Intro to Business Lines Of Analysis

Question 1

Primary research benefit

Answer 1

-involves collecting new data

-which is specific to business and up to date

-e.g. questionnaires and focus groups

-allows business to effectively identify customer wants and needs

-create a product which meets needs effectively

-build customer loyalty

-Price inelastic

-able to increase price without a significant fall in demand

-increase in revenue

-increase in gp and op

-more retained profit to reinvest

Question 2

Primary research drawback

Answer 2

-can be expensive
-may need to hire specialist researchers
-e.g. questionnaires and focus groups using a large sample size
-in order to find out customer wants and needs
-leads to increased cash outflows on wages
-lower net cash flow
-reduced cash reserves
-poor liquidity(acid test ratio)
-may be unable to pay day-to-day bills
-forced to sell non-current assets in order to cover payments
-business unable to operate

Question 3

Secondary research benefit

Answer 3

-data has already been collected and exists
-therefore does not require specialist researchers
-e.g. no need for focus groups
-this significantly reduces cash outflows
-improving net cash flow
-leading to increased current assets
-ability to pay debt and avoid failure

Question 4

Secondary research drawback

Answer 4

-research was completed for another reason so may not be time or business relevant
-therefore may make invalid suggestions on how the business can improve
-leading to an inappropriate product portfolio
-lower sales and revenue
-lower gross profit
-risking an operating loss
-forcing the business to use cash reserves to pay expenses
-lower liquidity
-less attractive to banks or investors as it suggests business may struggle to pay bills
-struggle to raise capital for future expansion

Question 5

Quantitative data benefit

Answer 5

-data collected in statistical form
-using closed questions
-these can be completed independently
-and easily analysed
-therefore specialist researchers are unlikely to be needed
-reducing costs of wages
-cash can instead be invested into using a larger sample size
-leading to more reliable data conducted
-more likely to produce a product which meets customer needs
-increased revenue
-increased gross and operating profit

Question 6

Quantitative data drawback

Answer 6

-data is presented in statistical form
-resulting in limited depth
-respondents can explain why they made certain choices
-making it difficult to develop new ideas
-limiting innovation
-less likely to develop unique and competitive products

Question 7

Qualitative data benefit

Answer 7

-it invites the participant to give a more detailed response
-this can lead to a deeper understanding of customer needs and wants
-resulting in business being able to produce a product that more effectively meets their needs
-increasing customer loyalty
-more price inelastic
-able to increase prices without a significant fall in demand
-increased revenue
-increased gp and op
-more retained profit to reinvest

Question 8

Qualitative data drawback

Answer 8

-Gathering a large volume of detailed responses will require a significant number of researchers
-this will significantly increase fixed costs
-may mean a lower volume of data is collected as a business may not have the cash to pay for the researchers
-resulting in unreliable results as less people are asked
-resulting in the wrong product being produced or wrong price being charged

Question 9

Product orientation benefit

Answer 9

-product orientation focuses on developing the product
-lots of investment into R&D of the function of the product
-improved innovation by having unique features
-differentiate from competitors
-customers willing to pay higher prices
-more price inelastic
-increased prices without a significant fall in demand
-increased revenue
-higher gross profit and operating profit margins
-increased retained profits to invest further into R&D to continue innovating

Question 10

Product orientation drawback

Answer 10

-can be expensive
-lots of investment needed into R&D in order to innovate
-increased fixed costs
-e.g. paying high wages of scientists/engineers
-leads to lower operating profit margins
-reducing retained profit
less capital to re-invest into further R&D
-may be unable to effectively differentiate
-unable to pursue Porter’s differentiation focus/leadership strategy

Question 11

Market orientation benefit

Answer 11

-involves focusing on customer wants and needs
-allow businesses to create products based on customer trends
-and use market research to quantify demand
-allowing them to produce products which are likely to have high sales volume
-benefit from marketing economies of scale
-fixed cost of market research can be spread across more units
-Lower fixed costs per unit
-increased operating profit margins
-able to reinvest in conducting further market research

Question 12

Market orientation drawback

Answer 12

-market research is needed to find out customer wants and needs
-high amount of investment into market research needed
-e.g. questionnaires and focus groups using a large sample size
-in order to find out customer wants and needs
-leads to increased cash outflows on wages for specialist researchers
-lower net cash flow
-reduced cash reserves
-poor liquidity(acid test ratio)
-may be unable to pay day-to-day bills
-forced to sell non-current assets in order to cover payments
-business unable to operate

Question 13

Benefit of using a market map

Answer 13

-help identify gaps in the market
-once identified businesses conduct R&D
-And design a product that matches the characteristics of
-product is likely to be unique
-lack of substitutes means product will be price inelastic
-businesses can increase selling prices and not experience significant fall in demand
-increased sales revenue and gp

Question 14

Drawback of using a market map

Answer 14

Market maps are based on consumer opinions.

To ensure decisions based on consumer opinions are valid

Business needs to collect data from a large sample.

This may require a large number of researchers.

To collect and analyse data and display it in a market map

If businesses recruit researchers, it will significantly increase cash outflows.

If cash outflows are greater than cash inflows

It may lead to a negative net cash flow.

Question 15

Benefit of segmentation

Answer 15

Through segmentation, a business can target market research at a specific group.

Rather than trying to create a product for all customers

This can help a business understand their customer needs more effectively.

Meaning they can adapt their design mix to better meet their needs.

Ensuring the business product is more differentiated.

And more price inelastic

So they can increase their prices without a significant decrease in demand.

Increasing their sales revenue.

Question 16

Drawback of segmentation

Answer 16

Need to create multiple products

To meet the needs of different segments

E.g. using geographical segmentation to create different products for customers in different countries

Therefore unable to benefit from marketing economies of scale

As each product will be targeted at a smaller group of customers

This mean that the fixed costs of R&D to produce the product

Is spread over less units

Leading to higher unit fixed costs

Lower operating profit margins

Question 17

Importance of aesthetic/function

Answer 17

If a business improves aesthetics/function of products design mix

Through R&D into improved functionality or market research to identify consumer trends

Product is likely to become differentiated compared to rivals

Gain a competitive advantage according to Porter

Price inelastic

Can increase selling price without significant fall in demand

Increase sales revenue and gross profit margin

Question 18

Drawback of prioritising aesthetic/function

Answer 18

To improve aesthetics or function it will require significant investment into R&D or market research

Increasing cash outflows

If cash outflows exceed cash inflows

Result in a negative net cash flow

Placing a strain on a businesses cash reserves

Business has difficulty making payments to suppliers

May have to sell non-current asset

Disruption in business operations

Question 19

Importance of economic manufacture

Answer 19

If a business designs a product with economic manufacture as priority

E.g. - Through using less robust raw materials – adapt this to business in extract

Reduce their cost of sales

Can pursue cost leadership according to Porter

Gain competitive advantage

Can reduce selling price

Significat increase in demand of product is price elastic

Increasing sales

Question 20

Drawback of prioritising economic manufacture

Answer 20

If a business designs a product with economic manufacture as priority

E.g. - Through using less robust raw materials – adapt this to business in extract

It may mean that the product they design becomes less robust

Damage the businesses reputation (now associated with being less robust)

Consumers may switch to alternatives

Decrease demand

Decrease in sales and gross profit

Less profit to retain and reinvest

Question 21

Benefit of changing design mix to reflect social trends

Answer 21

Changing design mix to reflect social trends (choose social trend and element of design mix relevant to business in question)

Product now aligned with social trends

Better meets customer needs

Consumers more loyal to business

Can increase selling price without significant fall in demand

Increase sales revenue and gross profit margin

Question 22

Drawback of changing design mix to reflect social trends

Answer 22

To identify relevant social trends

Requires significant investment into market research

To ensure data is valid, must be collected from a large sample

Business needs to recruit specialist research to collect and analyse data

Increasing cash outflows

Placing strain on cash reserves

Less cash to pay for day-to-day operations

Question 23

Benefit of adapting design mix over concern of resource depletion

Answer 23

Business may (adapt to business in extract) e.g. - stop using rare wood when making product

Swap to more sustainable wood

Changing aesthetic of product due to concern over resource depletion

Aligning with consumers values

Better meeting consumer needs

Product becomes more differentiated

Can increase selling price without significant fall in demand

Increase revenue

Question 24

Drawback of adapting design mix over resource depletion concerns

Answer 24

Adapting design due to concern over resource depletion (be specific to business in question)

Meaning the business needs to find alternative supplier for raw materials

Charge higher price for new material

Increasing cost of sales

Reducing gross profit margin

Reducing operating profit margin

Less profit to retain

Less profit to reinvest (be specific to business in extract)

Question 25

Benefit of business plan

Answer 25

Business plan involves carrying out market research Such as a questionnaire Which, if based on a large sample size improves the validity of the results Develop reliable sales predictions Create a cash flow forecast Convince the bank that they can make loan repayments

Question 26

Drawback of business plan

Answer 26

A Business plan can quickly become out of date For example, there may be an unexpected change in social trends (relate to the case study) Causing an unexpected change in demand of (relate to case study) Making the market research in the plan invalid Resulting in unreliable sales forecasts Inaccurate cash flow forecasts Therefore, any financial predictions will be unreliable making the loan, or investment, application unreliable

Question 27

Sales forecasting benefit

Answer 27

Accurate forecast will appropriately predict sales volume This will ensure the business can order the correct amount of stock This will reduce waste as the business will avoid over ordering Reduced waste will decrease outflows This will improve net cash flow Ensuring the business can pay suppliers OR invest in research and development (choose the one that is most relevant for the business) Explain the impact

Question 28

Sales forecasting drawback

Answer 28

Accurately compiling a sales forecast requires significant investment into market research To accurately quantify demand for products To ensure data is valid, it must be collected from a large sample This may require recruiting specialist researchers to collect and analyse data Their wages will increase the business’s cash outflows Placing a strain on their cash reserves Less cash available to pay current liabilities May be pressured to sell non-current assets

Question 29

Cash flow forecast benefit

Answer 29

The business may experience fluctuations in sales (why – relate to the case) This may mean that they experience a reduction in cash inflows at certain times (relate to the case study) So if they can accurately forecast cash flow, the business may be able to plan accurately Such as reducing their staff numbers if they forecast lower cash inflows during these periods (or pick an outflow significant to the business in the case) Allowing them to reduce their wages and subsequent cash outflows Improving net cash flow during off-peak seasons and ensuring they have sufficient levels of cash to keep up with essential payments such as wages.

Question 30

Cash flow forecast drawback

Answer 30

A cash flow forecast can quickly become out of date For example, there may be an unexpected change in social trends (relate to the case study) Causing an unexpected change in demand of (relate to case study) Making the market research in the plan invalid Resulting in unreliable sales forecasts Inaccurate cash flow forecasts This could result in the business being over or understaffed or over or under stocked. Choose one and explain the impact

Question 31

Break even benefit

Answer 31

By calculating their break-even point A business can identify the number of units they need to sell in order to cover their costs. They can compare this with sales forecasts And identify whether they are likely to make a loss. They can therefore take action to reduce their break-even point Eg. Switching to a cheaper supplier or increasing the selling price In order to increase their contribution per unit And prevent losses from occurring.

Question 32

Break even drawback

Answer 32

Break-even assumes prices and costs remain constant. For example, inflation may significantly increase prices of raw materials Decreasing contribution per unit Break-even ignores this so may become inaccurate Inappropriate decisions For example, prices too low causing the business to make a loss on each item sold Operating loss

Question 33

Sole trader benefit

Answer 33

Sole traders are the only owners of a business. Therefore, they can maintain full control over day-to-day running. Able to establish a strong power culture Maintain consistency throughout the business. Build a strong brand image. Differentiate from competitors. Price Inelastic Increase prices without a significant fall in demand. Increase in revenue. Increase in gross profit margin. Increase in retained profit to reinvest in...

Question 34

Sole trader drawback

Answer 34

Unlimited liability Increased risk of investment If business debt exceeds business assets May need to sell personal possessions This increased risk will make investment less attractive Leading to reduced investment Less capital Reduced assets

Question 35

Partnership Benefit

Answer 35

Knowledge and experience from the partners Look in case study and input knowledge and experience here Improved innovation Differentiation(specify how) Increase price Without a significant fall in demand Increased gross profit Increased operating profit

Question 36

Partnership Drawback

Answer 36

Unlimited liability Increased risk of investment If business debt exceeds business assets May need to sell personal possessions This increased risk will make investment less attractive Leading to reduced investment Less capital Reduced assets

Question 37

Ltd benefit

Answer 37

Can choose their own shareholders Choose people who match their objectives e.g. passion for innovation Might mean less focus on short term results as they share goals on R&D and long term investment Can reinvest more capital into R&D/growth rather than being pressured to pay dividends Able to innovate and pursue objectives Differentiate from competitors in the long-term

Question 38

Ltd drawback

Answer 38

Unable to sell shares on stock market This can make it more difficult to raise large amounts of capital So the business may find it difficult to build scale Limits amount of R&D Less innovation Less differentiated products

Question 39

Plc benefit

Answer 39

Have gone through stock market flotation therefore their shares are advertised to, and accessible to, the public Due to this they can sell a large volume of shares leading to significant amount of capital being generated increased cash available to invest in non current assets so the business can build scale

Question 40

Plc drawback

Answer 40

Shares are sold to the public therefore, there is more pressure from shareholders for short term profits so the business may neglect long term objectives for short term returns to satisfy shareholders by using profit to pay regular dividends neglecting investment into R&D to develop innovative products product becomes less differentiated in the long term

Question 41

Limited liability benefit

Answer 41

Limited liability means that the owners are not responsible for any debt that cannot be paid by the business. This therefore attracts more investment as there is reduced risk of investment. Leading to an increase in capital invested in the business. The business can build capacity (say how from the case). Improved accessibility (service) or output (factory). Increased opportunity to sell more goods. Increased sales revenue. Increased gross profit. Increased operating profit.

Question 42

limited liability drawback

Answer 42

The owners are not risking their personal possessions so if the business is unable to pay(through sale of assets) then the supplier or bank lose the amount owed this increases the risk of lending cash to the business or increases the risk of offering trade credit making banks and suppliers less likely to lend struggle to get trade credit or a loan limited expansion Can't benefit from EOS...

Question 43

Franchisor benefit

Answer 43

means allowing independent businesses to use your brand name this means that the franchisee provides the capital to open new branches/stores therefore reducing the capital required for expansion leading to the franchisor being able to expand quicker Able to benefit from marketing economies of scale Fixed costs of advertising spread over more units Lower fixed costs per unit, making advertising more affordable able to increase marketing budget and advertise more able to build a stronger brand

Question 44

Franchisor drawback

Answer 44

risk damaging their reputation as the franchisor is not responsible for the day to day running of the outlet the franchise may fail to uphold high levels of customer service due to lack of supervision from franchisor poor customer service in one outlet could then affect the reputation of others meaning customers switch to a rival business reducing sales revenue reducing gross profit

Question 45

Franchisee benefit

Answer 45

Means paying to use another businesses brand name this means they already have access to a well-known brand therefore there are already customers who have brand loyalty Making business more price inelastic the franchisee can charge higher prices than independent businesses, as customers will be willing to pay them leading to increased revenue and profit margins more retained profit to reinvest in opening further franchises

Question 46

Franchisee drawback

Answer 46

means paying to use another businesses brand name this will lead to higher costs, as fees and royalties will be need to be paid therefore leading to increased cash outflows lower net cash flow possibly reducing cash reserves Lower liquidity(acid test ratio) unable to pay day-to-day bills such as rent/suppliers forced to sell non-current assets in order to pay bills unable to operate

Question 47

Internal finance benefit

Answer 47

If owner uses their own capital,retained profit as a source of finance Business will not incur any debt Will not need to make any capital repayments or loan repayments Reduced cash outflow If cash outflows are less than cash inflows Business will have a positive net cash flow Able to keep up with payments to suppliers Won't have to sell non-current assets to generate cash inflow

Question 48

Internal finance drawback

Answer 48

If owner uses their own capital,retained profit as a source of finance They are more likely to be limited in the amount that they can raise This will limit the business's potential expansion Reducing their scale Limiting their ability to achieve economies of scale Fixed costs will be spread over less units Increased fixed cost per unit Reduced operating profit margin

Question 49

Family and friends benefit

Answer 49

If business uses family and friends as a source of finance They are likely able to negotiate longer repayment times Or lower interest rates Due to existing relationships Reducing cash outflows If cash outflows are lower than cash inflows Positive net cash flow Will not have to sell non-current assets to generate cash inflow

Question 50

Family and friends drawback

Answer 50

If business uses family and friends as source of finance They are likely to be limited in the amount that they can raise This will limit the business's potential expansion Reducing their scale Limiting their ability to achieve economies of scale Fixed costs will be spread over less units Increased fixed costs per unit Reduced operating profit margin

Question 51

Peer-to-peer funding benefit

Answer 51

Peer-to-peer funding allows businesses to source finance without having to give up equity in the business Meaning owner has full control over decision making Can continue investment into activities such as R&D To focus on long term Ensuring can develop differentiated product Without pressure to keep costs low so shareholders can receive dividends Differentiated product allows business to gain competitive advantage(Porter) Price inelastic Charge higher prices without significant fall in demand

Question 52

Peer-to-peer funding drawback

Answer 52

Peer-to-peer funding is a form of debt financing Meaning the business will need to repay the capital borrowed With interest Increasing business's cash outflows If cash outflows exceed cash inflows Business will have a negative net cash flow Placing strain on their cash reserves May have difficulties meeting current liabilities

Question 53

Business angels and venture capitalists benefit

Answer 53

They will likely have experience(look in case study) Meaning they can provide support with the finance This can give them a competitive advantage because(look in case study) Porter differentiation strategy Increase sales revenue Increase orders to suppliers For raw materials such as... Lower unit variable costs Opportunity to lower selling price to increase sales further to increase market share

Question 54

Business angels and venture capitalists drawback

Answer 54

Need to give up a high percentage of the business High share of profits Less profit can be retained Lack of capital to reinvest in the business Such as R&D Cannot fund wages and equipment of researchers and scientists Struggle to create a differentiated product E.g. product will be less durable Price elastic Pressure to keep prices low to avoid significant fall in demand Lower revenue Lower gross profit Lower operating profit

Question 55

Crowd funding benefit

Answer 55

Does not require interest and capital to be paid back This will lead to reduced outflows This will increase net cash flow in the future Ensuring a business can pay suppliers Avoiding the forced sale of non-current assets such as a store Avoiding disruptions in their operations Can effectively meet customer needs Keeping sales high and avoiding losses

Question 56

Crowd funding drawback

Answer 56

The business will have to give rewards to the investor In return for their investment(link to case study to give example) This will lead to an increase in cash outlflows Lower net cash flow Reduced cash reserves May struggle to pay day-to-day bills May have to sell non-current assets in order to cover payments Business unable to operate

Question 57

Loans benefit

Answer 57

The business does not need to give up a share of the business Therefore, they can retain more of the profit As they will not be required to pay dividends to shareholders/owners This mean they will have more capital available in the long term to invest(choose something from case study) Explain the impact of this investment(link to EOS or PED)

Question 58

Loans drawback

Answer 58

Requires regular repayments Of interest and capital This will lead to increased cash outflows Potentially causing a negative net cash flow The business may then lack cash to pay suppliers Potentially forcing them to sell non current assets Disruption to business operations Lower sales volume, therefore unable to benefit from economies of scale

Question 59

Share capital benefit

Answer 59

Does not require interest and capital to be paid This will lead to reduced outflows This will increase net cash flow in the future Ensuring business can pay suppliers Avoiding the forced sale of non current assets such as a store Avoiding disruptions to their operations Can effectively meet customer needs Keeping sales high and Avoiding losses

Question 60

Share capital drawback

Answer 60

Shareholders may request dividends to be paid Reduced retained profit Less investment into non current assets such as... Reduced scale of business operations Lower sales volume Fixed costs of marketing e.g. advertising will be spread over less units High unit fixed costs of marketing Making the advertising less affordable Less advertising, reducing brand awareness in comparison to competitors such as...

Question 61

Overdrafts benefit

Answer 61

Does not require monthly payments Can be paid off when the business chooses This means they can reduce payments, and therefore outflows,when there are low inflows Avoiding negative net cash flow This will ensure that they can pay suppliers Avoiding the forced sale of noncurrent assets such as a store Avoiding disruptions to their operations Can effectively meet customer needs Keeping sales high and Avoiding losses

Question 62

Overdraft drawback

Answer 62

Interest is much higher on overdrafts compared to a loan Therefore, it will have increased cost For the time that the capital is borrowed This will increase expenses Reducing operating profit Leading to less profit that can be retained Leading to reduce long-term cash to invest into r&d of... Making it harder for business to differentiate

Question 63

Leasing benefit

Answer 63

Have use of non current assets without requiring high initial cash outflow Lower cash outflows in the short term Higher net cash flow in the short term Higher current assets Improved liquidity More attractive investment to banks and shareholders Raise more capital to build scale Link to EOS

Question 64

Leasing drawback

Answer 64

Regular leasing payments Increase in expenses as the leasing payments may cost more than the non-current asset in the long term Reducing operating profit in the long term Lower retained profit Link to case study and say what business could have done with this retained profit Explain impact

Question 65

Trade credit benefit

Answer 65

Can receive raw materials without an immediate cash outflow The opportunity to sell them(link to case study) Inflows of cash from the sale Without the outflow for the goods Increased net cash flow in the short term

Question 66

Trade credit drawback

Answer 66

Available for a limited amount of time Potential cash flow problems in future When payment is due If the business is unable to make this payment Then, the supplier will have penalties Such as fines Leading to increased expenses Lower operating profit in the longer term

Question 67

Grants benefit

Answer 67

Does not require interest or capital to be paid This will lead to reduced outflows This will increase net cash flow in the future Ensuring that the business can pay suppliers Avoiding the forced sale of non current assets such as a store Avoiding disruption to their operations Can effectively meet customer needs Keeping sales high and avoiding losses

Question 68

Grants drawback

Answer 68

This must be adapted to extract- what will grant be used for? Business will only have access to grant if they use for a specific purpose E.g.(adapt to extract) Meaning business is limited in what it can use capital for Therfore(chose a path) 1. Maybe unable to invest into activities such as R&D Product less differentiated Price elastic 2. Cannot invest into non-current assets to increase capacity Cannot achieve EOS Increase unit cost

Question 69

Sale of assets benefit

Answer 69

If business sells non current assets as a source of finance Business will not incur any debt Will not need to make any capital or interest repayments Reduced cash outflows If cash outflows are less than cash inflows Business will have a positive net cash flow Able to keep up with payments to suppliers Won't have to sell non-current assets to generate cash inflows

Question 70

Sale of assets drawback

Answer 70

If business sells non current assets as a source of finance Business will not have use of assets,such as factory or machine Limiting the business's scale Reducing their ability to achieve economies of scale Fixed costs will be spread over less units Increased fixed costs per unit Reducing operating profit margin