Paper 3 Flashcards
Price skimming
High price when unique product is launched but as product life lengthens the price is reduced
Penetration pricing
Involves launching a product at a very low price to entice customers
Price skimming + -
+ high prices to create a desirable image for the product
+ early adopters will pay high price for exclusivity
+ high prices generate rapid profits
- lower sales as seen as a rip off
- Early buyers will be frustrated when price falls
- image may suffer when price begins to fall
Penetration pricing + -
+ low price encourages lower risk product sampling
+ low price boosts sales - cutting production costs
+ high volumes persuade retailers to buy the product
- product image seen as cheap
- upmarket retailers may be unwilling to stock the product
- create price sensitivity among customers - higher price elasticity
Price strategies for new products
Penetration
Price skimming
Price strategies for existing products
Cost-plus
Predatory
Competitive
Pyschological
Cost-plus
Deciding price by adding a desired percentage onto total costs per unit
Cost-plus + -
+ guarantee a profit is made per sale
- ignoring the market, may produce unrealistic price
Appropriate when firm is market leader and doesn’t need to worry about competition
Predatory
Price low enough to force a competitor out of business - usually on a local scale
Predatory + -
+ once rival has been pushed out, firm can rise prices
- illegal
Appropriate when firm is more financially more powerful
Competitive pricing
Charging a price at the market average or at a discount to the average market price
Competitive pricing + -
+ price wont be a factor to why a customer is put off
- little control over price they charge and revenue generated
Appropriate when a company is taking on more powerful rivals
Physiological
Fine tuned decisions on the price to charge, prices set just below major psychological levels, such as £9.99 instead of £10
Psychological + -
+ nudge customers make a purchase believing it is cheaper
- little affect on planned purchases and may annoy customers due to inconvenience
Appropriate when selling impulse purchases
Factors affecting pricing strategies
Levels of product differentiation - higher differentiation means higher price
Price elasticity of demand - inelastic demand means easy prices changes without impacting demand
Levels of competition
Strength of brand
Stage in the product life cycle - introduction high price but maturity lower price
Costs and need to make a profit
Changes in pricing to reflect social trends
Online sales - more sensitive due to price comparison websites
Price comparison sites encourager firms to be more price competitive so their best value show on their sites benefits all parties involved
Need to recruit because
Existing staff leaving
Growth of business
New activities needing new skills
Recruitment process
- Employee required
- Conduct job analysis on vacant role
- Create job description and specification
- Advertise vacancy internally and externally
- Draw up shortlist of candidates
- Decide on most suitable candidate
- Appoint most successful candidate
Decision on wether to recruit internal or external will depend on the
Cost of recruitment method
Size of recruitment budget
Location and characteristics of likely candidates
Internal recruitment + -
+ quicker and cheaper
+ chance of promotion boost motivation and productivity of workers
+ skills and attitudes already known by the business
- limits potential number of candidates
- fails to bring new ideas
- creates vacancy elsewhere that needs replacing
Selection methods
Interviews - may be bias or prejudice
Testing and profiling - can screen out great candidates who do not fit the traditional role
Assessment centres - more expensive and more for senior partners
Costs of training+ -
+ higher skill levels can boost productivity and innovation
+ a wider range of skills can enhance business flexibility
+ motivates staff, who feel they have been invested in the business
- large financial cost
- operations of normal business can be interrupted
- better trained staff are more attractive to other business who may poach them
On the job training + -
+ tailored to the company’s ways of working
+ mistakes can get instant feedback on
Saves time and cost of sending employees out
- less knowledge acquired on methods used elsewhere
May take a lower priority as staff focus on production targets
Capacity utilisation equation
Capacity utilisation = actual output/potential output x 100
Implications of under-capacity utilisation
- reduces operating margins significantly
- leads to fears of job security among staff, decreasing motivation
- cause poor morale between managers
- contribute to poor reputation for the business, especially in service sector = restaurant with spare tables
Implications of over-utilisation of capacity
- firm may not be able to accept new orders, potentially turning away new customers to rivals
- little to no time to carry out maintenance on machines or time for staff
Ideal is 85%
Ways of improving capacity utilisation
Increase current output - boost sales through marketing methods
Reduce maximum capacity - selling assets or laying off staff
Circumstances in which inflation has a major effect are:
- When rates of inflation are above 2%
- When prices are rising faster than incomes
- When UK inflation is higher than that in most other countries
Effects of inflation on businesses
- a firm with a long term fixed price contract may find that if costs rise rapidly while the contract is being completed, the fixed price does not even cover their higher levels of cost, damaging profitability
- firms with substantial long term borrowings will find the real value of the money they repay will be lower
- Uk inflation higher than others than competitiveness is lost due to higher prices
Exchange rates on business
Strong pound = imports cheaper, exports expensive
Weak pound = imports cheap, imports expensive
Effects of high interest rates on businesses
Consumers have less money to spend as mortgages and borrowing payments increase
Interest will rise increasing costs
Consumers are less likely to borrow money so expensive good demand such a cars will decrease
Business less likely to invest as money gained on interest is greater
Taxation and government spending contributes
Publishers of textbooks
Road building firms
Pharmaceutical firms
Railway companies
Effects of the business cycle of businesses
If economy slows, consumers on average will reduce spending
While in a boom period, consumers demand increases]
Changes in consumers incomes are result of changes in wages or even changes in the level of unemployment
Effect of business uncertainty
Dictates investment wether it will generate profit
Effects of consumer protection laws on business
Does the product do what it claims to do?
Is the product correctly labelled?
Is the product sold in the correct weight or measure?
The rights of consumers to refunds or to exchange faulty products
Two major acts of parliament covering consumer protection is
Sale of goods act
Trade descriptions act
Effects of employee protection on business
Fair pay
Sick pay
Maternity and paternity leave
Employment contracts
Relationships with trade unions
The ability of businesses to get rid of staff
The responsibilities of businesses to employees who are made redundant
Key areas of employment law
Minimum wage = increased labour costs
Right to a contract of employment = employee security needs but less flexibility
Increased to sick, paternity and maternity leave = increased cost of paying for cover but feel more valued and less staff turnover and recruitment costs
Redundancy = becomes expensive due to statutory payments causing cash flow problems
Trade union rights = has pros and cons
Effects of environmental protection on business
Materials used for products
Processes used to make certain products
Need to use recyclable materials for certain products
Landfill tax
Environmental risk assessments for different business activities
Effects on competition policy on businesses
Competition and markets authority (CMA)
Investigates takeovers and mergers
Investigates anti-competitive practices
Investigates possible price fixing
Can bring criminal prosecutions against wrongdoers
The work of the CMA should ensure that
Companies set competitive prices
Companies do not collude with others in their market to the detriment of consumers
Mergers and takeovers that will create overly powerful firms will be prevented
Effects of healthy and safety on business
Health and safety act
Safe physical conditions
Precautions that firms are required to take when planning work
The way in which hazardous substances should be treated in the workplace
Health and safety + -
+ prevent negative publicity
+ motivate employees due to safety
+ accidents can delay or haunt production
- extra paperwork
- Needs to pay for extra safety equipment
- needs to pay to adjust physical work conditions
Three methods of investment appraisal are
Payback
Net present value
Average rate of return
Pay back calculation
- minus annual returns from investment to work out how many years it will take
- (Residual/ remaining payback) X12
Define payback
the amount of time it takes for an investment to repay its cost.
disadvantages of payback
- based on future predictions.
2. is a short term calculation and doesn’t consider money made after payback period
Average rate of return calculation
- add positive cashflows
- takeaway initial cost of investment
- divide by the lifespan
- calculate as a percentage of investment
ARR definition
calculates the rate of return as a percentage of the investment
negatives ARR
doesn’t consider the future value of cash
Ignores time
Focuses on profit rather than cash flow
Not adjust for time-money
Net present value calculations
- multiply each return by discount factor
- add all values up
- minus the cost of investment
evaluation of investment appraisals
- the validity of the predictions (without past experience it may be biased)
- doesn’t account for external shocks
what does theory suggest if the NPV is positive
the theory suggests that a business should go through with the project
Stakeholders v shareholders
Stakeholders is someone who has interest in the business
Shareholders is someone who owns shares
Stakeholder because
Shareholder because
Deal with them on day to day basis and encourage too continue that positive relationship
Maximise profits to keep shareholders happy and invest more
Internal stakeholders
Manager
Employees
Owners
External stakeholders
Suppliers Society Government Creditors Shareholders Customers
Stakeholder objectives
Staff = growth, new technology and profit
Managers = growth, new technology and profit
Shareholders = rising profits in the short and long term
Suppliers = growth
Customers = quality of product/service, new innovative products
Bankers = stable profits
Local residents = clean, green production
Some trading blocs are moving towards
Harmonisation of laws
Free movement of labour
Attractions of trading blocs
Harmonisation of laws
Countries working together to combat techniques such as dumping
Boosts efficiency due to larger domestic market
Expansion of trading blocs
Creation of trade blocs
New countries joining trade blocs
Examples of trading blocs
EU
USMCA
Impact on businesses of trading blocs + -
+ free movement of goods
+ external tariff against international competitors
+ governments provide infrastructure support
+ free movement of labour
- competition increases domestically
- new rules and regulations introduced
- Neighbouring markets may reduce enterprise compared to new ones such as China
- common problem such as low commodity prices
Assessment of a country has a production location
Cost of production Skill and availability of work force Infrastructure Location in trading bloc Government incentives Ease of doing business Political stability Natural resources Return on investment
Costs of production
Labour intensive
Capital intensive
Lower cost more attractive
Skills and availability of workforce
Less skilled may not be able to manage machinery
Literacy will be a key factor
Shows development in an economy
Infrastructure
Modern technology and utilities required in order to be reliable
Some MNCs will improve local infrastructure themselves
Location in a trading BLOC
Being in a trading bloc is a pull factor
Avoids tariffs imposed by toner countries for the same product such as Toyota in the uk avoiding japan
Government incentives
Production facilities to: Job creation Extra tax revenues Boost in local suppliers Increasing skill levels amount labour force Positive impact on balance of trade
Incentives include
Grants
Tax breaks
Investment in infrastructure and training
Ease of doing business
Days to start a business Days to enforce a contract Days to import an item Total tax rate of profit Days to get electricity Days to wait for construction permits
Political stability
Business plan head through stability
Investment in production location is higher so payback will be longer than selling in that market
Natural resources
Large quantities of bulk resources to reduce importing materials
Near resources
Return on investment
Cheaper location = smaller initial investment
Cheaper location can provide problems which causes more expense
More expensive will guarantee better return on investment due to producing better revenues in the long-term
