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Business A Level > Theme 3: 3.1, 3.2, 3.3 > Flashcards

Theme 3: 3.1, 3.2, 3.3 Flashcards

1
Q

What is a Business Objective?

A

Targets which a business adopts in order to achieve its overall corporate aims. (SMART targets)

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2
Q

What are some examples of common business objectives?

A
  • customer satisfaction
  • sales/profit maximisation
  • market share
  • survival
  • employee welfare
  • social objectives
  • cost efficiency
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3
Q

3 different types of objectives and the differences between them?

A
  • Corporate: relate to the business as a whole (e.g. market share of 12%)
  • Functional: related to specific functions of the business e.g. HR, Marketing, Operations, Finance
  • Unit: individual aims (e.g. shop sales of £500,000)
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4
Q

What are some factors that may influence business objectives?

A
  • age of business
  • political factors
  • size and legal status
  • views of owners and managers
  • competition
  • corporate culture
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5
Q

What is a Mission Statement?

A

A qualitative statement that sets out the over riding goal, the reason for a business’ existence and vision for the future.

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6
Q

Purpose of a mission statement?

A
  • clearer sense of business purpose and values
  • motivates, inspires, guides the staff and investors
  • differentiates a business from competitors
  • relevant to all stakeholders, not just managers and employees but customers also
  • track progress of business, head in intended direction
  • informs public about business purpose so good for PR
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7
Q

Some criticisms of mission statements?

A
  • not always supported by business actions
  • often vague, general, lack detail
  • can be cynically regarded by staff
  • or viewed as a PR stunt
  • not wholehearted supported by senior management
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8
Q

What is Quantitative Sales Forecasting?

A

Forecasting using data and numbers rather than judgement

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9
Q

What areas of planning can quantitative sales forecasting be used for?

A

> HR plans: workforce for production
Production/capacity plans
Cash flow forecasts
Profit forecasts and budgets

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10
Q

What is a Moving Average?

A

a technique that looks at several periods at a time and averages out data by smoothing out peaks and troughs (fluctuations) which gives a better insight into whether sales have risen or fallen over time.

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11
Q

What is Extrapolation?

A

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

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12
Q

To create a 3 month moving average, what is the main calculation?

A

Add all 3 months, divide by 3

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13
Q

How do you calculate the variation in sales from a moving average?

A

Sales in a specific period - the moving average sales

Either positive or negative

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14
Q

Positives of extrapolation?

A
  • simple method
  • not much data required
  • cheap and quick
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15
Q

Drawbacks of extrapolation?

A
  • unreliable if there are significant fluctuations in historical data
  • assumes past trends will carry on into the future (very RETROSPECTIVE, in a competitive business environment this is unlikely)
  • ignores qualitative factors
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16
Q

What makes Quantitative techniques more effective in forecasting sales?

A

If the BUSINESS is mature = meaning lots of past data available to identify trends
If the INDUSTRY is mature = rapid change is less likely
Stable external environment = e.g. economy, politics, legislation less likely to change

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17
Q

What is Investment Appraisal?

A

A series of techniques designed to help businesses in judging the desirability of investing in projects

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18
Q

What is the payback method and how is it calculated?

A

judges length of time it takes for investment to be paid back from the net returns provided

Number of full years + (what you need/what you get) x12

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19
Q

Advantages of Payback?

A
  • easy to calculate
  • takes into account cost of investment
  • focuses on short term cash flow as priority
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20
Q

Disadvantages of Payback?

A
  • ignores time value of money
  • ignores overall return of project
  • encourages short-termist approach
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21
Q

What is the Average Rate of Return (ARR) and how is it calculated?

A

Measures return per year as a percentage of initial spending

  1. Add up returns
  2. Subtract initial spending
  3. Divide answer by no. of years
    Then Calculate ARR: (average profit/inital cost) x 100
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22
Q

Advantages of ARR?

A
  • measures profitability

- easy to compare a percentage

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23
Q

Disadvantages of ARR?

A
  • ignores timing of cash flows as finds the average only
  • ignores time value of money
  • ignores the risk that projections of future sales may be more inaccurate the further in the future they are
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24
Q

Is shorter payback vs. higher ARR better?

A

we need more info:

  1. how long does the investment continue to pay for?
  2. Volatility of dynamic market (if more volatile, short payback is good)
  3. Attitudes or objectives of the shareholders (may have short termist attitudes)
  4. Cash flow (if negative = need a quick payback, cash rich will be more patient)
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25
Q

What is Net present value (NPV) and how is it calculated?

A

Measures the present value of future income from an investment, minus the cost
- Uses a discount factor: could be opportunity cost, inflation, interest rates

  1. Net cash flow x discount factor
  2. Add up all the present values
  3. Subtract the initial spending
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26
Q

Advantages of NPV?

A
  • has a decision making mechanism so can reject projects with a negative NPV
  • use of discounting factor reduces the impact of long term, less likely cash flows = TIME VALUE OF MONEY
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27
Q

Disadvantages of NPV?

A
  • more complex to calculate
  • cannot automatically compare projects with different initial costs
  • rate of discount is critical: if its too high then affects success of project
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28
Q

What are Decision Trees?

A

= a mathematical model that sets out all the options available for managers when making a decision, plus the possible outcomes

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29
Q

What is the expected value? How is it calculated?

A

= the financial value of an outcome

Success probability x potential outcome) + (Fail probability x potential outcome

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30
Q

What is the net gain? How is it calculated?

A

= how much profit is made by launching the project, taking into account the likelihoods
It is always the average as it may vary in reality

Expected value - initial spending

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31
Q

Advantages of Decision Trees?

A

> choices clearly presented and decision making method given
probabilities highlight the risk vs. rewards of each choice and allow for uncertainty
considers alternative outcomes as well as “success”

32
Q

Disadvantages of Decision Trees?

A

> probabilities are just estimates and prone to error especially for new or one off decisions
only quantitative data
arrangement of expected values and probabilities can involve bias

33
Q

What is a node?

A

= it is the beginning go an activity

34
Q

What is critical pathway analysis?

A

= process of planning the sequence of activities in a project in order to identify the most efficient way of completing a task/project

35
Q

What is the aim of CPA?

A

Completing a task in the shortest time possible

36
Q

What goes in a node?

A
  • EST: earliest start time at the top

- LFT: latest finish time at the bottom

37
Q

What is a critical path?

A

= the longest route with the activities that cannot be delayed without delaying the end of the project
(allows the manager to know the priorities)

38
Q

How do you work out LFT?

A

EST of the next task - duration of task

if on the critical path, EST is the same as LFT

39
Q

What is Float?

How is it calculated?

A

= the duration an activity can be delayed or postponed so the project finishes within the minimum time.

Calculation: LFT - Activity duration - EST

40
Q

Advantages of CPA?

A

> Benefits for efficiency: control and review progress against the original plan, reduce time taken
Benefits for decision making: reduces risk of delays, gives information to customers for better relationships, allocation of resources
Benefits for working capital: know when stock is needed, JIT
Benefits for time management: identify activities that cant be delayed, could allow for simultaneously occurring activities

41
Q

Disadvantages of CPA?

A

> makes assumptions: unforeseen circumstances and external factors are not taken into account but could happen
too rigid and there is not enough scope
time consuming to complete (necessary if similar projects have been done?)
may encourage rushing: corners are cut, quality affected adversly

42
Q

What is PESTLE Analysis?

A

Assesses the key features of the external environment facing a business.
this could be the environment which they already operate in or which they want to move into.

43
Q

Examples of Political influences?

A
  • competitive policy e.g. preventing mergers or monopoly
  • industry regulation e.g. living wage
  • government spending
  • tax policies
  • relations e.g oil market, BREXIT, entering markets without considering regime change of government, terrorism
  • instability in overseas market
  • foreign policy
  • incentives e.g. subsidies
44
Q

Examples of Economic Influences?

A
  • interest rates set by the BOE
  • FDI for certain industries
  • exchange rates
  • business cycle and its changes e.g. 2009 recession
  • consumer spending and incomes e.g. affected by inflation as it would change purchasing power and demand/supply
45
Q

Examples of Social influences?

A
  • demographic change e.g. UK increasing population
  • consumer tastes
  • pressure groups e.g. sugar tax
  • changing lifestyles
46
Q

Examples of Technological Influences?

A
  • disruptive technologies (innovations creating a new market and eventually disrupt and transform an existing one)
  • new production processes
  • big data, dynamic pricing
47
Q

Examples of Legal Influences?

A
  • employment law
  • health and safety law
  • environmental legislation
    Can all affect total market sales as well as market share
    May be within the Uk market but also any other international market
    If trading globally, law becomes a more complex area
48
Q

Examples of Environmental Influences?

A
  • sustainability
  • tax practices
  • ethical sourcing (fair-trade, slavery acts, child labour)
  • CSR ( corporate social responsibility)
  • pollution and carbon emissions
  • pressure from NGOs
49
Q

What is the key to controlling external influences?

A

Make the most of any favourable external influence whilst it lasts
Successful firms will make compensating internal changes to their business to offset the external constraint

50
Q

What is a S.W.O.T analysis?

A

An analysis of the internal strengths and weaknesses of the business and the opportunities and threats presented by its external environment

51
Q

What areas are included in Internal strengths and weaknesses?

A 
marketing and sales
HR 
Operations
Finance
Resources
52
Q

What areas are included in opportunities and threats?

A

PESTLE factors
if they are positive = opportunities
if they are negative = threats

53
Q

What typical data is used to look at strengths and weaknesses?

A

It is relative so you would use competitors data or past data

  • market share
  • sales revenue
  • profitability and efficiency
  • brand recognition
  • market capitalisation
  • reputation
54
Q

Why is SWOT useful?

A
  • once you know strengths, you can capitalise on opportunities
  • helps focus on strategic issues
  • allows firms to address weaknesses and deter threats
  • understand your business better
  • make decisions on aims and plan strategy to achieve them
55
Q

Why is SWOT limited?

A
  • some info gathered may not be useful or out of date
  • doesn’t prioritise the issues: doesn’t inform about the magnitude of threats/weaknesses
  • no solutions provided
  • can be used to generate ideas, but does not help with decision making
  • if no formal data is used, only opinions used which are prone to bias
56
Q

What is growth?

A

An increase in size or status

57
Q

How many objectives of growth are there?

A

5

58
Q

Why is ‘increasing profits’ a growth objective?

A
  • key objective for many firms, especially those with shares floated on the stock market or who are owned by private equity
59
Q

Why is ‘economies of scale’ a growth objective?

A
  • by growing the scale of output, a business can achieve lower unit costs (unit costs decrease as fixed costs are spread across a larger output)
  • these improve a firms competitiveness
  • 6 types of economies of scale
60
Q

Why is ‘increase market share and brand recognition’ a growth objective?

A
  • higher brand recognition links to growing market share
  • linked with higher profits
  • brand recognition can help with product extension, launches are more successful, increased value of intangible non-current assets on balance sheet (brand)
61
Q

Why is ‘grow business and shareholder value’ a growth objective?

A
  • one of the main reasons why firms adopt a growth strategy
  • larger businesses generally more valuable
  • increase market capitalisation incase of a takeover
  • higher profit margins
62
Q

Why is ‘increase market power’ a growth objective?

A
  • larger firms may be able to extent greater bargaining power over suppliers and or customers to gain a competitive advantage
  • can put prices higher, can make suppliers variable costs lower
63
Q

What are technical economies of scale?

A

the use of specialist equipment or processes to boost productivity

64
Q

What are managerial economies of scale?

A

specialist managers can be employed to help reduce unit costs and boost efficiency

65
Q

What are marketing economies of scale?

A

Spreading a fixed marketing spend over a larger range of products, markets and customers

66
Q

What are network economies of scale?

A

Adding extra customers or users to a network that is already established

67
Q

What are financial economies of scale?

A

larger firms benefit from access to more and cheaper finance

therefore lower fixed financial costs

68
Q

What are external economies of scale?

A

Benefits of lower unit costs as a result of whole industry growth in size
e.g. better transport and infrastructure, lowered taxes from government, introduction of new tech, training and education focused on that industry

69
Q

Why is market power beneficial?

A
  • monopoly power can be gained which means customers do not have a choice over supplies
  • less competitive pressure for price so profit margins can rise, less need to innovate so these costs fall
  • not as expensive to keep customers happy as customers service does not have to be perfect
  • suppliers have to give more favourable terms
70
Q

Why is brand recognition beneficial?

A
  • can diversify if the brand is trustworthy
  • benefit from industry growth
  • easier to attract the best employees due to higher status jobs
71
Q

How is a monopoly market usually created?

A

predatory pricing and buying competitors either by offers or a hostile takeover

72
Q

What are diseconomies of scale arising from growth?

A

= when the average cost per unit increases as output increases
when expansion happens beyond the optimum size

73
Q

What is overtrading arising from growth and when is it likely to happen?

A

= when a business expands too quickly without having the financial resources to support quick expansion

  • sales are made on credit and customers take too long to settle amounts owed
  • growth is achieved when there are significant capital investments in production or operations capacity before revenues generated
  • a long term contract requires a business to incur substantial costs before payments are made by customers
  • spending on fixed costs with a delay in revenues
  • liquidity and cash flow issues
74
Q

What could diseconomies of scale lead to?

A
  1. workers in large firms feel alienated and have a loss of motivation
  2. less communication
  3. worse coordination and control if problems in monitoring productivity and work quality, increases wastage
  4. internal politics… cultural clashes with senior people with inflated egos, unrealistic expectations
75
Q

How could overtrading be managed?

A

reducing inventory levels, leasing rather than buying, enforcing and obtaining better payment terms

76
Q

What is retrenchment?

A

When a business reduces the scale of a specific business area/element within the business operation to refocus on growing a core activity in operations

Business A Level (4 decks)

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