Theme 2: Building a business Flashcards
What is Economies of scale? how does it make businesses grow?
Economies of scale is when the cost per unit of a product is reduced, allowing a business to charge lower prices and increase market share by selling more
How does increased sales help businesses grow?
Increased sales brings in greater revenue, which will increase profits if cost stay the same
How does market share increase?
Market share increases if sales increase faster than competitors
What are the different ways businesses can grow?
Internal growth (organic)
External growth (Inorganic)
What is Internal / Organic growth
Businesses do this by selling more products (more revenue).
How can Internal growth be achieved?
Launching better products
Lowering prices
Advertising
What is external growth
External growth is done by either:
Having a merger with another business
or
Having a takeover of another business
Why would a business grow externally?
A business may externally grow because they:
lack expertise in an area
or
want to increase market share and eliminate competition.
Benefits of external growth (3)
Eliminate competition
Increased market share
Benefit from economies of scale
Risks of external growth (2)
If money is borrowed in order to buy another business and the business plan doesn’t work, the business could end up in debt
Workers may become redundant, affecting staff motivation and business reputation
Name 3 objectives a business might have
Growth
Diversification
Expansion abroad
What is Diversification?
Diversification is when a business moves into a new market.
What is expansion abroad?
Going international, which can help businesses target a larger customer base, will help increasing sales and reducing risk
What other objectives would a business have?
Ethical objectives
Environmental objectives
What is ethical objectives?
example:
Paying workers a fair wage
Paying suppliers a fair amount
What is environmental objectives?
Aiming to do minimum damage to the environment.
Why would a business change their objectives?
Market conditions
Technology
Legislation
Internal reasons
What is Internal reasons?
New shareholders believe they should reduce their environmental impact
Features of a LTD company?
Owned by shareholders
They have limited liability
The business is a separate entity from the shareholders and do not risk the shareholder’s assets
Different types of LTD companys?
Private Limited Company
Public Limited Company
What are the features of a Public Limited Company?
Shares are traded on the stock exchange
Shares can be offered to the general public, making it easier to raise money.
What are the features of a Private Limited Company?
Shares are not traded on the stock exchange
Shares not offered to general public, making it harder to raise money
Advantages of being a Public Limited company
Easier to raise finance by selling shares
More likely for a loan approval
Disadvantages of Public limited company
Annual reports are published which competitors get to see
Can be costly to set up
Shareholders must be paid dividens, meaning money is lost and focus is diverted from the business into focusing on shareholders
Give 2 examples of external sources of finance
Loan capital
Share capital - stock market floatation
Give 2 examples of internal sources of finance
Retained profits
Selling assets
What is Share capital as a source of finance?
Selling parts of the business by floating shares on the stock market
Disadvantages of share capital as a source of finance
Must pay shareholders dividends
Must publish accounts, meaning competitors may benefit
Lose some control of the business
What is Loan capital as a source of finance?
An amount borrowed from the bank for a purpose
What are the disadvantages of using loan capital?
Loan must be repaid with interest
Assets may be used as security, meaning the bank can take assets if the loan isn’t paid back
What is using retained profits as a source of finance?
Profit kept in the company instead of paying it to shareholders
Disadvantages of using retained profits as a source of finance?
Profits are lost
What is selling assets as a source of finance?
Selling unwanted items to raise money
Disadvantages of selling assets?
Assets no longer owned by company
What are the problems with loans?
Banks will ask for security
The company must be credible - small businesses may have issues when asking for large sums
When should a business use an overdraft?
If money is needed quickly or there are cash-flow problems within the business
Advantages of globalisation
fewer tariffs and taxes making it easier to trade internationally
E-Commerce means companies can sell to all over the world
Businesses can import materials for cheaper prices
Businesses can expand internationally
Disadvantages of globalisation
Greater competition
Greater environmental damage, drawing attention to pressure groups who want governments to act
What is free trade?
When countries reduce or eliminate taxes to encourage trade between each other
What are tariffs?
Taxes placed on imports to protect domestic jobs.
Advantage of tariffs?
Makes imports more expensive so people will switch to domestic jobs and create more jobs and money in the economy.
What are trade blocs?
When a group of countries work together to promote free trade
Advantages of trade blocs
Lower prices all around
Businesses can expand into other countries
Disadvantages of trade blocs
Domestic businesses may go out of business
Countries outside the trade bloc must pay more and it discourages trading outside of the bloc
How do businesses compete internationally?
Internet and e-commerce
Changing the marketing mix to compete internationally
3 examples of unethical behaviour
Child labour, low paid, long hour shifts with bad working conditions and bad health and safety
Misinforming customers
Buying materials from unsustainable sources
What is a pressure group?
A group of people who join together to try to influence government policy or business policy
What methods may pressure groups use?
Boycotts
Social media campaigns
Protests
Online petitions
What are the 5 stages of the product life cycle?
- Development
- Growth
- Maturity
- Saturation
- Decline
What happens in the development stage of the product life cycle?
Product is being tested and advertised
What happens in the growth stage of the product life cycle?
Product sees growing sales, revenue grows
What happens in the maturity stage of the product life cycle?
Sales reach it’s peak
What happens in the saturation stage of the product life cycle?
Prices start dropping, competition arises
What happens in the decline stage of the product life cycle?
Sales fall, profits fall
Give 4 examples of extension strategies
Cutting prices to increase sales
Updated versions
Spending more on advertising
Introducing the product to another country
What are the different quarters of the marketing mix
Price
Product
Promotion
Place
What is penetration pricing?
Setting a low price to boost sales and market share
What is price skimming?
Setting a high price to boost profits
What is competitive pricing?
When a business decides to set it’s price based on that charged by rivals
What is cost-plus pricing?
Setting a price by adding a fixed amount to the cost of making a product.
What are the disadvantages of advertising?
Can be very expensive
Give 5 different ways a business could promote it’s products
Advertising
Sales promotion
Sponsorships
Use of technology for direct marketing
Use of technology to deliver advertising using social media
What are the advantages of sales promotion?
Effective to achieve quick sales and get customers to switch products
What are the disadvantages of sales promotion?
Sales promotion is only short term
What are the advantages of sponsorships?
Improves brand image
What are the disadvantages of sponsorships?
can be expensive
Hard to measure success rate
What is direct marketing?
Promotional material directed through email or telephone
What are the advantages of direct marketing? (4)
Allows business to targeted groups of customers.
Allows business to increase brand loyalty
Easy to measure success
Cheap form of promotion
What are the advantages of direct marketing? (4)
Allows business to targeted groups of customers.
Allows business to increase brand loyalty
Easy to measure success
Cheap form of promotion
What are the disadvantages of direct marketing?
Some customers consider it to be junk mail
What are the advantages of using social media?
Only selected customers are targeted using cookies, creating a bigger chance that they will buy the product
Cheap
What are the disadvantages of social media
Some customers don’t purchase online
How does technology affect the marketing mix?
Business can promote their products online
Businesses can reduce costs due to more efficient technology
Customers can compare prices online, leading to lower prices
What are the 3 methods of production
Job production
Flow production
Batch production
What are the advantages of job production?
Manufactured to meet customer needs
Charge higher prices for higher quality products
What are the disadvantages of job production?
Very labour intensive so higher wages must be paid
What is batch production
Making products in groups
Advantages of batch production
Faster than job production
effective for small businesses
Disadvantages of batch production
Stock may run out, causing customers to go to other brands
Higher costs
What are the advantages of flow production?
High levels of quality
Business can benefit from economies of scale, producing goods which will lower cost per unit.
What are the disadvantages of flow production?
Start-up costs of machinery is expensive
Flow production capital is expensive
If there any problems with the machinery then the whole cycle must stop
Span of control meaning
the number of employees each manager is responsible for
Chain of command meaning
The line in which orders and decisions are passed
What is the hierarchical structure?
It has many layers of management and a long chain of command.
What is a flat structure?
Only a few layers of management
Managers have a wider span of control and a shorter chain of command.
Advantages of a flat structure
Decisions made more quickly
Higher worker motivation as organisation is smaller
Disadvantages of a flat structure
No clear chain of command so may be unproductive
Advantages of a tall structure
clear chain of command
Decisions made quickly at the top
Disadvantages of tall structure
Decisions take time to be passed down
Decisions can be distorted
Demotivated workforce due to isolated departments
What is a centralised structure?
Where senior managers have control over the whole organisation, making decisions for the whole business
What is a decentralised structure?
Decision making is spread out to include other managers in the hierarchy
Pros of centralised structure
easier to control business as decision making is quick and does not have to go through several layers of managemen
Chain of command and accountability is clear
Cons of centralised structure
Less ideas from other managers
Decisions require authorisation from senior managers
Pros of Decentralised structure
Gives power to other managers, motivating them and improving their morale
Decision making which caters to the needs of local customers
Cons of decentralised structure
No strong leadership to give direction to the organisation.
Why is communication important?
Motivates staff
No mistakes
Customers and suppliers stay happy
Increase customer loyalty
What is the result of insufficient communication?
Unproductive workers
Ignored customer feedback
What are the 3 different ways of working for a business as an employee?
- Full time work
- Part time work
- zero-hour contracts
What is meant by full time work?
People who work 5 days a week for at least 35 hours
What is meant by part time work?
People who work for a limited number of hours in a week, usually people who can’t work full time
What is meant by zero-hour contracts?
Employees who are only called into work when the business becomes too busy
What are the 3 types of job contracts?
- permanent contract
- Temporary contract
- freelance contract
What is meant by the permanent contract?
An ongoing contract which expires when the employee leaves the business
What is meant by temporary contract?
A contract which includes a clear end of contract of when the worker will leave.
What is a freelance contract?
Someone who is self employed but carries out work for another business.
What are the advantages of part time employment?
Lower hourly wage
Flexible working hours
Disadvantages of part time employment
Staff may not be fully committed to role
Increased staff turnover as part time jobs lack career progression.
Advantages of temporary contracts
If a business does not like an employee, they can be replaced at the end of the contract
Allows businesses to then employ the best employees on permanent contracts
Disadvantages of temporary contracts
Staff may not take role seriously
Increased staff turnover as they are more likely to accept a permanent contract offer somewhere else
What impact has technology had on how businesses work with employees?
Working from home reduces business overheads and workers become more motivated
Better technology results in more efficient staff
What is staff retention? What effect does it have on costs?
The ability of a business to hold onto workers, lowering recruitment costs
What is staff turnover?
Percentage of workers that leave a business per year
What is a job description?
A document which describes the role and responsibilities of the candidate
What is a person specification?
A document which lists the qualities a company looks for in a candidate.
