify costs into fixed and variable. • Can easily be confused with profit. • Can only be used in the short term when fixed costs do not change and output is fixed for a certain period of time.

Answer 71

A level of output at which total sales revenu is equal to the total costs of production. The business doesn't make a loss but also doesn't make a profit.

Answer 72

Fixed costs / contribution per unit

Answer 73

The difference between the actual level of output of a business and its breakeven level of output.

Answer 74

Actual output - Breakeven output

Answer 75

• Helps entrepreneur understand the level of risk involved in a start-up. • Calculations are quick and easy - great for giving estimates. • Focuses entrepreneur on how long it will take before a start-up reaches profitability. • Helps to hypothesise the impact of changing variables on Breakeven and profit. • Margin of safety calculations shows how much a sales forecast can prove over-optimistic before losses are incurred. • Helps entrepreneur understand the viability of a business; also those who will lend money to, or invest in the business. • Illustrates the importance of a start-up keeping fixed costs to a minimum. • Breakeven analysis should be seen as a planning aid rather than a decision-making tool.

Answer 76

• Sales are unlikely to be the same as output - there may be some build up of stocks or wasted output too. • Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes. • Variable costs do not always stay the same. E.g. as output rises, the business may benefit from being able to buy inputs at lower prices which would reduce vcpu. • Most businesses sell more than one product, so break-even for the business becomes harder to calculate

Answer 77

A business process, assessing the probable outcome using assumptions about the future.

Answer 78

Projection of future sales revenue often based on previous sales and market data.

Answer 79

• Used in cash flow forecasts in order to estimate inflows each month. • Used in Human Resources planning to estimate how many staff to employ or make redundant. • Used in production planning to estimate how much stock/raw materials to buy. • Used in Human Resources and finance to estimate what sales targets to give to the sales force and what bonuses/commissions to pay. • Forms the basis of the businesses overall aims and objectives which are viewed by investors and other market commentators to judge the success of the company.

Answer 80

1. Using correlation: - Sometimes there is a link (correlation) between internal/external influences and future sales. If we can understand this relationship, we can predict how the external influence will affect sales in the future. E.g. if you are a house building company, then your sales are going to be correlated to the interest rate. - If you know the magnitude of that relationship, then this can be used for forecasting. 2. Using past sales data: - Using past sales data to predict future sales data is called extrapolation.

Answer 81

• Higher conumser income for a normal good. • A successful promotion campaign. • Training for staff in a service industry.

Answer 82

• Launch of a close substitute by a competitor. • Poor weather forecast for a barbecue manufacturer. • Higher consumer income for an inferior good.

Answer 83

1. Consumer trends 2. Economic variables 3. Actions of competitors.

Answer 84

• Seasonal variations in demand for certain goods. • Fashion - Celebrities influences can have a short-term impact on sales. • Consumer behaviour, attitudes and spending habits change over time.

Answer 85

An economic variable is any measurement that helps us to determine how an economy functions. 1. Interest rates. 2. Consumer incomes rising (slowly) 3. Exchange rate for pound declining. 4. Tax on sugary drinks increasing.

Answer 86

The cost of borrowing money or reward for saving money. When interest rates are high, consumer spending calls as people are more likely to save so sales revenue falls.

Answer 87

The money a consumer earns from work or investment. Income elasticity = measures the sensitivity of demand to changes in consumer income. A normal good is one with a positive relationship between income and demand e.g. bottled water. When income rises, demand for bottled water rises. An inferior good is one with a negative relationship between income and demand e.g. supermarket own brand products. When income rises, demand for these products falls, as they can afford a more luxurious product.

Answer 88

Rate at which one currency will be exchanged for another. If the pound is worth less the cost of buying goods from overseas goes up which means business costs go up so price goes up and therefore sales revenue falls.

Answer 89

Will lead to a fall in sales of sugary drinks.

Answer 90

• Short term actions of competitors - sales promotions. • Long-term strategies - changes to product ranges and expansion plans. • Competitor actions are difficult to predict so the use of past sales data to predict future sales may be limited as a result.

Answer 91

• If the business is new - a new startup (difficult to forecast sales). • If the market is subject to significant disruption from technological change (dynamic market) • If demand is highly sensitive to changes in price and income (elasticity) • If the product is a fashion item. • If there are significant changes in market share (e.g. new market entrants) • If management have demonstrated poor sales forecasting ability in the past.

Answer 92

Correlation is usually measured using a scatter diagram, on which data points are plotted. The independent variable (one causing other to change) is on the x-axis), dependent (being influenced) on the y-axis.

Answer 93

A statistical technique used to establish the strength of relationship between 2 variables. - Line of best fit (regression line) is added and used to forecast sales and identify factors influencing demand. - If the data suggests strong correlation, then the relationship might be used to make marketing predictions.

Answer 94

- As one variable increases so does the other. - Direct relationship. - E.g. sales and advertising or income and sales. - Close to the line = strong. - Far from the line = weak. - On the line = perfect.

Answer 95

- As one variable increases the other decreases. - Inverse relationship. - E.g. price and demand. - E.g. Interest rate rises, fall in demand for new houses.

Answer 96

- When there is no apparent link between the variables. - E.g. price of beef and cinema ticket sales.

Answer 97

Correlation is expressed as a number between +1 and -1 with 0 = no correlation. Closer to +1 (+ve positive correlation) and -1 (-ve negative correlation) the stronger the correlation.

Answer 98

- Useful to predict sales and demand factors. - Can see if there is a link that can be influenced for the benefit of the business. - Simple technique and useful for tactical thinking. - If appears regularly, the more chance there is that correlation exists.

Answer 99

- Coincidental links - does not always show casual links e.g. does coffee make you smoke. - Shows a link but hard to distinguish between cause and effect e.g. price rises and wage rises are strongly correlated which is dependant and independent. - Need to find a casual link by looking at other factors - treat with caution as almost impossible to isolate factors.

Answer 100

A method used by businesses to predict future levels such as sales, through analysing trends in past data.

Answer 101

- To predict sales. - Carried out visually by reading off a correlated graph. - Extend the line forward by eye. - Go to the forecasted time period and predict sales levels.

Answer 102

+ Can help firms look ahead and plan in the future (staff, production and distribution levels) + The past can be useful in the immediate future of some markets. + Can prepare for times of the year when busy and adapt marketing strategies. + Can identify particular segments of growth/decline.

Answer 103

- Only effective if trends continue into the future - unlikely in a competitive environment. - Unanticipated external and seasonal factors change forecasts or render useless. - Some new random factors cannot be predicted. - Treat figures with caution: depends on what extent the past repeats itself. - Ignores quantitative factors (e.g. changes in tastes and fashions.) - Not statistically valid. - Unreliable if there are significant fluctuations in historical data.

Answer 104

Statistical calculation of underlying trends in data. - Useful when dealing with erratic/seasonal data. - Average of multiple time periods. - Minimises effect of extreme values as an average taken. - Used to emphasise the direction of trend and reduce 'noise' that can confuse interpretation.

Answer 105

This looks at several periods at a time and averages out the data. By doing so, this helps to iron out all peaks and troughs in demand and gives a more accurate figure of whether sales have risen or fallen in a market over a period of time.

Answer 106

Sales in a specific time period - The moving average sales

Answer 107

Recording data at regular intervals in order to identify trends and make forecasts.

Answer 108

+ Easier to analyse smoother trends. + Accounts for variation in data. + More statistically reliable.

Answer 109

- Reduced accuracy and original data distorted as ironed out. - Erratic values may be useful to know. - Most useful only in stable periods. - Still based on past information.

Answer 110

A business tool to enable a business to run efficiently and effectively through setting financial targets. A financial plan/target for the future of costs and incomes for a particular aspect of a business that must be reached over a given period of time. There are individual and master budgets.

Answer 111

1. Revenue (or income) budget: - Expected revenues and sales volume. Start ups? - Broken down into more detail (products, locations etc) 2. Cost (or expenditure) budget: - Expected costs based on sales budget. - Overheads and other fixed costs - plan for. 3. Profit budget: - Based on the combined sales and cost budgets - calculate expected profit or loss. - Of great interest to stakeholders - investors/bank managers. - May form basis of performance bonuses.

Answer 112

1. Analyse market - Market size and growth. - Market share. - Market prospects. 2. Draw up sales budget - Sales forecast - New products - Pricing changes 3. Draw up cost budget. - Based on sales budget - Allow for known changes in supplier prices. - Include contingencies - a potential negative event that may occur in the future.

Answer 113

- To motivate staff. - A means of controlling income and expenditure. - To monitor performance - acts as a review and allows time for corrective actions to take place. - Provides direction and helps in the coordination of a business and improves communication between different sections of the business. - Provides clear targets to be met and helps employees to focus on costs. - Forecast outcome. - Turn objectives into practical reality. - They allow delegation without loss of control - delegate responsibility for revenue and cost targets to departments of geographical locations in order to improve control and accountability.

Answer 114

- Use last year's figures as the basis for the budget. - Realistic in that it is based on actual results. - However circumstances may have changed (e.g. new products, lost customers, credit crunch). - Does not encourage efficiency.

Answer 115

+ Quick and simple. + Can be accurate as based on actual figures from previous time periods. - Departments can feel an expectation to spend a certain amount of money, regardless of what they really need. - Managers can become complacent with their companies budgets. - No incentives for developing new ideas or reducing costs. - Fails to take into account changing circumstances. - Encourages spending up to the budget so that the budget is maintained next year.

Answer 116

- Budgeted costs and revenue are set to zero. - Budget is based on new proposals for sales and costs i.e. built from the bottom up. - Makes budgeting more complicated and time-consuming, but potentially more realistic.

Answer 117

+ Eliminates unnecessary costs as all spending has to be justified. + Can take into account current and likely future conditions which may be more accurate. + Helps the business to identify those departments which require large amounts of essential capital and day-to-day expenditure as well as those which require minimal expenditure. - Time consuming. - These budgets can be very tight, especially if managers are interested only in profit.

Answer 118

Forecast of cost or revenue

Answer 119

The amount of cost spent/revenue that is accounted for during the time period.

Answer 120

Difference between Budgeted - Actual figures. Every variance must be listed as either neutral or adverse (unfavourable/worse than expected) or favourable (positive/better than expected).

Answer 121

Unfavourable/worse than expected.

Answer 122

Positive/better than expected

Answer 123

Budgeted = Actual

Answer 124

• Stronger demand than expected = higher actual revenue. • Selling prices raised higher than budget. • Cautious sales and cost assumptions. • Competitor weakness leading to higher sales. • Better than expected productivity or efficiency.

Answer 125

• Unexpected events lead to unbudgeted costs. • Over-spending by budget holders. • Sales forecasts prove over-optimistic. • Market conditions (eg. competition actions) mean selling prices are lower than budgeted.

Answer 126

• Act only if the variance is outside an agreed margin - don’t waste time. • If small - no action. • Investigate the cause of a significant variance. • Consider was it avoidable or unavoidable. • Act to remedy the problem - if appropriate.

Answer 127

• Difficult to forecast accurately. • Difficult to monitor fairly. • Allocations may be inaccurate - can lead to competition and conflict between different business functions. • Budgets can take time and skill to set, monitor and review. • Unforeseen changes difficult to predict. • Unachievable budgets can have a negative impact on motivation. • Government and public body decisions e.g. interest rates. • Can encourage managers to focus on the short-term rather than long-term performance.

Answer 128

A financial document that summarises a business’s historic trading activity (sales revenue) and expenses to show whether it has made a profit or loss over a time period.

Answer 129

Difference between total revenue and total costs. • If a business is not doing well, then it uses different kinds of profit (e.g. profit for the year, net profit) to find out where the issue is.

Answer 130

1. To re-invest. 2. As a reward for the business owners. 3. As a measure of performance.

Answer 131

Revenue - Cost of sales These are direct costs.

Answer 132

Gross profit - Fixed overheads These are indirect costs.

Answer 133

Operating profits - (financing + tax) Or Profit before tax = Operating profit - financing costs Net profit = Profit before tax - tax

Answer 134

Charged on operating profit as a % flat rate.

Answer 135

Costs not associated with production that are fixed.

Answer 136

A technique for analysing business financial performance by comparing one piece of accounting information with another. Allows business investors to compare different years and different companies to assess performance.

Answer 137

Measure performance, a firms efficiency at achieving profit. - High percentage the better. - Relate profit to size of firm.

Answer 138

Gross profiyt / Sales revenue X 100

Answer 139

Operating profit / Sales revenue X 100

Answer 140

Net profit / Sales revenue X 100

Answer 141

+ Useful to assess control of direct costs and ability to max sales. - Ignores overheads.

Answer 142

+ Best measure of quality of profit. + Sales turnover measures scale.

Answer 143

- Increase quantity sold. - Increase selling price. - Reduce variable cost per unit. - Increase output. - Reduce fixed costs.

Answer 144

Items that are owned by an organisation for a period of less than 1 year. Cash in the bank, inventories.

Answer 145

Items that are owned by an organisation for a period of over 1 year. Goodwill, buildings, plant and machinery.

Answer 146

Items that are owed by an organisation for a period of less than 1 year. Overdraft, creditors.

Answer 147

Items that are owed by an organisation for a period of over 1 year. Mortgage.

Answer 148

The total amount of capital invested. Retained profits + Share capital + Non-current liabilities OR Total assets - Total liabilities

Answer 149

Shows whether a firm is able to meet its short term liabilities and meet its debts.

Answer 150

Shows businesses ability to meet debts over the next year. Current assets/Current liabilities Ideal value between 1.5 and 2. Expressed as a ratio (x:y)

Answer 151

Measures very short liquidity. More accurate indicator as it takes out inventories (stock) which is considered to be less liquid than cash. (Current assets - stock) / Current liabilities Ideal value is 1 (between 0.75 and 1)

Answer 152

A financial document that shows the value of all the businesses assets and liabilities, and how the business has funded the purchase of assets.

Answer 153

Current assets - Current liabilities

Answer 154

Net current assets + Non-current assets - Non-current liabilities

Answer 155

- Too low and it means that the business may be at risk from insolvency. - Too high and it means that the business is not taking advantage of possible investment opportunities. - Improve by; raising more cash selling non-current assets agreeing long-term borrowing and reducing short-term borrowing raising more share capital postponing planned investments reduce credit period offered pay suppliers later

Answer 156

The day-to-day finance used in the business. Current assets - Current liabilities A measure of liquidity: the ability to convert an asset into any form (usually cash) without any delay.

Answer 157

Produce goods --> Sell to customers on credit --> Customers (debtors) pay up --> Buy materials -Capital injected into the business-

Answer 158

- External changes - Internal problems - Failure to control stock levels - Poor control of debtors - Poor control of creditors

Answer 159

- Reduce trade credit - Negotiate extra credit - Cut production costs - Negotiate additional short term loans - Careful financial planning - Effective stock management - Sale and leaseback/redundant assets

Answer 160

Gearing measures the proportion of business' capital (finance) provided by debt. - A business is highly geared, if it has used debt to fund all of its capital investment. - A business has low gearing if they have used internal sources of finance to find its investment.

Answer 161

1. Measure of the financial health of a business. 2. Focuses on the level of debt in the financial structure of a business. 3. High gearing can mean high business risk (but not always).

Answer 162

Non-current liabilities/Total equity+non-current liabilities x 100

Answer 163

- Gearing ratio of 50%+ high - Gearing of less than 20% low - Level of acceptable gearing depends on business and industry.

Answer 164

- Less capital required to be invested by shareholders. - Debt can be relatively cheap source of finance compared with dividends. - Easy to pay interest if profits and cash flow are strong.

Answer 165

• Less risk of defaulting on debts. • Less exposed to interest rate changes. • Shareholders rather than debt providers have influence over the business. • Business has the capacity to add debt if required.

Answer 166

• Small businesses: - Large firms delay pay,ents. - Limited access to funds. • Expanding business: - Increasing expenditure will impact on working capital. • Enables businesses to survive day to day. • Businesses with long working capital cycles incur unpredictable costs. • If a business is holding large amounts of cash it is likely to be missing out on the benefits of investing it in fixed assets or investments. • If working capital is too tight and cash is short, the business may not be able to buy supplies in bulk resulting in variable costs per unit being higher than competitors.

Answer 167

Measures the % return a business makes on an investment decision. A business has a high return in capital employee so the investment is profitable.

Answer 168

• Evaluate the overall performance of the business. • Provide a target return for individual projects. • Benchmark performance with competitors.

Answer 169

Operating profit/Total equity + non-current liabilities x 100

Answer 170

• ROCE will vary between industries. • It is based on a snapshot of a business’ statement of financial position. • Comparisons over time and with key competitors are most useful.

Answer 171

•Employees feel the job or workplace is not what they expected. •There is a mismatch between the job and person. •There is too little coaching and feedback. •There are too few growth and advancement opportunities. •Employees feel devalued and unrecognised. •Employees feel stress from overwork and have a work/life imbalance. •There is a loss of trust and confidence in senior leaders.

Answer 172

1. Labour productivity. 2. Labour turnover/retention. 3. Absenteeism.

Answer 173

Measures the output per employee.

Answer 174

Total output/Number of workers

Answer 175

• Labour costs are a significant part of total costs. • Business efficiency and profitability are closely linked to use of labour. • In order to remain competitive, a business needs to keep its unit costs down.

Answer 176

•Extent and quality of non current assets (e.g. equipment, IT systems) •Skills, ability and motivation of the workforce •Methods of production organisation •Extent to which the workforce is trained and supported (e.g. working environment) •External factors (e.g. reliability of suppliers)

Answer 177

•Measure performance and set targets •Streamline production processes (Kaizen, TQM, Lean, Cell) •Invest in capital equipment (automation + computerisation, become more capital intensive) •Invest in employee training •Improve working conditions •Financial incentives

Answer 178

The percentage of the workforce that leave a business within a given period.

Answer 179

Number of employees leaving/Average number of employees x 100

Answer 180

• Measure of performance. • Some departments may naturally have a high turnover so context is important. • Turnover should be measured against historical figures in the business. • High labour turnover may be due to poor recruitment, weak induction, lack of challenge in the job and low pay rates. • If this figure is rising year on year management should see this as a red flag and investigate it.

Answer 181

• Higher costs —> Increased recruitment and training costs. • Increased pressure in remaining staff. • Disruption to production/productivity. • Harder to maintain required standards of quality and customer service.

Answer 182

The ability of a business to convince its employees to remain with business.

Answer 183

Number of staff staying over a period/Average number of staff in time period x 100

Answer 184

• Type of business —> Some businesses have seasonal staff turnover, some businesses employ many temporary staff. • Pay and other rewards. • Working conditions. • Opportunities for promotion. • Competitor actions. • Standard of recruitment. • Quality of communication. • Economic conditions —> Downturn often leads to lower staff turnover. Buoyant economy - staff more likely to leave. • Labour mobility —> how transferable are skills? What other jobs are available? • Employee loyalty

Answer 185

• Effective recruitment and training —> recruit the right staff, do all you can to keep the best staff (role for training &other motivation tools) • Provide competitive pay and other incentives —> competitive pay levels & non-financial benefits. • Job enrucihement. • Reward staff loyalty —> service awards, extra holiday etc..

Answer 186

• Serious accidents and illness. • Low morale. • Poor working conditions. • Boredom of the job. • Lack of job satisfaction. • Inadequate leadership and poor supervision. • Personal problems (financial, marital, child care etc.) • Poor physical fitness. • Problems getting to work. • Stress. • Workload. • Employee discontent with the work environment.

Answer 187

An employee’s intentional or habitual absence from work. (Measured as a %)

Answer 188

Number of work days lost through absence/Total possible days worked x 100

Answer 189

• A significant cost - Sick pay, temporary staff to cover. • Output reduced. • Other staff demotivated if have to cover absent workers. • Wider culture of absenteeism may develop. • Key to understand reasons (genuine/not) - Genuine sickness, bereavement, bullying stress. - Some employees simply “playing the system” • Often predictable - Monday/Friday or end of shift pattern. - Main holidays.

Answer 190

• Introduce more flexible working practices. • Ensure that jobs are interesting and challenging. • Improve working conditions and thus reduce dissatisfaction. • Improve relations between employers and employees. • Inteoduce attendance bonuses as an incentive to attend regularly. • Set targets and monitor trends. • Have a clear sickness & absence policy.

Answer 191

The transformation of resources into goods or services.

Answer 192

• Job • Batch • Flow

Answer 193

Firms producing items that meet the specific requirements of the customer. • Often these are one-off, unique items such as those made by an architect or wedding dressmaker. 1. Making one thing at a time. 2. Used for individual, unique products. 3. Normally made to customers specifications. Examples: Ships, bridges, made-to measure clothes, wedding cake.

Answer 194

Where products are made in groups with a series of tasks performed on each group. Aims: • Concentrate skills. • Achieve better use of equipment and so produce good quality products more economically than manufacturing. Examples: Houses, bread, different sized clothing, milk.

Answer 195

• Customers requirements and changes can be handled. • Associated with higher quality so can charge higher prices. • Employees can be better motivated - more job satisfaction. • A flexible production method.

Answer 196

• Individual cost of one unit may be high. • Often labour intensive so high labour costs. • Requires close consultation with the client. • Usually reliant on high skills.

Answer 197

• Cost savings can be achieved by buying in bulk. • Still allows customers some choice. • Products can be worked on by specialist staff or equipment at each stage. • Allows a firm to handle unexpected orders.

Answer 198

• Takes time to switch production of one batch to another. • Requires the business to maintain higher stocks of raw materials and work-in-progress. • Tasks may become boring (repetitive) - reducing motivation. • Size of batch dependant on capacity allocated.

Answer 199

Producing as many as possible of an identical product continuously on an assembly line. • Used for mass market products. • Ussually highly automated. • Product moves continuously through production process, with no stoppages (shift work) Examples: Drinks, mobile phones, televisions.

Answer 200

When work is divided into separate tasks or jobs that allow workers to become skilled at one of them.

Answer 201

• Costs per unit of production reduced through improved work and material flow. • Suitable of manufacture of large quantities. • Capital intensive which means it can work constantly. • Less need for training and skills.

Answer 202

• Very long set up time and reliant on high quality machinery. • High raw materials and finished stocks unless lean production is used. • Goods are mass produced - less differentiation for the customer. • Production is shut down if flow is stopped.

Answer 203

• Target market - e.g. does customer demand product options. • Technology - can production be automated? • Resources - does firm have finance and people to be able to use flow production. • Standards - what quality is required?

Answer 204

Japanese approach to production focused on eliminating all forms of waste.

Answer 205

• Where work is organised into teams. • The production line is split into a series of self contained tasks. • Each cell takes responsibility for the production of complete units of output. • The members of the cell work as a team to achieve goals and ensure quality standards are met.

Answer 206

• Improved productivity due to greater employee motivation from team working and responsibility. • Quality improvements as each cell has ‘ownership’ for quality on its area. • Workers become specialised and multi-skilled and more adaptable to needs of the business. • Closeness of cell members should improve communication.

Answer 207

• Culture has to embrace trust and participation or workers can feel they are being pushed for greater output with no respite. • Business may have to invest in new materials and ordering systems suitable for cell production. • May not allow firm to use machinery as intensively as traditional flow production. • Allocation of work to cells has to be efficient so that employees have enough work but not too much. • Small scale production lines may not yield enough savings to make a switch to cell production worthwhile. • Some workers in the cell may not ‘pull their weight’ causing tension amongst team members.

Answer 208

Reduction at lowest unit cost.

Answer 209

Total production costs in period/Total output in period

Answer 210

Factors that cause average cost per unit to fall as output increases.

Answer 211

Predominately uses machinery and technology in the production of goods/serices.

Answer 212

Predominantly uses physical labour in the production of goods/services.

Answer 213

+ Low-cost production where output is high. + Machines are usually consistent and precise. + Machines can run without breaks. - Significant set up and maintenance costs. - Breakdowns can severely delay production. - May nit provide flexibility in production.

Answer 214

+ Low-cost production where labour costs are low. + Provides opportunities for workers to be creative. + Workers are flexible (e.g. they can be retrained) - Workers may be unreliable and need regular breaks. - Incentives may be needed to motivate staff. - Training costs can be significant.

Answer 215

Impacts firms competitiveness. • Increase profits by reducing unit costs (more funds for investment or owners). • Reduce price and increase sales. Barrier to entry for other firms wishing to enter the market.

Answer 216

When the unit cost is at its lowest possible point while the company is producing its goods effectively. Point at which all economies of scale have been exploited.

Answer 217

Factors that cause average costs per unit to rise as output increases. 1) Communication problems - making sure everyone is on the same page. 2) Coordination and control problems e.g. culture differences resulting in different approaches, such as marketing seeing themselves as different from finance. 3) Motivation problems - senior management becomes more remote, employees feel remote and not part of a team.

Answer 218

1. Have a mission statement. 2. Manage by objectives. 3. Use appraisals to review progress and increase individual involvement. 4. Communicate regularly. 5. Invest in systems to aid motivation/communication.

Answer 219

• Introducing standardisation - all staff use same components and techniques in the production process. • Investing in new technology. • Relocating. • Downsizing. • Delayering. • Outsourcing - tasks given to other specialist businesses able to complete at lower cost. • Lean production. • Just in time production.

Answer 220

When a business meets the expectations of its customers/consumers and meets the specifications that the firm has set out.

Answer 221

- Find out what the customer wants. - Specify what the product does. - Make sure specifications are achieved.

Answer 222

Service industry: - Consumer satisfaction levels. - Accurate billing. - Speed of response. Manufacturing industry: - Number of products with defects. - Amount of wastage. - Proportion of returned goods.

Answer 223

The process of inspecting finished products to ensure that they meet the required quality standards (detect faults).

Answer 224

+ Inexpensive and a simple way to check that output is fit for purpose. + A few highly skilled workers will be responsible for quality which simplifies job of others on the production line. + Production line doesn't need to stop to fix issues so less bottlenecks in production. - Greater wastage and cost. - Doesn't get to the source of the issue and correct it.

Answer 225

Process that ensures production quality meets the requirements of customers throughout the process.

Answer 226

+ Less wastage and quality issues fixed before product reaches end of production line. + Cause of defects is identified to prevent future quality issues. - More workers involved in quality checks which can increase labour costs as staff training and a skilled workforce is required. - Can create bottlenecks if production is halted to fix a fault.

Answer 227

Small groups of workers in the same area of production who meet regularly to study and solve production problems.

Answer 228

+ Workers may be motivated as they are involved in decision making and feel valued - improve business reputation. + Employees doing job often have a better idea on how to improve processes so relevant and focused solutions are likely. + Business already has staff available to do it. - Management need to have trust in workers views and solutions. - Meetings and structures must be organised regularly - time consuming. - Lack of participants due to voluntary membership. - Options/solutions to problems can be quite narrow due to a small sample of quality circles.

Answer 229

An approach to quality that aims to involve all employees in the quality improvement process. - All employees of significant importance. - Quality considered from design through to sales. - Customers not just external, also internal. - May be less productive as assessing quality takes focus away from work. - Need to establish quality culture system, quality at centre of everything organisation does.

Answer 230

+ Improves efficiency - zero defects. + Workers more motivated to improve quality and offer better customer service. + Better team work, and job satisfaction/motivation. + Improved customer satisfaction. - Not everyone wants to be involved or trained in quality - requires all staff to buy into the idea. - Careful monitoring and control required. - Time consuming and costly.

Answer 231

- Don't see why it's necessary. - Don't want to undertake additional training. - Prefer to carry on doing things the same way.

Answer 232

- Explain why it's necessary. - Provide training so employees feel motivated. - Rewards.

Answer 233

A Japanese philosophy of continuous improvement where firms should constantly seek to improve their performance.

Answer 234

1. Accepted by all. 2. Many small gradual changes lead to a big effect on competitive advantage. 3. Based around people and ideas. 4. 1 worker 2 jobs. 5. Team working - cells and quality circles. 6. Empowerment - speed of decision making. 7. Performance targets. 8. Improving quality: MR, design the product, plan the process.

Answer 235

1. Culture - management and workers could resist change, impact motivation. 2. Training costs - to change attitudes it is expensive and takes time. 3. Justifying the cost - opportunity cost of investment in time and training whilst loss of output, hard to measure benefits.

Answer 236

Business process re-engineering: Redesigning key aspects of the business from scratch. • Scrap existing systems. • Rethink. • Clean slate. • Attract new bosses.

Answer 237

• Diminishing returns: impact of improvement gets less over time, staff enthusiasm. • Training staff to adapt to new changes can be expensive and time consuming. • Radical solutions: not right for all situations, may need drastic action to survive.

Answer 238

Measures the maximum amount of output a firm can produce at a given moment with its existing resources.

Answer 239

Measures the existing output relative to the maximum.

Answer 240

Current output/Maximum output x 100

Answer 241

If capacity utilisation is high - Business can spread fixed costs over more units (lower average cost and greater economies of scale) - higher chance of reaching Breakeven output. If low (UNDER CAPACITY) - Inefficient as resources are not being used effectively.

Answer 242

• Lower than expected market demand. • A loss of market share. • Seasonal variations in demand. • Recent increase in capacity - a new production line. • Maintenance and repair programmes - capacity is temporarily unavailable.

Answer 243

• Do nothing (temporary setback). • Renew marketing activities. • Reduce level of capacity (reduce staff, change premises).

Answer 244

Capacity shortage - Demand too high for capacity. • Do nothing. • Expand capacity (Invest in people equipment, bigger premises). • Subcontract (offer other work to other companies). • Increase the price —> may reduce demand depends on elasticity.

Answer 245

• Negative effect on quality —> production is rushed, less time for quality control. • Workers and machines can get stressed —> Increased absenteeism/staff turnover and increased maintenance costs. • No scope to increase output if needed. • No time for maintenance or training of workers.

Answer 246

Represent the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand.

Answer 247

• Enable production to take place. • Satisfy customer demand. • Precaution against delays from suppliers. • Allow for seasonal changes.

Answer 248

An amount of stock held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers.

Answer 249

1) Need to satisfy demand • Demand may be seasonal or unpredictable. 2) Need to manage working capital • Capital is tied up in stock which reduces working capital. 3) Risk of stock loosing value • Out of date, obsolete

Answer 250

• Cost of storage • Interest costs - holding stocks means tying up capital (cash) on which the business may be paying interest. • Obsolescence risk. • Stock out risks - a stock out happens if a business runs out of stock. This can result in lost sales and customer goodwill, cost of production stoppages or delays, extra costs of urgent replacement orders.

Answer 251

Cutting out any process that does not add value to the business to minimise inputs, 1. Time wasted by workers who are not busy. 2. Using more raw materials than needed. 3. Machines staying idle. 4. Throwing away items that are faulty. 5. Unsold stock.

Answer 252

1) Reduces costs —> Reduces prices —> Firm becomes more price competitive. 2) Reduces costs —> Increases profit margins —> Reinvested in innovation and improving product/service —> Firm competes on quality.

Answer 253

Diagram to show the level of stock over time to aid decision making.

Answer 254

Shows how stock levels change over the given time period. Decreases as used, increases when delivery.

Answer 255

Maximum amount of stock a business is able to hold.

Answer 256

The lowest level to which a business is willing to allow stock levels to fall.

Answer 257

The level at which a business places a new order. Accounts for lead time to process order and make delivery.

Answer 258

Difference between maximum stock level and minimum stock level.

Answer 259

The length of time from the point of stock being ordered to being delivered.

Answer 260

1) Lead time from supplier - higher lead times may require a higher re-order level. 2) Implications of running out (stock outs) - if stock-outs are very damaging, then have a high re-order level and quantity. 3) Demand for the product - higher demand normally means higher re-order levels.

Answer 261

1. Regular pattern unlikely. 2. Orders may arrive late, incorrect quantity. 3. Constant usage rate unlikely. 4. Line gradients may change depending on quick or slow use of stock.

Answer 262

Where production occurs with minimum stock levels so every process is completed just in time for the next process.

Answer 263

1. No stocks held, reduce waste. 2. Multi skilled and flexible staff. 3. Production is to order. 4. Stock is ordered when needed. 5. 0 defects.

Answer 264

1. Supplier relationships: communication, cooperation & flexibility, quality. 2. Reliable workers: good industrial relations & authority to alter production. 3. Flexible workforce: modify workloads to cope with changes in workload, contracts adapted, anticipate changes in market. 4. Suitable equipment: adapted to changing needs.n

Answer 265

+ Low storage costs. + Low opportunity cost of capital. + High quality - 0 defects. + Less waste. + Better liquidity. - Looses economies of scale. - Vulnerable to supplier. - Struggle to meet sudden demand changes. - Vulnerable to industrial action.

Answer 266

A qualitative statement of the businesses aims. The over-riding goal, the reason for a business’s existence and its vision for the future.

Answer 267

• Clear sense of purpose. • Excites, inspires, motivates and guides. • Easy to understand and remember. • Differentiates business from competitions. • For all stakeholders.

Answer 268

Targets which the business adopts in order to achieve its overall corporate aims. • Survival. • Profit maximisation. • Sales maximisation. • Market share. • Cost efficiency. • Employee welfare. • Customer satisfaction. • Social objectives.

Answer 269

The day to day goals of functions or departments within the business, derived from corporate objectives.

Answer 270

Specific Measurable Achievable Relevant Time bound

Answer 271

• Not always supported by the actions of business. • Often too vague and general. • Often merely just statements of the obvious. • Are they just PR. • To be effective, everyone in the business has to buy in. • Sometimes regarded cynically by staff.

Answer 272

• Age of the business. • Size and legal status. • Ownership. • Views of owners and managers. • Market conditions. • Legislation. • State of the economy. • Competition. • Risk and attitude to risk. • Corporate culture. • Political factors. • Social attitudes.

Answer 273

An increase in size or status.

Answer 274

* Achieve economies of scale (internal or external) * Increased profitability. * Increased market share and brand recognition. - Increased market power over customers and suppliers.

Answer 275

Factors that cause average cost per unit to fall as output increases.

Answer 276

1) Purchasing economies = Buying in greater quantities usually results in a lower price. 2) Technical = Use of specialist equipment or processes to boost productivity. 3) Managerial = Specialist managers can be employed to help reduce unit costs and boost efficiency. 4) Marketing = Spread a fixed marketing spend over a large range of products, markets and customers. 5) Network = Adding extra customers or users to a network that is already established (e.g. mobile phones). 6) Financial = Larger firms benefit from access to more and cheaper finance.

Answer 277

Occurs when a firm benefits from lower unit costs as a result of the whole industry growing in size. 1. Growth of industry - training and education focused on that industry. 2. Better transport and communication systems. 3. The government might lower taxers for the business. 4. Introduction of new technology to lower costs. 5. Support businesses grow and develop.

Answer 278

1. Diseconomies of scale. 2. Internal communication. 3. Overtrading.

Answer 279

Factors that cause average cost per unit to increase as output increases. 1. Co-ordination/control = problems in monitoring productivity and work quality, increasing wastage of resources. 2. Motivation = Workers may develop a sense of alienation and loss of morale. 3. Communication. 4. Negative effects of internal politics = information overload, unrealistic expectations among managers and cultural clashes between senior people with inflated egos.

Answer 280

Happens when a business expands too quickly without having the financial resources to support such a quick expansion.

Answer 281

- Growth is achieved by making significant capital investment in production or operations capacity before revenues are generated. - Sales are made on credit and customers take too long to settle amounts owed. - Significant growth in inventories is required in order to trade from the expanding capacity. - A long-term contract requires a business to incur substantial costs before payments are made by customers under the contract.

Answer 282

- Reducing inventory levels. - Scaling back pace of growth until profit margins and cash reserves have improved. - Leasing rather than buying capital equipment. - Obtaining better payment terms from suppliers. - Enforcing better payment terms with customers (e.g. through prompt-payment discounts).

Answer 283

The business has grown from within.

Answer 284

Growth which occurs as a result of taking over or merging with another businesses - it does not occur from within.

Answer 285

1. New product launches - product development/diversification. 2. Opening new stores. 3. Expanding into foreign markets. 4. Expansion of the workforce. 5. Franchising.

Answer 286

- Avoids risks and pitfalls of joining with another business. - Cheaper than inorganic. - Retains company culture and existing management. - Can be planned for unlike a takeover - pace of growth is manageable. - Higher production scale means economies of scale and lower average costs.

Answer 287

- High risk strategy - capital required - Growth may be limited and is dependant on reliability of sales forecasts/revenue. Growth achieved may be dependent on growth of market. - Pace of growth can be slow - long period between investment and return on investment. - New markets and countries can be dangerous to enter without foreign links.

Answer 288

Tactical reasons: - Ensure an increase in market share. - Access to technology. - Access to staff. - Access to intellectual property such as patents. - Economies of scale. - Cost and revenue synergies. Strategic reasons: - Access to new markets. - Improved distribution networks. - Improved brands.

Answer 289

A combination of two previously separate firms which is achieved by forming a completely new firm (mutual decision).

Answer 290

Synergy = When the value of two businesses brought together is higher than the sum of the value of the two individual businesses. - Achieve economies of scale (cost synergies - additional cost savings if larger). - Revenue synergies (increasing in sales of not businesses - greater by being larger e.g. cross selling, new distribution, markets - Market power. - Creates higher barriers to entry. - Increased market share - growth. - Combine expertise.

Answer 291

- Some smaller scale redundancies may be needed due to duplicate roles. - Often are unsuccessful if the brands are too different and don't integrate well. - Hard to integrate the two businesses to work alongside one another culture differences.

Answer 292

When one larger business buys the majority of the shares in another and therefore achieves full management control.

Answer 293

When one larger business buys the majority of the shares in another and therefore achieves full management control.

Answer 294

Takeover of a company whose management is actively against the takeover deal. Accomplished by going directly to the shareholders, ignoring board of directors.

Answer 295

Where the target company's management and board of directors agree to be absorbed by an acquiring company. The acquisition has been subject to the approval of the target company's shareholders.

Answer 296

• Reduces competition by removing key rivals. • Diversification. • Market power - enter new market segments. • Acquire tangible non-current assets. • Create higher barriers to entry. • Increased market share - growth. • Quick method of growth as control is clear. • Leverage expertise. • Increase overall dominance.

Answer 297

• Existing products are in the later stages of their life cycles, making it harder to grow organically. • Business lacks knowledge or resources to develop organically. • Speed of growth is a high priority. • Competitors enjoy significant advantages that are hard to overcome other than acquiring them.

Answer 298

• High cost involved. • Resistance from employees - could be hostile. • May not have any experience of the market in which they are purchasing. • Upset customers and suppliers as a result of disruption involved. • Incompatibility of management styles, structures and culture. • Problems of integration (change management). • High failure rate.

Answer 299

• Price paid for takeover was too high. • Cultural incompatibility between 2 businesses. • Loss of key personnel and customers post acquisition. • Competitors take opportunity to gain market share whilst takeover target is being integrated. • Poor communication, particularly with management, employees and other stakeholders of the acquired business.

Answer 300

Joining with a business at the same state of the supply chain.

Answer 301

Joining with a business further up in the supply chain.

Answer 302

Joining with a business operating earlier in the supply chain.

Answer 303

+ Rapid market share expansion. + Elimination of competitors. + Potential economies of scale. + Existing knowledge of industry means merger is more likely to be successful. + Firm may gain new knowledge or expertise. + Building synergies. - Can be a culture clash between two firms that have merged. - Can lead to diseconomies of scale. - Increased complexity and financial risks.

Answer 304

+ Lower costs of supplies. + Quality of raw materials can be controlled. + Greater control over supply chain reduces risk as access to raw materials is more certain. - Can tie business into a supplier that may not always offer the best option.

Answer 305

+ Additional profits as profits from next stage of production are assimilated. + Reduces costs of production as middlemen profits are eliminated. + Manufacturer can determine how products are promoted and build relationships with end users. + Guaranteed outlet for businesses products. - Consumers may resent loss of choice - with one firms products dominating these outlets. - Possible little expertise in running new firm results in inefficiencies. - Fewer economies of scale because production is at different stages of supply. - Many resources needed.

Answer 306

Where one business has no clear connection to the business buying it.

Answer 307

+ Diversifies business - spreading risk into different markets. + Useful for firms where may be no room for growth in present market. - No expertise - failure to understand market - highest chance of failure. - May distract management from original business due to unfamiliarity and slowness to integrate.

Answer 308

• Strain on cash flow. • Product quality and quality of customer service issues. • Diseconomies of scale. • Culture clash. • Managers overloaded with new responsibilities. • Shortage of resources. • Employee burnout. • Overtrading.

Answer 309

• Integration costs. • Bidding wars. • Resistance from employees (redundancies). • Regulatory intervention e.g. CMA make take time and cost money. • Cultural differences.

Answer 310

• Speedy growth (larger market share). • Lower costs resulting from economies of scale. • Increased profitability. • Higher remuneration for senior staff (bonuses). • Rewards to previous owners/shareholders.

Answer 311

Small and medium sized enterprises is any business with fewer than 250 employees.

Answer 312

1) Product differentiation/usp 2) Flexibility in meeting customer needs. 3) Deliver high standards of customer service. 4) Exploit opportunities from e-commerce.

Answer 313

• Creates value; highlights quality or durability of the product. • Non-price competition; focus on other ways of attracting customers such as taste and style. • Brand loyalty; gain customer loyalty. • No perceived substitute; focusing on the quality and design may give the impression that there are no suitable substitutes.

Answer 314

• Many small businesses talk to their customers regularly; therefore more in tune to their needs. • Easier to get customer feedback (larger firms often struggle with this). They do this by: • Carrying out research into opinions, looking at customers websites. • Gaining feedback; forums, polls, users groups, online communities. • Track social media discussions about the products. • Collect data on customer transactions. • Collaborate with customers to produce new products or services.

Answer 315

• Most small businesses operate in the service sector so this is a key source of competitive advantage, • Employees in smaller firms are likely to treat customer service as a priority. • Consumers appreciate businesses that give them more for their money. • Efficient service, fast delivery and flexible payment terms will help to persuade customers to spend with them rather than a competitor.

Answer 316

• E-commerce is an obvious (and increasingly common) way for small firms to reach a broader customer base. • Easy to target niche segments both domestically and overseas using e-commerce. • Smaller firms can gain significant traction with customers using social media. • Can also distribute/sell through third parties e.g. eBay, Amazon.

Answer 317

Medium to long term actions a business takes to achieve its aims.

Answer 318

1) Ansoff's Matrix 2) Porter's generic strategy

Answer 319

!) Market penetration - existing product, new market. 2) Product development - existing product, new market. 3) Market development - existing product, new market. 4) Diversification - new product, new market.

Answer 320

Aim: To increase market share by selling more existing products to the same target customers. - Advertise/Promote the product. - Use sales promotion techniques. - Reduce the price. - Expand channels of distribution. - Open more stores. - Sign up more retailers to stock your product.

Answer 321

- Product extension strategies - modification/improvement to an existing product to increase sales after saturation. - Umbrella brands - when a business launches independent sub-brands under overall umbrella brands. - Brand extension - new products added under existing brand.

Answer 322

- Re-branding an existing product to appeal to a new customer. - Selling into a new country by setting up retail outlets. - Selling into a new country by using a local distribution partner or licensing agreement.

Answer 323

- Innovation and R&D: develop new solutions. - Acquire an existing business in a new market through conglomerate integration. - Extend an existing brand into the new market.

Answer 324

+ Low risk – business focuses on markets and products it knows well. + Can exploit insights on what customers want. + Unlikely to need new market research. - May not achieve much growth. - Still some risk.

Answer 325

+Brand loyalty already established – easy to persuade customers to try new product. + Market research can be used to gain insights into your existing customers needs. - Expensive to research, develop and launch product. - Affect brand image if customers don’t like product. - May not be first to the market.

Answer 326

+ Effective where existing markets are saturated or where there is huge potential in emerging markets. + Increases global reach and brand awareness. - Risky – international markets, culture may be different. - Existing products may not suit new markets.

Answer 327

+ High growth potential. + If done successfully, reduces risk of one product or market failing. - Risky: no experience, may have few economies of scale initially.

Answer 328

An advantage over competitors gained by offering consumers great value, either by means of lower prices or by providing greater benefits and service has justifies higher prices.

Answer 329

Porter argues that a business should adopt a competitive strategy which is intended to achieve some form of competitive advantage for the business. Porter argues that failing to adopt one of these strategies risks a business being stuck in the middle and unable to compete successfully with rivals in the market.

Answer 330

1) Cost leadership = Where a business is able to produce its product at a lower cost than competition. 2) Differentiation = Where a business is able to differentiate its product from the competition such that customers perceive superior value.

Answer 331

1) Cost leadership = Where a business is able to produce its product at a lower cost than competition. 2) Differentiation = Where a business is able to differentiate its product from the competition such that customers perceive superior value.

Answer 332

Involves a business carrying out a detailed evaluation of its full range of products in order that appropriate strategies may be identified and pursued.

Answer 333

Involves a business carrying out a detailed evaluation of its full range of products in order that appropriate strategies may be identified and pursued.

Answer 334

A tool for analysing the current position of the products within a businesses product portfolio in terms of market share and market growth.

Answer 335

A tool for analysing the current position of the products within a businesses product portfolio in terms of market share and market growth.

Answer 336

+ Can help businesses understand which products and markets are growing. + Can help businesses direct their investment towards areas that are growing, using revenue from cash cows to fund that investment. - Can be difficult to separate different markets e.g. running shoes from fashion shoes. - Assumes that market share and market growth data is available. - It is not the only way to develop a corporate strategy - Ansoff’s and Porter’s matrix can also be used.

Answer 337

+ Can help businesses understand which products and markets are growing. + Can help businesses direct their investment towards areas that are growing, using revenue from cash cows to fund that investment. - Can be difficult to separate different markets e.g. running shoes from fashion shoes. - Assumes that market share and market growth data is available. - It is not the only way to develop a corporate strategy - Ansoff’s and Porter’s matrix can also be used.