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Core Knowledge and Reasoning Flashcards

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1
Q

Porters Generic Strategies - Differentiation

A
  • increased differentiation…
  • make the product/ service unique
  • persuading customers to buy it over competitors
  • making the product less price elastic
  • consumers less sensitive to a change in price
  • the business can charge higher prices and therefore increase gross profit margin
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2
Q

Porters Generic Strategies - Low cost strategy

A
  • Lower variable/fixed costs
  • Increased gross/operating profit margins
  • Therefore able to reduce the selling price
  • Become more price competitive within a price elastic market
  • Leading to a significant increase in demand
  • Therefore increasing output, allowing the business to benefit from economies of scale
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3
Q

Price Elasticity Line Of Analysis

A
  • Due to poor customer service for example a business’ products may become price elastic
  • Leading to customers being less loyal to the brand
  • Therefore if the price increases there will be a significant fall in demand
  • Leading to pressure to keep prices low
  • Leading to lower revenue
  • Reducing gross profit margin
  • Reduce the operating profit
  • Reduce the retained profit
  • Reduce the total equity
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4
Q

Price Inelastic Line Of Analysis

A
  • Differentiate from competitors
  • Customers are loyal to the good or brand
  • Therefore if the price rises they continue to buy the product meaning there will only be a small fall in - demand
  • Therefore businesses can charge higher prices in order to generate more revenue
  • Leading to an increase in gross profit margin
  • Potentially increasing operating profit which can be retained to improve liquidity or invested in non-current assets to increase scale.
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5
Q

Income elasticity - Luxury Goods

A
  • If a business only sells luxury goods then they are vulnerable to changes in average incomes
  • Therefore if many people within a country lose their jobs then there will be a fall in incomes
  • This will lead to a significant fall in demand for a business’s goods as consumers switch to cheaper alternatives
  • Leading to a fall in revenue resulting in a fall in gross profit
  • This could lead to them making an operating loss putting them under pressure to reduce their expenses
  • This could involve selling their non-current assets such as stores and factories
    Reducing scale
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6
Q

Income elastic - Inferior Goods

A
  • When unemployment is high then incomes will be lower and therefore the demand of inferior goods will increase
  • The business may then need to be flexible to be able to respond to an unexpected change in income so they can increase production of a good to meet the new demand
  • This will lead to an increase in gross profit.
  • This flexibility will also help them reduce production when incomes rise again
  • This will ensure that they can reduce operating expenses when demand falls therefore avoiding a loss
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7
Q

Purchasing EOS

A
  • If sales increase.
  • There will be an increase in volumes ordered from suppliers (use the case study to identify what they will be buying more of – be specific - E.g. plastic and metal).
  • Leading to a potential discount from bulk buying.
  • Leading to lower average cost of sales/variable costs.
  • Resulting in increased gross profit margin.
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8
Q

Marketing EOS

A
  • When businesses have increased sales.
  • Increase sales volume. * Meaning the fixed costs of marketing e.g…. a) Market Research b) Advertising c) Research and development
  • Can be spread over more units.
  • Lower unit fixed costs.
  • Making the above more affordable and can therefore can do more of it.
  • Link to the advantages of doing more of the above – improved product development, increased brand awareness, improved innovation.
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9
Q

Financial EOS

A
  • Large businesses have significant non-current assets.
  • Meaning they have more collateral for loans
  • Lower risks for banks.
  • Lower interest rates.
  • Lower fixed costs (interest payments are a fixed cost).
  • Lower unit fixed costs
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10
Q

Technical EOS

A
  • As businesses grow they begin to make better use of capital/machinery or have the resources to invest in more.
  • Further/increased use of machinery will improve productivity and further increase output.
  • Spreading fixed costs of production (labour, rent, utilities) over more units.
  • Lowering unit cost of producing a product.
  • Allowing business to lower selling price / increase profit margin (choose one).
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11
Q

Distribution - Multiple intermediaries

A
  • A business may choose to distribute its products through multiple intermediaries, eg – multiple retailers/online.
  • This improves the accessibility of the product as it will be more widely available.
  • Therefore, more customers may purchase the product.
  • Leading to an increase in sales for the business.
  • Link to EOS, increased capacity utilisation, lower cost per unit.
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12
Q

Distribution - Direct Distribution

A
  • A business may choose a more traditional distribution channel and sell their products directly.
  • This gives the business more control over the customer experience.
  • Improved customer service.
  • Makes business more differentiated.
  • Business become more price inelastic.
  • Increase selling price and not experience significant fall in demand.
  • Higher revenue.
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13
Q

High Liquidity - Benefit

A
  • High liquidity – (current ratio between 1.5-2 or acid test above 1)
  • High amount of cash reserves/ working capital
  • Therefore can keep up with payments to suppliers and banks (loans and mortgages)
  • Unlikely to be forced to sell non-current assets in order to pay day-to-day bills
  • Therefore likely to have uninterrupted business operations
  • Leading to a reduced risk of failure and a higher chance of success
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14
Q

Low Liquidity - Drawback

A

-Low liquidity (Current ratio below 1 and acid test below 0.75)
-Low level of cash reserves
-Will struggle to pay suppliers and the bank
-May be forced to sell non-current assets to pay day to day bills
-This may lead to a disruption in business operations
-Leading to a high risk of failure

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15
Q

Balance sheet LOA

A
  • Increased cash outflows there will be lower net cash flow
  • This will lead to lower cash reserves
  • Reduced current assets
  • Reduced current ratio
    Putting the business at risk as they may not be able to pay for current liabilities
  • Leading to the sale of NCA to pay for current liabilities
  • Disruption to operations
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16
Q

Income Statment LOA

A
  • Increased sales
  • Leads to increased gross profit
  • Leading to increased operating profit
  • Increased net profit
  • Which can be retained
  • And invested in…
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17
Q

Taylors - Motivation Theory

A
  • Through Taylor’s, scientific management staff are given effective training to do a very specific job
  • This means they will become more skilled in that given area
  • This will mean that they will be able to produce more and will be motivated to do so if they are paid for every item they produce
  • This will lead to increased output per worker and therefore lead to increased productivity
  • Leading to fixed costs being spread over more units leading to lower unit fixed costs
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18
Q

Mayo - Motivation Theory

A
  • Through having more managers there will be more supervision
  • This will lead to employees feeling like their actions are valued as the manager is showing an interest in their work
  • This is argued by Mayo to an effective motivational factor as workers produced more when watched called the hawthorn effect
  • This will lead to increased productivity
  • Leading to fixed costs being spread over more units leading to lower unit fixed costs
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19
Q

Maslow - Motivation Theory

A
  • Empowerment refers to giving employees more control in their work and more responsibility in decision making.
  • Therefore, by empowering employees it is likely to improve their levels of motivation as they will feel trusted to make the right decision without having to consult with a superior.
  • This will mean that employees’ esteem needs are met according to Maslow’s hierarchy of needs.
  • This may ensure that NHS staff become more satisfied in their job. A higher level of job satisfaction will improve staff members’ wellbeing.
  • Therefore, by empowering staff and improving job satisfaction it is likely to reduce labour turnover
  • A lower labour turnover will then ensure that the NHS does not experience significant recruitment costs
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20
Q

Herzberg - Motivation Theory

A
  • By having increased profits the business can make investments into working conditions
  • This will mean that they can expand office spaces to avoid workers being cramped and the office space being too noisy
  • This will help meet one of Herzberg’s Hygiene factors
  • This will provide a foundation in which to motivate staff by other factors such as employee recognition
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21
Q

High Capacity Utilisation - Manufacturing Business - Benefit

A
  • Through improving worker motivation or advancements in production technology
  • Increase productivity
  • Increase output
  • Improved capacity utilization
  • Fixed costs of production (rent, wages, insurance)
  • Spread over more units
  • Lower fixed unit costs
  • Increase operating profit
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22
Q

High Capacity Utilisation - Service Business - Benefit

A
  • Through exceptional customer service or a high level of differentiation
  • Business will have high sales volume
  • Increased number of seats filled
  • Improved capacity utilization
  • Fixed costs of providing service (rent, wages, insurance)
  • Spread over more units
  • Lower unit fixed costs
  • Increase operating profit
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23
Q

High Capacity Utilisation - Service Business -Drawback

A
  • Operating with high capacity
  • Will mean that employees may be working for long periods
  • To ensure the business has a strong brand reputation
  • And high percentage of seats full
  • Employees may feel overworked
  • Safety needs will not be met(Maslow)
  • Employees become demotivated
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24
Q

High Capacity Utilisation - Manufacturing Business -Drawback

A
  • Operating at a high capacity
  • Will mean that machines are working for long periods
  • To produce high levels of output
  • Increased chance of machine failure
  • Disruption in the process
  • Increased expenses as the business will need to spend on repairs
  • OR poor customer service as longer lead time
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25
Low Capacity Utilisation - Manufacturing Business - Benefit
- Operating with low capacity utilisation - Will mean that the business has time to service machinery between production - To reduce the chance of machine failure - As machinery will not need to be constantly in operation as capacity utilization is low - Reduce expenses OR will retain a positive brand image due to no delays
26
Low Capacity Utilisation - Service Business - Benefit
- Operating with low capacity utilisation - Employees not working for long periods - Service may not be as busy - Improving working conditions - Ensuring safety needs are being met - Ensuring employees remain highly motivated - And deliver exceptional customer service - Increase level of differentiation (porter) - Service become more price inelastic
27
Low Capacity Utilisation - Service Business - Drawback
- Operating with low capacity utilisation - Will mean that the business is not utilising full resources - Low percentage of seats filled - Lower sales volume - Fixed costs of providing service are spread over less seats (rent, wages, insurance) - Increased unit fixed cost - Lower operating profit margin
27
Low Capacity Utilisation - Manufacturing Business - Drawback
- Operating with low capacity utilisation - Will mean that the business is not utilising full resources - Low levels of productivity - Reduce output - Fixed costs are spread over less units - Increased unit fixed cost - Lower operating profit margin - Less profit to retain and reinvest
28
Stronger pound benefit
The pound buys more foreign currencies Fewer pounds are required to buy foreign currency Therefore, fewer pounds are required to buy foreign goods Cheaper to import raw materials Lower cost of sales Can lower the price Higher gross profit
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Stronger pound drawback 1
Foreign currency buys fewer pounds More foreign currency needed to buy pounds Therefore, price of UK goods increases for foreigners UK exports are dearer and less competitive Fall in demand for UK goods Pressure to lower prices
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Stronger pound drawback 2 (domestic businesses)
The pound buys more foreign currency less pounds required to buy more foreign goods Foreign competitors products appear cheaper Customers switch to foreign imports Fall in demand for domestic businesses
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Weaker pound benefit for domestic businesses
Foreign currency buys more pounds Less foreign currency needed to buy pounds Therefore, price of UK goods falls for foreigners UK exports are cheaper and more competitive Rise in demand for UK goods Economies of scale
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Weaker pound - drawback
Pounds buys less foreign currency More pounds needed to buy foreign currency Foreign goods become more expensive as more pounds required to purchase them Increasing cost of raw materials if business relies on foreign goods Increasing the cost of sales Lower gross profit margin
33
Drawback if interest rates are higher, (luxury and normal goods).
Increased costs of borrowing Increased cost of consumer loans and mortgages to individuals Leads to lower spending on luxury and normal goods Leading to lower demand for luxury and normal goods but higher for demand for inferior goods Reduced sales revenue for luxury and normal goods Lower gross profit leading to lower operating profit reduced retained profit limiting long term investment in staff training or R+D
34
However, higher interest rates (if wages rise)
If wages rise by more than the rise in interest rates and inflation There will be increased income Reducing the impact of increased mortgage and or loan costs Consumers continue to buy luxury and normal goods Demand remains stable or increases if wages rises significantly
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Weaker pound benefit
Foreign currency buys more pounds Less foreign currency needed to buy pounds Therefore, price of UK goods falls for foreigners UK exports are cheaper and more competitive Rise in demand for UK goods Economies of scale
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HOWEVER Impact of inflation (using income elasticity)
If wages rise more than the rise in inflation Real wages will increase Rise in income rather than fall in income Increased demand for luxury and normal goods Such as fashionable clothing
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Impact of inflation (using income elasticity)
Increase in inflation Increased consumer spending on necessities E.g. milk gas electricity fuel Lower disposable income for luxury and normal goods Such as fashionable clothing Customers switch to inferior goods Lower demand for luxury and normal goods Lower sales revenue leading to lower gross profit
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However, inflation (impact on demand if a business sells price inelastic good)
If a business sells price inelastic goods (look at the case) The increased in price (caused by the increase in costs) Will lead to an insignificant fall in demand Therefore gross profit will not fall significantly or at all Reducing the impact of inflation
39
Inflation (impact on cost of sales) (drwback)
Increase inflation Increased in the cost of goods and services Increased in the cost of raw materials Increased cost of sales Lower gross profit Lower operating profit Pressure to increase prices Fall in demand for the businesses goods
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However, boom drawback (inflation risk)
Boom leads to increase average incomes caused by business demand increasing Rise in wages (more bonuses and pay rises) Increased demand in the economy Demand pull inflation If inflation is higher than rise in wages Consumers spending more on necessities Fall in real wages Potential falling demand for luxury and normal goods
41
The effect of economic uncertainty on the business environment
Uncertain what economic variables e.g. inflation will be in the future Uncertain consumer incomes Uncertain demand Uncertain profits, therefore difficult for shareholders to invest in confidence As their return will be uncertain Reduced share capital when selling shares Reduced expansion Benefit less from EOS
42
Normal good LOA
If a business sells normal goods then they are likely to have stable, predicable sales * This is because when incomes change demand does not change very much This means that they are unlikely to see a significant fall or rise in profits when incomes change This means the business is attractive to banks as it is a safe investment Meaning they are unlikely to make a loss and can therefore keep up with loan repayments This could result in them getting low interest rates on loans leading to lower expenses
43
Benefit of specialisation - Business
- Focus cash reserves and resources on being an expert in one field - product or industry - Increased investment on research and development within the chosen field as cash/spending not -spread across a wider product portfolio - More advanced product development - Gives business a competitive advantage - Increased volumes sold - Fixed costs of the R&D spread over more units Lower unit costs
44
Drawback of specialisation - Business
Specialisation means a business has a focus on one product or industry The business does’t have spread risk so is vulnerable to external factors e. g: - Changes in incomes (more of an issue if the good is income elastic) - Changes in competition – new businesses enter the market and become more advanced in that area – lose competitive advantage Social trends change – product no longer in demand Shortage of supply: Labour – skill shortage Raw materials – commodities run out
45
Role Culture
- To improve reliability and consistency the business needs to have clear guidelines and rules - This will create a role culture - Where each employee is given direction and descriptions on how best to do their job - This may lead to less mistakes and therefore less defective products - This will improve the business’ reputation leading to a stronger brand
46
Power Culture
- Through power culture, there is a centralised decision-making system where all the directions and actions that employees need to take are controlled by one source. - This might be a team of directors or one individual * This follows an authoritarian style of management - Leading to clear instructions being given very efficiently - Leading to rapid change in employee behaviour provided they are all tuned in to the directives of the central power source. - This means that the business may be able to quickly avoid failure, for example, as the central power source will be able to quickly change attitudes towards business spending and expenses - Making the business less likely to experience a loss.
47
Person culture –ONLY FOR HIGHLY SKILLED EMPLOYEES
- Through a personal culture employees are empowered to act in a way they see as the most effective manner there is little to no intervention from leadership and or company policy - Therefore a Laissez- Faire leadership style is used - This means that highly skilled employees (such as software engineers) are given the opportunity to be creative – meeting their esteem needs as they get a sense of achievement from their inventions - This effectively improves innovation within the organisation leading to the differentiation of products * --- Meaning they are more likely to have price-inelastic goods
47
Task Culture
- To improve creativity they need to adopt a task culture - This can be achieved by recruiting individuals who enjoy working as a team - To encourage this business will need to empower teams to make decisions and give them the freedom to make mistakes - This will lead to ideas being generated without fear - This will lead to innovation and ultimately differentiated products
48
Drawback of recession
- Falling demand for goods and services within economy - Falling production of goods and services within an economy - Falling GDP - Businesses reduce capacity but making staff redundant and selling NCA - Increased unemployment - Fall in average incomes - Increased demand for inferior goods but increase demand for luxury and normal goods - Fall in sales revenue OR Fall in tax revenue
49
Long-term benefit of recession
- Presents an opportunity - If a business has high cash reserves they may be unable to sustain losses - Caused by falling revenue - During this time competitors (lower cash reserves go out of business) -Reducing the PED in the market long term - Due to lower buyer power as long as there is less choice in the market - Can increase prices when the economy recovers - Increase sales long term - Increase revenue long term
50
Drawback of a recession spread risk
- Impact of recession will be reduced if a business has spread risk - May be achieved by having a wide product portfolio - For example, selling luxury and inferior goods - Therefore the falling demand for luxury goods (due to the recession) will be offset by the increasing demand for inferior goods - Resulting in sales revenue remaining stable - Avoid losses
51
Benefit of a boom
- Increased demand for goods and services - Increased production of goods and services in an economy - Increase GDP - Business increase capacity - Increase employment and wages - Rise in average incomes - Increased demand for luxury and normal goods - Increase sales revenue -OR Increase tax revenue
52
Cost of targeting emerging economies
- If Uk businesses attempt to target middle income earners - Greater risk devlopment - Need to understand any cultural differences - As need to understand cultural difference in new market - Increased investement in market research - Increased cash outflows - Strain cash reserves - Lower current assets - Lower current ratio - Poor liquidity
53
Emerging economy
- An emerging econmy is growing but not yet fully developed - Growing number of middle income earners - Who have an increased demand fo luxury goods - Currently not being met by the domestic businesses in that economy - Opportunity for foreign business to export emerging economy - Increase export )R increased demand - Increase UK GDP OR Link to EOS
54
Drawback of emerging economy
- Emerging economy is growing but not yet full developed - UK businesses will start to outsource to capitalize on low cost labor - Fall in employment - Fall in incomes reducing consumer spending - Fall in GDP
55
Benefit of exports
- Increased exports - Leads to an increase in sales volume for domestic businesses - Leading to increased sales revenue - Increase GDP - Government can raise more tax revenue - Increase fiscal spending - Increase improvements in education and healthcare
56
Drawback of exports
- Increased exports could lead to resource depletion - More goods produced for the international market - Using the countries resources - Supply shortages for raw materials - Increase the price of raw materials - Increase in the cost of production for businesses - May increase prices for domestic customers
57
Benefit of imports
- Increased imports leads to access to foreign goods - That are potentially cheaper than domestic goods - Reducing the cost of raw materials for businesses - Businesses will have higher gross profit margins leading to higher net profit - Increase corporation tax - Increased tax revenue and fiscal spending
58
Drawback of imports
- Increased competition for domestic firms - As domestic customers may buy ,pre competitive goods - Fall in demand for domestic firms - Reduction in capacity for domestic firms - Increased redundancies - Increase unemployment
59
Benefit of when a country specializes
- Focus tax revenue of improving knowledge, expertise, and technology in one industry - Produce more advanced workers and production methods - Increased productivity in the industry - Fixed costs spread over more units - Lower unit costs - Lower selling price compared to other countries - Improved international competitiveness - Increased exports of goods - Increased GDP - Increase government spending - Improved healthcare and infrastructure and education
60
Drawback to a country specializing
- If a country speciliases in one or a narrow range of products - Vulnerable to changes in - ( Labor shortage, Skill shortage, Social trends, Competition and running out of raw materials - If one or more of these change - Decrease in demand for their product - Decrease international competitiveness - Fall in exports - Fall in GDP
61
Benefit - FDI - Increase production
- Foreign money invested in a country can lead to improvements in knowledge skills within the wider economy - Introduce new technology and training - Increased productivity - Fixed costs spread over more units - Lower unit costs - Lower selling price - Improved international competitiveness - Increased exports - Increased GDP - Increased government spending - Improved education/health care and infrastcure
62
Drawback - FDI - Increase domestic demand
- Foreign money invested in a country can create new jobs - Increased average incomes due to lower unemployment - Increased spending of luxury and normal goods - Increased sales from domestic businesses - Increased GDP - Increased tax revenue from businesses and workers - Increased government spending - Improved education and health care
63
Benefit of a tariff for domestic business
- Tarrifs can have a positive impact on domestic manufactures - will make it more expensive to import foreign goods due t new tax - Reduce level of imports - Increased demand for domestic producers who's prices are lower than imports - Increase employment, increase incomes - Increased spending on normal luxury goods
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How does Tariff lead to increased FDI
- Government imposes tariff on price inelastic goods - Demand will not fall significantly as a result of price increase - Increased tax revenue for government - Increased government spending on improved infrastructure - More attractive investment opportunity and freign investment - Increased FDI - Increased knowledge/ skill/ employment - Improved international competivieness
65
Drawback Tariff - Inflation
- New tarrif will increase the cost of imports - If goods cannot be produced domestically business will continue to import - Businesses may increase prices of finished goods as a result of increased cost of sales - Consumers have less disposable incomes - Employees demand higher wages - Increase business expenses - Business increases prices as a result - Cost push inflation
66
Drawback of Tarriffs on - Reduced Exports
- If a government imposes tariffs on certain good on certain goods - Could lead to other countries improving their own tariffs - More expensive for foreign countries - Reduced exports - Negatively impacts balance of trade - Reduced tax revenue for the government - Reduced GDP
67
Import Quotas - Benefit
- Limits the supply of the foreign goods - Limiting availability - Causing the business to source domestic suppliers - Increased demand for domestic goods - Increased sales revenue for domestic business - Increased operating profit, increased corporation tax - Increased fiscal spending
68
Import Quotas - Drawback
- Limits the supply of foreign goods - Limiting the availability - Increased cost the goods - Cost push inflation - Increased spending on necessities reducing disposable income - Reducing spending on luxury and normal goods
69
Subsides benefit
- Increased cash from the government - Increased spending on R+D of goods and production facilities - Improved of innovation for goods leading to differentiation - Increased competitiveness of goods - Increased foreign demand for the goods - Increased exports - Increase in business profits/ Increase in sales volumes
70
Subsides - Drawback
- Increased cash government paid to businesses from the government - Potentially reduced fiscal spending in other areas due to less government cash to spend - Could lead to reduced spending on infrastructure - Weaker broadband speeds and access to reliable utilities - Disruption in services such as insurance and banking - Falling demand for UK banking sector leading to a reduction in exports
71
Government legislation as legislation as a protectionist policy
- Legislation such as consumer protection legislation - Setting a quality for foreign imports - Increased bureaucracy for foreign businesses to prove the quality of their goods - Increased administration expenses for foreign business - Forcing foreign businesses to increase prices - Reduced comptivitnesss for foreign businesses - Increased demand for domestic business
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