Paper 1 revision D24’ Flashcards
What is SWOT analysis?
A four factor model that details the strengths, weaknesses, opportunities and threats facing a business - helps managers to make strategic decisions.
The strengths and weaknesses are internal factors that business can influence whereas opportunities and threats are beyond control (external) of business so bus has to understand them in order to act appropriately such as political/legal/economic/social/tech factors.
Since SWOT analysis identifies these factors there’s overlap with functional objectives.
Importance of SWOT?
-Very useful tool in developing strategy as it considers individual circumstances and is done in factual and objective way.
- In planning strategy, managers will focus on opportunities that build bus strength, converting weaknesses into strengths and on managing threats.
- One advantage of SOW is can easily be redone to take into account changing conditions, thus allowing bus to adapt its strategy using new SWOT.
- It also lets business know where it has competitive advantage over rivals, so bus can change strategy to focus on these elements.
What is budgeting?
Budget forecasts future earning and spending, usually over 12 month period. There are three types of budgets:
- Income budgets, forecasts amount of money that will come into business as revenue. To do this bus must predict how much it will sell and at what price. (research done by sales fig and market research)
- Expenditure budgets, predict what the bus total costs will be for the year taking into account fc and vc. Variable costs increase with output, so managers must predict output based on sale estimates.
- Profit budgets, uses income budgets minus expenditure budgets to calculate expected profit or loss will be for that year.
Benefits and drawbacks of budgeting?
Benefits
- help achieve targets like keeping revenue high or keeping costs down
-help control income and expenditure (shows where money is going)
- help managers to review their activities and make decisions
- focuses on priorities
- let’s heads of departments delegate authority to budget holders (authority is motivating)
- allows departments to coordinate spending and provides direction
- managers can monitor performance and forecast outcomes
Drawbacks
- may cause disagreements within business as departments have to compete for money (higher budgets)
- budgets are restrictive, fixed budget stops firms responding to changing market conditions
- time consuming for managers to create the budgets, forget focus on real issues like winning consumers
- inflation is difficult to predict, prices can change much greater than average
- start up businesses may struggle to gather data so may be inaccurate
- lead to inflexibility in decision making
- business may choose short term decisions to keep within budget instead of the right long term decisions that exceed budget.
What is adverse and favourable variances?
Variance means the business is performing better or worse than expected.
Adverse variance: when the actual figures are worse than the budgeted figures, difference that reduces profits.
This may arise when costs were higher than expected in the budget or revenue/profits were lower than expected.
Favourable variance: when the actual figure is better than the budgeted figure, leads to increased profit
This may arise when costs were lower than expected in the budget or revenue/profits were higher than expected.
What is delayering?
Means removing parts of the hierarchy, creating a flatter structure with wider spans of control. Delayering can help to lower costs as cutting management jobs can save lots of money tied into labour costs thus giving junior employees enhanced roles it’s more responsibility and can improve communication.
However, can cost business money in the short term as remaining staff need to be retrained for new roles, if delayering is overdone managers can be stressed a overworked with huge spans of control.
What is unlimited liability?
Means the debts a business entails becomes a personal debts of the owner, for example sole traders. Sole traders can be forced to sell personal assets to pay off business debts.
Unlimited liability is seen as a huge financial risk.
What is limited liability?
Means owners aren’t personally responsible for the debts of the business, shareholders of both private and public limited companies have limited liability, because has a separate legal identity from owners.
The most shareholders in limited company can lose is the money they’ve invested into the business
What are decision trees?
Is a form of scientific decision making that combines probability and expected pay-off to analyse uncertain outcomes. Managers make a subjective estimate based on experience or past data.
Expected value (EV) of an outcome is probability of outcome occurring multiplied by pay-off bus expected to get, to find EV of course of action add the EVs of different outcomes together.
Net gain is financial gain after initial costs have been subtracted Net gain= EV - initial costs
- Managers should usually choose course of action with highest net gain.
Decision trees advantages and disadvantages?
Advantages
- managers have to come up with real numerical values for courses of action, probability and potential pay-off
- visual representation of potential outcomes of decision
- allow managers to compare options quantitatively and objectively
- useful in familiar situations where bus can make accurate estimates of probabilities and benefits
Disadvantages
- ignores qualitative data such as employee opinions about decisions which should be taken into account before deciding on course of action
- probabilities are hard to predict accurately and estimate pay-offs, if these are based on dodgy info the decision is flawed too
- reality has wider range of potential outcomes than DT suggests
Decision trees advantages and disadvantages?
Advantages
- managers have to come up with real numerical values for courses of action, probability and potential pay-off
- visual representation of potential outcomes of decision
- allow managers to compare options quantitatively and objectively
- useful in familiar situations where bus can make accurate estimates of probabilities and benefits
Disadvantages
- ignores qualitative data such as employee opinions about decisions which should be taken into account before deciding on course of action
- probabilities are hard to predict accurately and estimate pay-offs, if these are based on dodgy info the decision is flawed too
- reality has wider range of potential outcomes than DT suggests
What is Ansoff’s matrix?
A strategic planning tool that provides framework to devise strategies for future growth.
Market development: this is focus on gaining position in new market with existing product (launching existing product to new group of consumers).
Market penetration: focus on gaining stronger position in existing market by customer awareness and sales (greater market share).
Diversification: strategy of moving into new markets with new products not currently in their portfolio.
Product development: strategy of introducing new products into a market which business already has presence in, will expand or reinforce portfolio in the market.
What is Ansoff’s matrix?
A strategic planning tool that provides framework to devise strategies for future growth.
Market development: this is focus on gaining position in new market with existing product (launching existing product to new group of consumers).
Market penetration: focus on gaining stronger position in existing market by customer awareness and sales (greater market share).
Diversification: strategy of moving into new markets with new products not currently in their portfolio.
Product development: strategy of introducing new products into a market which business already has presence in, will expand or reinforce portfolio in the market.
Risks and benefits of strategies in Ansoffs matrix?
Market development risks include new customers have diff wants and needs, cultural differences, not experienced in market, different levels of competition (unpredictable) and supply chains. Advantages include could gain bigger consumer group, risk spreading across markets.
Market penetration risks include product life cycle and market saturation can influence MP (greater market share). Advantages include existing market means know consumer wants and needs whilst also knowing product is successful.
Product development risks include may be expensive to bulk create at start of production, demand isn’t certain and may have production issues. Advantages include has existing customers to fall back into on, could gain greater market share.
Diversification risks include new consumer group could be unsuccessful (dog, boston matrix), need markers research which is expensive. Advantages include brand association if good brand and wider target audience.
What is price elasticity?
Is how much price change affects the demand. If PED is greater than 1 product is price elastic meaning change in demand is greater than change in price. If PED is less than 1 it’s price inelastic meaning change in demand is less than the change in price.
What is income elasticity of demand?
When people earn more money, there’s more demand for some products and less demand for others.
Normal goods such as fresh fruit have a positive income elasticity of demand that’s less than 1, so as income rises demand rises but at a slower rate than income.
Luxury goods have a positive income elasticity of demand which is more than 1 which means demand for luxury goods grow faster than the increase in income.
Inferior goods (asdas own brand products) have negative income elasticity of demand, demand falls as income rises and demand rises when income falls.
How to work out financial ratios?
Current ratios= current assets/current liabilities
ROCE (return on capital employed, %)= operating profit/total equity + non current liabilities (capital employed) x 100
Inventory turnover= costs of sales/cost of average stock held
Payables days= payables/cost of sales x365
Receivables= receivables/sales revenue x365
Gearing (%)= non current liabilities/total equity + ncl x100
What is gearing?
measures the proportion of company’s funding that comes from debt (reliance on long term borrowing). A higher gearing ratio is typically above 50% indicates high proportion of debt relative to equity, can lead to high returns which are sometimes good, helps bus expand quickly but increases financial risk. Low gearing typically below 50% suggest company relies more on equity rather than debt, seen as risky though it may limit growth since relies on internal funds or equity.
Rewards for HG, helpful during growth phase to fund expansion and gain competitive advantage when interest rates are low HG is less risky because payments are lower. Risks may be risk of unable to afford repayments, interest rates may go up.
What is capacity utilisation and how to calculate it?
A measure of the extent to which productive capacity of a business is being used.
Capacity utilisation (%)= output/ maximum capacity x100
What is economies of scale and what are the different types?
The process by which average cost of output deceases output increases, can happen in variety of different ways:
- Purchasing economy of scale, bulk buying of goods or service (discount on more you buy)
- Financial economy of scale, negotiating with banks larger firm will be on better position (bigger firm lower the risk and lower interest rates)
- Managerial economy of scale, employing specialist managers in different functions (more efficient no training)
- Technical economy of scale, specialist workforce and equipment purchased (increased productivity, efficient)
How to calculate total contribution and what is it?
Contribution is difference between selling price of product and variable cost it takes to produce it.
Total contribution= total revenue - total variable costs OR contribution per unit x number of units sold
What is margin of safety and how to calculate it?
The difference between actual level of output and the break even output (level of sales business needs to cover its costs)
Margin of safety= actual output - break even output
What is share capital?
Shares are sold by companies to raise money this known as ordinary share capital, often used for long term investment.
In exchange for a share, shareholders are paid a dividend (proportion of profit given as a fixed amount per share, more shares larger the dividend). Ordinary share capital is done by public and private limited companies (private can’t sell to public and doesn’t sell on stock exchange)
Benefits of using this to finance is it doesn’t have to be repaid, drawback is owner no longer owns all of the business.
What is a bank loan?
External long-term source of finance, business borrow a fixed amount of money and pay it back over fixed period of time with interest, they amount to be payed back depends on the interest rate and how long the loan is for. Bank needs security for a loan, usually in the form of property, bank loans are a good long term source of finance for start up businesses for paying assets such as machinery, not good for day to day running costs of bus.
