Paper 3 Flashcards
Everything you need to know for paper 3 from the advanced information 2022
Give 2 internal stakeholders
- owners/ managers
- employees
Give 5 examples of external stakeholders
- customers
- suppliers
- local community
- government
- creditors - people the business owes money to
What analysis technique takes into account the power and interest of stakeholders?
Stakeholder mapping
What are the axis variables on a stakeholder map?
Power/ influence (y) and interest (x)
Relationships with stakeholders are important. How can a business keep them satisfied?
1) Adapt to external influences
2) Don’t just focus on one stakeholder at the expense of another
3) Consult all stakeholders before major decisions
4) Keep good communication between the business and their stakeholders
List the 7p’s
Price Product Place Promotion People Physical environment Process
A business’ marketing mix must be…
Integrated
Give the 3 types of consumer product
Convenience
Shopping
Speciality
What is a convenient product?
Inexpensive, everyday items bought regularly by lots of people
What are shopping products?
These are things like clothes, computers and washing machines that are bought less regularly than convenience products. They are more expensive and are sold in fewer places than convenience products
What are speciality products?
These are products that are unique in some way. Percieved image and quality are more important to consumers than price for speciality products, so higher profits can be made from them
What does the Boston matrix analyse?
Product portfolio
What does the x-axis represent on a Boston matrix?
Market share
What does the y-axis on the Boston Matrix represent?
Market growth
What are the 4 quadrants of the Boston Matrix?
Stars
Question marks
Cash cows
Dogs
Give 3 reasons why it is beneficial to develop new products
1) Bring in new customers
2) They give a competitive advantage
3) They allow companies to maintain a balanced product portfolio
What are the 5 stages of the product life cycle?
1) Research and development
2) Introduction
3) Growth
4) Maturity
5) Decline
What extension strategies can a business implement to prolong the life of a product?
1) Product development
2) Market development
3) Change the distribution channels
4) Change the pricing strategy - offers and competitions
5) Promotions - new ad campaign
Give some factors that affect pricing decisions
1) Value of costs / mark ups
2) How price sensitive customers are
3) Price elasticity of demand
4) The stage of the products life cycle
5) Corporate objectives
6) The price of competitor products
Give the 7 types of pricing strategies
1) Price skimming
2) Price penetration
3) Predatory pricing
4) Competitive pricing
5) Psychological pricing
6) Loss leaders
7) Price discrimination
What is price skimming? And give an example
When new and innovative products are sold at high prices when they first reach the market. Consumers will pay more because the product has scarity value, and the high price boosts the products image and increases its appeal. An example of this is the launch of PS5
What is price penetration?
The opposite of skimming. It means launching a product at a low price in order to attract customers and gain market share. It is especially effective in markets that are price-sensitive
What is predatory pricing?
When a business deliberately lowers prices to force another business out of the market (this is illegal under EU and US laws)
What is competitive pricing?
When companies monitor their competitors’ prices to make sure that their own prices are set at an equal or lower level
What is psychological pricing?
Basing prices on customers expectations. A high price may make people think the product is high quality.
What are loss leaders?
Products that are sold at or below cost price. These products will lose money but they’ll make a profit for the business indirectly by enticing customers into the shop where they will buy full priced items
What is price discrimination?
When a company sells its product at different prices to different groups of consumers, eg theme park ticket prices will vary according to the age of the customer
What is the purpose of promotion?
Promotion is designed to inform customers about a product or service or persuade them to buy it
What is the difference between industrial promotion and consumer promotion?
Industrial promotion tends to be informative, whereas consumer promotion tends to be persuasive
Excluding advertising, what are the other types of promotion?
1) Merchandising
2) Direct mail
3) Personal selling
4) Relationship marketing
5) Event sponsorship
6) Shopping channels
What are the 4 types of distribution channels?
1) Direct selling (0 level channel)
2) Indirect selling (1 level channel)
3) Direct selling through an agent (1 level channel)
4) Indirect selling (2 level channel)
Describe the direct selling channel
Manufacturer => Consumer
Describe the indirect selling channel (1 level channel)
Manufacturer => Retailer => Consumer
Describe the direct selling through an agent channel
Manufacturer => Agent => Consumer
Describe the indirect selling channel (2 level channel)
Manufacturer => Wholesaler => Retailer => Consumer
The fewer intermediaries in the distribution chain, the more _ _ _ _ _ _ _ a business has over how its products are sold
Control
What are 5 examples of things that are included in physical environment?
1) Decor and appearance
2) Appearance of the website
3) Appearance of staff
4) Layout
5) Practicality and safety
What is cash flow?
Cash flow is all the money flowing in and out of the business on a day to day basis
Why are cash flow objectives put in place?
To prevent cash flow problems
What does ROI stand for?
Return on investment
What does ROI measure?
Return on investment measures how efficient an investment is - it compares the return from a project to the amount of money that’s been invested
ROI formula
(ROI / Cost of investment) X 100
What does capital structure refer to?
Capital structure refers to the way a business raises capital to purchase assets
What combination makes up capital structure?
Capital structure is a combination of debt capital and equity capital
Percentage change in profit formula
(Current year’s profit - previous year’s profit) / previous year’s profit) X 100
What are the 3 types of profit?
- Gross profit
- Operating profit
-Profit for the year (net profit)
Gross profit margin formula
(Gross profit / sales revenue) X 100
Operating profit margin formula
(Operating profit / sales revenue) X 100
Net profit margin
(Net profit / sales revenue) X 100
Give examples of cash inflows
- Sales revenue
- Payment from debtors (recievables)
- Sale of assets
- Owners’ capital invested
- Sources of finance
What is the difference between credit sales and cash sales?
Cash sales appear in the month of sale and credit sales usually appear in the month after
Give examples of cash outflows
- Purchasing stock
- Wages
- Paying debts
- Purchasing assets
What 2 things is the length of the cash flow cycle depends on?
- The type of product - this determines the length of time it’s takes to produce and how long it’s held in stock
- Credit payments
What is the difference cash payments and credit payments?
Cash payments appear in the month of purchase and credit purchases appear in the month of cash outflow
Give 6 ways that businesses can improve cash flow
1) Overdrafts
2) Hold less stock, so less cash is tied up in stock
3) Try to reduce the time between paying suppliers and getting money from customers
4) Credit controllers keep debtors in control
5) Debt factoring
6) Sale and leaseback
What are cash flow forecasts?
Cash flow forecasts show the amount of money that managers expect to flow into the business and flow out of the business over a period of time in the future
Give two reasons why a cash flow forecast is useful to someone setting up their own small business
- They can use it to support themselves when applying for loans and sources of finance
- It can give them an idea of when they will have large payment months (e.g when bills are paid quarterly or yearly)
Why isn’t cash forecasting always accurate? (Think about the two main reasons)
- Cash flow forecasts can be based on false assumptions about what’s going to happen
- Business environment can suddenly change and costs and demand can change rapidly
What is a budget?
A budget is a financial plan for the future
What are the three types of budget?
- income
- expenditure
- profit
What are budget holders?
Budget holders are people responsible for spending or generating the money for each budget.
For example, the budget holder of the expenditure budget for marketing could be the head of the marketing department
Give 3 advantages of budgeting
- help achieve targets
- control income and expenditure
- assists managers to review their activities and make decisions
Give 3 drawbacks of budgets
- can cause resentment and rivalry if departments have to compete for money
- restrictive
- time-consuming to set and review the budget
What are the two methods used to set budgets?
Zero-based budgeting and historical budgeting
What is zero-based budgeting?
When businesses develop their budgets from scratch
Define liquidity
Liquidity is the ability of a firm to pay its short term debts
What is variance?
Variance is the difference between actual figures and budgeted figures
What does a favourable variance lead to?
Increased profit
What does an adverse variance lead to?
Reduced profits
What are the two types of variance?
Adverse and favourable
Give 3 external influences that cause variance
- competitor behaviour
- changes in the economy
- the cost of raw materials
Give 3 internal influences that cause variance
- improvements in efficiency
- overestimated/ underestimated budgets
- changes in selling price
What are 3 examples of decisions based on adverse variances?
- changing the marketing mix
- streamlining production
- motivate employees
What are 3 examples of decisions based on favourable variances?
- set more ambitious budgets
- improve responsibility of employees to be able to set higher targets in the next budget
- increase production
What is the break-even output?
The break even output is the level of sales a business needs to cover its costs
What is contribution?
Contribution is the difference between the selling price of a product and the variable costs it takes to produce it
Contribution per unit formula
selling price per unit - variable costs per unit
Total contribution formula
total revenue - total variable costs OR contribution per unit X number of units sold
Break-even output formula
fixed costs / contribution per unit
Margin of safety formula
Actual output - break-even output
Give 3 advantages of break-even analysis
- Easy to carry out
- Quick way to find out break-even output and margin of safety
- Forecasts how variations in sales will affect costs, revenue and profits
Give 3 disadvantages of break-even analysis
- Assumes that variable costs always rise steadily
- The analysis is for only one product and the majority of businesses sell a whole portfolio of products
- It only tells you how many units you need to sell and not how many you are actually going to sell
Give two types of internal sources of finance
Retained profit and rationalisation (sales of assets)
What is retained profit?
Profit kept within a business from profit for the year to help finance future activities
Give two advantages of retained profit
– Avoid interest repayments
– does not dilute the business ownership
Give two disadvantages of retained profit
– Only an option if sufficient retained profit exists
– may cause shareholder dissatisfaction if this is at the expense of dividend payments
– reduces the security blanket of keeping profit for emergencies
What is rationalisation?
Sales of assets
Give an advantage of rationalisation
Quick and easy
Give two disadvantages of rationalisation
– Small amount if the asset is old
– replacing the asset is usually more expensive
Give six examples of external sources of finance
– Debt factoring
– overdraft
– share capital
– loans
– venture capital
– crowdfunding
What is debt factoring?
Selling debts owed to a business to a financial institution. Businesses will receive funds immediately but at a reduced rate, all of the money will be returned but the company will keep a fee
Give two advantages of debt factoring
Guaranteed payments and saves time
Give one disadvantage of debt factoring
The business doesn’t get all of the payment because the factoring company will take a percentage of it
Is debt factoring short term or long term?
Short term
What does an overdraft allow for?
An overdraft allows for the facility to overspend on a current account up to an agreed sum
Give two advantages of overdrafts
– Good for small businesses and emergencies they face
– only borrowed when required allowing flexibility
Give two disadvantages of overdrafts
– Interest is changed on the overdrawn amount day to day
– only available from a current bank account
Are overdrafts short term or long term?
Short-term
What is share capital?
Finance raised from selling shares
Give three advantages of share capital
– Good for large businesses
– quick access to large sums
– no interest repayments
Give four disadvantages of share capital
– Only for LTDs and PLCs
– complex and costly process
– pay dividends
– dilutes ownership
Is share capital short-term or long-term?
Long-term
What is a loan?
A set amount borrowed from the bank, to be repaid with interest over a set period of time
Give three advantages of loans
– Large sums of money
– improve cash flow
– no loss of ownership
Give two disadvantages of loans
– Interest is added on top of the repayment
– can be more expensive than other financing options
Are loans short-term or long-term?
They can be both
What is venture capital?
Investment from an established business into another business in return for a percentage of equity in the business
What is venture capital also known as?
Private equity finance
Give three advantages of venture capital
– Potential for large sums of money
– gain of expertise
– makes it easier to attract other sources of finance
Give three disadvantages of venture capital
– Venture capitalists look for a high rate of return in a specific time period
– long and complex process
– partial loss of ownership
Is venture capital short-term or long-term?
Long-term
What is crowdfunding?
Raising finance from a large number of people each investing different, often small amounts of money
Give two advantages of crowdfunding
– No interest
– way to get large sums quickly
What is the biggest disadvantage of crowdfunding?
The investor is only tied into their promise contribution if the total amount is raised, otherwise they will have to return all the money if the projected amount isn’t raised
Is crowdfunding short term or long term?
Can be both
What are the four types of internal economies of scale?
Technical
Managerial
Purchasing
Marketing
What are technical economies of scale?
Technical economies of scale are related to production. Production methods for large volumes are often more efficient
What are managerial economies of scale?
Large businesses can employ managers with specialist skills to manage specific departments. They oversee plans and strategies which can result in work being done more quickly and efficiently
What are purchasing economies of scale?
Purchasing economies of scale are to do with discounts. Big businesses can negotiate discounts when buying supplies in large quantities. They can get bigger discount and longer credit period then they’re smaller competitors and they can also borrow money at lower rates of interest than a small business
What are marketing economies of scale?
Marketing costs are usually fixed, so a business with a large output can spread the cost over more units
When do external economies of scale happen?
External economies of scale happen when industries are concentrated in a small geographical area
Describe what the experience curve is?
In general, the production of any goods or services will follow the experience curve. As the total units produced by business increases, the cost per unit decreases at a constant rate
What are economies of scope?
Economies of scope arise when a business produces multiple products instead of specialising in one.
It’s cheaper for one business to produce many products than it is for many businesses to produce one product each
What are diseconomies of scale?
Diseconomies of scale make unit costs increase as the scale of production increases
Why do diseconomies of scale occur?
They happen because large firms are harder to manage than small ones.
How does a business prevent diseconomies of scale?
Strong leadership, delegation and decentralisation can all help prevent diseconomies of scale and keep costs down
What is retrenchment?
Retrenchment means that the business will have to downsize in some areas
How can a business retrench?
– Cut jobs
– reduce output
– withdraw from markets
– demerging (splitting the business up)
What is organic growth?
When a business grows from within
Give 4 advantages of organic growth over external growth
– Can maintain current management style, culture and ethics
– Less risk as it’s expanding what the business is good at and it’s usually financed using profits
– It’s easy for the business to manage internal growth and control how much the business will grow
- Less disruptive changes mean that workers efficiency, productivity morale remain high
Give 3 disadvantages of organic growth compared to external growth
– It can take a long time to grow a business internally
– Market size isn’t affected by organic growth. If the market isn’t growing, the business is restricted to increasing its market share of finding a new market to sell products to
– Businesses might miss out on opportunities for more ambitious growth if they only grow internally
Give 5 problems of growing in size
– Large companies can suffer from diseconomies of scale
– Growing companies find it more difficult to manage cash flow
– Fast growth increases the risk of overtrading
– When a company grows in size it will often change from UNLTD to a plc which can make the running of the company more complicated
– Businesses have to avoid growing so much that they dominate the market and become a monopoly
Give 4 reasons why a business owner may choose to restrict growth or retrench
– They may want to maintain the culture
– The business will become more complicated to manage as it gets bigger
– Growth requires the business to secure additional financial resources which can be complicated
– They may not want to put too much strain on their cash flow position
Who came up with a model for Growth?
Greiner
What are the 5 crisis’ stated in Greiners model of growth?
Leadership Autonomy Control Red tape Growth
What are the 5 types of growth in Greiners model of growth?
Creativity Direction Delegation Coordination Collaboration
What is a franchise?
A franchise is an agreement which allows a new business to use the business idea, name and reputation of an established business
What is the franchisor?
The franchisor is the establish business which is willing to sell, or license, it’s idea, name and reputation
What is the franchisee?
The franchisee is the business which buys into the franchise.
They usually pay the franchisor an initial fee plus ongoing payments – usually a percentage of their revenue or profit
Why is franchising good for growth?
Franchising allows a franchisor to grow quickly as most of the costs and risks are taken on by the franchisee
What are the three main types of external growth?
Mergers, takeovers and ventures
What is a merger?
Mergers are when two companies joined together to form one company. They might keep the name of one of the original companies or come up with a new name. The shares of the merged company are transferred to the shareholders of the old companies
What is the main motive for mergers?
Synergy – this is where the business after the merger is more profitable than all the businesses before the merger. This is a result of the match business generating more revenue or cost savings than the independent businesses could between them
What is a takeover?
Takeovers are when one business buys enough shares in another so it has more than 50% of the total shares. This is called a controlling interest and it means the buyer will always win in a vote of all shareholders.
What are takeovers also known as?
Acquisitions
What are the two types of takeovers?
Agreed and hostile
When do hostile takeovers occur?
Hostile takeovers occur when one plc buys a majority of the shares in another plc against the will of the directors of the company. It can do this because the plc shares are traded on the stock exchange and anyone can buy them
When does an agreed takeover happen?
Agreed takeovers happen when shareholders or other types of owners such as sole traders agree that they’ll sell the business to someone else. This is usually because the owners believe it would be beneficial for the survival of the business
What are ventures?
Ventures or small businesses or projects that are set up by existing businesses in the hope of making a profit. They are often set up to try and meet the needs that are not being met in the current market.
What is a joint venture?
If more than one business investor then it’s called a joint venture. In a joint-venture, businesses share their resources but there is no change of ownership for the businesses involved. When the joint-venture is terminated, bills are paid off, profits are shared and the businesses remain separate
What’s the advantage of a joint venture?
A joint venture can be a good way to set up a new business if you don’t have the capital to do it yourself and it can also be a good way for businesses to access markets in different countries
What is the main disadvantage of ventures and why are joint ventures often preferable?
A venture often involves a lot of risk to the business setting it up – a joint venture is often preferable because the risk can be spread among the businesses involved
What are the four types of integration?
Horizontal
Forward vertical
Backward vertical
Conglomerate
Describe horizontal integration
Horizontal integration happens when a firm combines with another firm in the same industry at the same stage of production process
Describe vertical integration
Vertical integration occurs when a firm combines with another firm in the same industry but at a different stage of the production process
What are the two types of vertical integration?
Forwards and backwards
Describe forward vertical integration
Forward vertical integration is when a business combined with another business that is further on in the production process.
For example, a manufacturer merging with the outlets where its products are sold
Describe backward vertical integration
Backward vertical integration is when a business combined with another business at an earlier stage of the production process.
For example, a retailer taking over its suppliers
Describe what a conglomerate merger is
Conglomerate mergers are between unrelated firms – they aren’t competitors of each other and they aren’t each other suppliers or customers
What is innovation?
Innovation means thinking of a new idea and putting it into action
What are the two types of innovations?
Product and process
What is product innovation?
Making new goods/services are improving existing ones
What is process innovation?
Putting into place new or improve production and delivery methods
Give 4 benefits of innovation
- Charge higher prices for innovative products
- Good for reputation
- Innovations in processes can help and value to existing products and services
- Take advantage of economies of scope
Give 4 drawbacks of innovation
- Very costly and time-consuming process
- You can waste resources by developing a product that is not wanted
- No guaranteed return on investment
- A business can ruin their reputation if the innovative product is poor quality
What are the six stages of new product development?
1) Idea
2) Analysis in screening
3) R&D
4) Value analysis
5) Test marketing
6) Launch
What is a continuous form of innovation?
Kaizen
What is kaizen?
The kaizen approach to innovation is by encouraging employees to improve the way they work and the processes they use all the time. Over a long period of time the small kaizen changes can add app and lead to innovation
What is intrapreneurship?
Intrapreneurship is when employees within a business are encouraged to solve a problem by coming up with innovative new ideas
What is benchmarking?
Benchmarking studies other businesses with excellent quality standards and aims to innovate by adopting the same methods
What is a patent?
A Patent as a way of registering and protecting a new invention
What do patents allows the business to do?
Patents allow businesses to maintain the unique features of their products for as long as the patent lasts. They do not have to worry about competitors copying their exact invention
What does a trademark do?
If you want to protect your businesses name, logo or slogan, you can register it as a trademark so that nobody else can use it
What is the purpose of copyright?
Copyright gives protection to written work and music
What is organisational culture?
Organisational culture is the way that people do things in a company and the way that they expect things to be done. It’s an important way to shape the expectations and attitudes of staff and managers
What is a strong organisational culture?
Organisational culture is strong when employees agree with the corporate values of the company
What is a weak organisational culture?
Weak culture is where the employees of the company don’t share the companies values and have to be forced to comply with them
What are the four main types of organisational culture according to Charles Handy?
Power
Role
Person
Task
Explain what a power culture is
Power cultures have a centralised structure where decision-making authority is limited to a small number of people
If there is a power culture, are employees more likely to be resistant to change?
Employees are likely to be more resistant to change because they don’t have the opportunity to give their opinion on what changes should and shouldn’t be made
Explain what a role culture is
Role cultures are common in bureaucratic firms where authority is defined by job titles. Decisions come from senior managers, so employees don’t have the opportunity to get involved in the decision making process.
What type of communication do role cultural organisation have?
Organisations with role cultures tend to have poor communications between departments so they respond to slowly to change
In what type of companies are person cultures most common?
Person culture is common in loose organisations of individual workers, usually professional partnerships such as solicitors, accountants, doctors etc
How are objectives formed in a business with a person culture?
The objectives of these firms will be defined by personal ambitions of the individuals involved. The firms have to ensure that the individual is actually have common goals
How are decisions made within a person culture and why can decisions be difficult to make?
Decisions are made jointly so all employees are likely to be comfortable and accepting of any changes that are made because they’ve agreed to them.
However, decisions on change can be difficult to make – individuals will often think about what is best for themselves rather than thinking about what is best for the organisation
Describe what is a task culture
Organisations with a task culture place an emphasis on getting specific tasks done
How do people work within an organisation that has a task culture?
Task culture get small teams together to work on a project, then disbands them. There may be conflicts between teams for resources and budgets. It can be confusing if a firm has too many products or projects
How do staff respond to change within a task culture?
Staff working in a company with a task culture are likely to think that changes normal because they are used to changing teams often and working with a variety of people. This means that they are less likely to be resistant to change in general
What data allows businesses to assess the cultural differences when dealing with businesses from different countries?
Hofstede’s national cultures
What are the four dimensions countries are scored on in Hofstede’s national cultures data?
– Individualism and collectivism
– Masculinity and femininity
– High power and low power distance index
– Uncertainty avoidance
What is an individualist culture?
An individualist culture is one where each person will look to maximise their personal self interest
What is a collectivist culture?
A collectivist culture is one where individuals will work as a team to achieve mutually beneficial outcomes
If a country has a high score for individualism and collectivism, what does this indicate?
High score = individualist culture
If a country has a low score for individualism and collectivism, what does this indicate?
Low score = collectivist culture
What is a masculine culture?
Masculine cultures are highly competitive and powerful, with contrasting gender roles
What is a feminine culture?
Feminine cultures focus on caring, quality of life and there is a concern for others
If a country has a high score for the masculinity and femininity dimension, what does this indicate?
High score = masculine culture
If a country has a low score for the masculinity and femininity dimension, what does this indicate?
Low score = feminine culture
What is the power distance index?
The power distance index is the extent to which people accept that power and wealth is distributed unequally
If a country has a low power distance index score, what does this mean?
Societies with low power distance expect equality
If a country has a high power distance index score, what does this mean?
Societies with high power distance except the hierarchy of power without argument
What is uncertainty avoidance?
Uncertainty avoidance is the extent to which people attempt to minimise uncertainty and risk
If a country has a low score for uncertainty avoidance, what does this mean?
Low score = a risk taking society
If a country has a high score for uncertainty avoidance, what does this mean?
High score = Not a risk taking society
What are 4 specific types of organisational structure of business can use?
Functional
Product based
Regional
Matrix structures
How are employees organised in a functional structure?
Functional structures organise staff by department
How are employees organised in a product-based structure?
Product-based structures organise staff by product
How are employees organised in a regional structure?
Regional structures organise staff by geographical location
How are employees organised in a matrix structure?
Matrix structures organise staff by two different criteria
The matrix structure insures that the staff are pursuing clearly defined objectives and encourages departments to build relationships with one another
Give the formula for total float of an activity
Total float = LFT – duration – EST
Give 4 advantages of critical path analysis
– Helps firms forecast their cash flow
– Find the shortest time possible for completing a complex project
– It can be used as a visual aid to communicate with employees
– It can be used to review progress on individual tasks
Give 4 disadvantages to critical path analysis
– Relies on estimates of how long each task will take
– Constructing and amending the network will require a significant amount of planning and time
– The network analysis sets tight deadlines – employees may cut corners in the rush to meet deadlines
– There is no information about costs or how good the project is going to be
What is a planned strategy?
Planned strategy is planned out before action is taken to implement it
What is an emergent strategy?
Emergent strategy develops over time, as a businesses actions lead to patterns of behaviour. Emergent strategy can be adapted as the business learns what works in the current environment
What is strategic drift?
Strategic drift is what happens when a strategy becomes less and less suited to the business environment. It happens when a business is strategy doesn’t do that to keep up with the changes in the environment
