EDUQAS A LEVEL PAPER 2

Business aims

Business aims are what the business wants to achieve in

the future, and they tend to be quite generic and broad.

They set out the goals for the business

Business objectives

Business objectives are more specific and measurable

targets the business will set to achieve its aims. A business

may aim to increase sales revenue and will set sales targets

(objectives) in order to achieve the aim.

Aims of for-profit firms

survival

•

profit maximisation

•

sales maximisation

•

growth/increase market share

•

increase shareholder value

•

corporate social responsibility/environmental/ethical

•

increase productivity/improve quality.

Aims of Not-For-Profit firms :

to provide services

•

to avoid wasteful duplication of resources where a

natural monopoly exists, such as litter collection and

beach cleaning

•

to control strategic industries

•

to prevent exploitation by monopoly suppliers

•

to help people in need, whether it's age, disability,

poverty or illness.

SMART objectives

Targets that are specific, measurable, achievable, realistic and time constrained.

Long term objectives

Invest in training

Build up brand

Expand into new markets

Develop new products

Short term objectives (max profit)

Staff redundancies

Cheaper suppliers

Increase productivity

Set a high price for sr profit

Sell assets

Vision Statement

Description of what a business sets out to achieve in the medium to long term, provides clear guidance to managers and help direct business decisions

Mission statements

written statements of organisational purpose

Non financial methods of performance

Productivity

Market share

Sales targets

Environmental impact

Quality consumer satisfaction

Productivity

This is the output produced in relation to the inputs used. For a given time period this could be; output per worker; output per machine; output per site.

Methods of improving labour productivity are:

increasing the number of hours worked

• training

• investment in equipment and technology

•changing the way work is done • motivating employees.

Window Dressing

'Window Dressing' is the term used to describe techniques for improving a business' balance sheet position, in particular its apparent liquidity.

Why would a business want to make itself look as successful as possible?

To please the shareholders of public limited companies - a high profit usually means a high share price.

• To show growth in terms of sales, value of fixed assets or dividends; for example, to impress potential investors.

• In order to raise finance from a bank or any other source.

• To increase the likelihood of a merger with, or takeover by, another firm.

Market Share

Sales/market sales x 100

Debtors

People who owe the business money.

• They represent the total value of sales to their customers for which payment has not yet been received.

Trade creditors

• Businesses to which the business owes money.

• A business is likely to have purchased goods from suppliers or services on credit so that payments are still outstanding.

• These debts must be be paid within 12 months/a short period of time

Drawings

• Money taken out of the business by the owner - a reduction of owner's capital - a withdrawal by a sole trader (the owner) from the business for personal reasons.

• Represents the salary taken out of an unlimited liability business. • If the business is owned by one person then it will represent their salary.

Working Capital

• The day-to-day finance available for running a business. • Formula: current assets - current liabilities = working capital.

Capital Expenditure

• Spending on new fixed assets - such as machinery, buildings, polytunnels

Usefulness of Balance Sheets

• Shareholders are owners of the business, so they want to know how well it is doing.

• Gives a picture of the assets/what the business owns and the liabilities/what the business owes.

• If the current liabilities are a lot more than the current assets in each year, then the business could have a problem in paying its debts.

• Can be compared over time.

The Importance of Working Capital

Needed to fund the day-to-day finance available for running a business. If there is not enough cash for the business then it may not be able to pay its bills on time. If a business borrows too much through trade credit, then it might be unable to pay invoices when they are due.

Balance Sheet

A measure of the assets and liabilities of a business.

Fixed Assets

: Items owned by the business which do not change in the short term/they last a long time/used repeatedly, e.g. buildings/machines/vehicles.

Current Assets

Assets which can be converted into cash quickly, e.g. stock, debtors, cash in till/bank.

Current Liabilities

What the business owes, and which must normally be paid within 12 months, e.g. overdraft, creditors

Long-term Liabilities:

Money owed to others that will take more than a year to pay back, e.g. bank loan and debentures.

Capital Employed:

The total money that has been invested in the business such as shareholders' funds (share capital); owners' capital; retained profit and reserves

[Capital Introduced + Retained Profit + Long Term Liabilities]

Budgeting

A budget is a financial plan for the future; without such a plan, businesses and individuals often get into financial trouble.

types of budgets

Sales revenue budgets set out a business' planned revenue from selling its products. Important information includes expected level of sales and the likely selling price of the product.

Expenditure budgets set out a business' planned expenditure on labour, raw materials, fuel and other items essential for production.

The Pros of Budgeting

Advantages:

• A means of controlling income and expenditure.

• Regulate the spending of money and highlight losses, waste and inefficiency.

• They act as a review and allow time for corrective action to take place.

• They allow delegation without loss of control - subordinates can be set their own targets.

• They help in the co-ordination of a business and improve communication between different sections of the business.

• Budgets provide clear targets to be met and should help employees to focus on costs.

• Can act as a motivator for staff if budget is met.

The Cons of Budgeting

Limitations:

• They can be time consuming for managers in small businesses; especially for those who are not particularly numerate.

• Some personnel can resent having to meet budget targets that they have had no part in constructing. Poor motivation and missed targets can result.

• If the actual figures are very different from the budgeted ones the budget can lose its significance.

• The budget must not be too inflexible as business opportunities might be missed.

• Poorly constructed budgets can lead to poor decision making

Budgetary Control: Variances

A variance is any unplanned change from the budgeted figure. They occur when an actual figure for sales or expenditure differs from the budgeted figure. Variances can be favourable (F) or adverse (A):

favourable variance

exists when the difference between the actual and budgeted figures will result in the business enjoying higher profits than shown in the budget.

For example, when: - expenditure is less than expected - revenues are higher than expected.

adverse variance

occurs when the difference between the figures in the budget and the actual figures will lead to the business' profits being lower than planned.

For example, when: - expenditure is higher than expected - revenues are lower than expected.

Zero Budgets

It involves managers starting with a clean sheet where they must justify all expenditure

This does the following:

• improves control • helps with allocation of resources

• limits the tendency for budgets to increase annually with no real justification for the increase

• reduces unnecessary costs

• motivates managers to look at alternative options.

Cost Benefit Analysis

Cost benefit analysis (CBA) is a method for measuring, in financial terms, the costs and benefits of an investment project. It includes a consideration of the external costs and benefits to society as well as the costs and benefits to just the business.

Private Costs and Benefits

Private Costs:

• These are costs that the business making the investment must accept.

• They include training and recruitment costs, the purchase of new capital equipment, marketing costs etc.

Private Benefits:

• These are benefits that the business gains from as a result of making the investment.

• These benefits will include things such as increased productivity, increased sales, brand values and increased profits.

Public Costs and Benefits

Public Costs:

These are costs external to the business making the investment. • A building company will have an environmental impact as it builds houses - increased traffic, noise etc.

• A farm extracting water from a river to irrigate its crops leaves less water further downstream for fishing.

• A new factory may involve the loss of open space, increased traffic congestion and so on.

Public Benefits:

• These are benefits external to the business that result from making the investment.

• An obvious external benefit from a large-scale investment would be jobs created by the business.

• Other public benefits include further jobs created outside the business as a result of increased business activity and an increase in tax paid by employees to the government.

• In areas where unemployment is high, crime and social problems might be reduced

Social Costs and Benefits

- Social Benefit (private benefit + public benefits)

- Social Cost (private costs + public costs)

• If the social benefits are greater than social costs, then go ahead with proposal.

• If the social costs are greater than social benefits, then do not go ahead with proposal.

Advantages of CBA

.Considers a wide range of benefits and costs.

• Impacts on society and the community are included.

• Puts a value to external benefits and costs that would normally be ignored by private sector businesses.

• Can be used to rank possible major projects in order of public cost.

• It shows that a business cares about the local community and the environment, which can be good for public relations

Disadvantages of CBA

• The valuation of intangibles will be difficult - how do you put a value on the effect of pollution or the improved traffic flow of a new road?

• Valuations will often include value judgements - one person's or manager's calculation of an intangible benefit is likely to differ from another person's calculation, who has a different set of views on what is important for a business.

• If the social costs and benefits are incorrectly calculated, then the wrong choice could be made.

• Will all stakeholders be included in the calculation of social costs and benefits?

Critical Path Analysis

Critical path analysis (CPA) is a method of planning and controlling large projects and is used to make decisions on the management of resources and time. It is a technique used to find cheapest and quickest way to complete a task.

Advantages of CPA

• CPA is an effective management tool for planning and controlling complex projects. Critical activities can be identified which forces managers to think about the process and supports a systematic approach to planning activities. Problems can be highlighted early so that whole projects are not delayed.

• Allows effective management of resources. Allocating factors, such as labour, to where they are needed and can be most effective. Supports the transferring of resources for different tasks, if required.

• Reduces the need for working capital - parts used in the project can be ordered exactly when they are needed. Allows the use of just-in-time production.

• Improves cash flow as a result of reduced need for working capital. Also helps with cash flow forecasts.

• Can be used to check on the efficiency of individual activities and to identify if new resources are needed or if employees need training.

• Improves overall management of projects - managers understand what is involved and what needs to be done and when it needs to be done by.

• Can be used to give a business a competitive advantage by being more efficient and supports time-based management.

Disadvantages of CPA

• Information can be distorted or poor (over optimistic) methods of estimation of activity times can be used. Lack of experience of those preparing CPA leads to inaccuracies.

• CPA can give the wrong results or fail to allow for external factors that will influence the total time taken.

• Sub-contractors, who may be completing some of the activities on a project, can be outside the control of the project manager.

• Supplies may be delayed; they may be of the wrong type or of poor quality.

• CPA only identifies the critical activities; it does not ensure these are done on time. Close supervision may be needed which may reduce employee morale.

• Requires ongoing checking of activities. Changes may be required if there is a delay. The construction of critical path analyses can be time consuming.

• CPA does not ensure quality - the focus is mainly on time and meeting deadlines.

FREE FLOAT

This is the amount of spare time available for an activity without delaying the NEXT ACTIVITY

EST at End of activity - (EST at start + Duration of activity)

TOTAL FLOAT

This is the amount of spare time available for an activity without delaying the WHOLE PROJECT

Types of Decision-making Models

Strategic decisions

Tactical decisions

Operational decisions

Strategic decisions

long term and will affect the direction the business takes. These decisions will affect the entire business and will be made by the owners or senior management. Strategic decisions are often complex and may result in major organisational change internal to the business or in the markets, or in new markets they operate in. Strategic decisions may also involve a large financial commitment in order to carry out the decision. It may take a few years, and a few million pounds, to see if strategic decisions have had the positive affect anticipated by the business.

Tactical decisions

are not as far reaching as strategic decisions - they tend to be medium-term. They should aim to implement strategic decisions. Tactical decisions are less complex than strategic decisions and are usually carried out by middle management. Tactical decisions can also be more flexible - if it is failing to meet its objective then it can be changed.

Operational decisions

are the day-to-day decisions made in a business. These are lower-level decisions that tend to be short term and have little risk. A business will make hundreds of operational decisions in a typical day by a range of employees, as they do not need the careful thought and planning of strategic and tactical decisions. Many decisions at this level are routine and can be made quickly

Scientific decision-making

involves the use of facts and data in a systematic way in order to arrive at a logical and evidence-based decision.

The scientific approach is favoured by most businesses making strategic and tactical decisions as it is based on logic and evidence and should reduce the risk of failure.

Intuitive decision-making

uses experience and intuition (gut feeling) to make decisions. This has proved successful for many entrepreneurs and managers who use their experiences and emotions to decide. There is often no data or systematic approach to back up this decision. Intuitive decisions can be made quickly and are often useful for operational decisions, however at strategic and tactical level there is a large risk on relying on intuitive decisionmaking alone.

Decision Trees

A method of tracing the alternative outcomes of any decision

Advantages of decision trees

• Clearly lay out the problem so that all options can be considered.

• Allow managers to analyse fully the possible consequences and risks of a decision.

• Provide a framework to quantify the values of outcomes and the probabilities of achieving them.

• Decision trees give an easy-to-understand visual representation of the problem.

Disadvantages of decision trees

rely on qualitative data

probability is hard to predict

wider range of outcomes

Depreciation

The difference between what the value was and what it is now is called depreciation. Depreciation represents the fall in the value of these fixed assets, either due to their use, due to time, or due to obsolescence.

The straight-line method of depreciation

assumes that a fixed asset depreciates an equal amount to each year of its expected useful life.

Original Cost - Residual Value/ Expected life of the asset (years)

Why is it important for businesses to depreciate their assets?

• It is essential for businesses to depreciate the value of their machinery, because otherwise the true value would not be reflected.

• Over time machines become worn out and obsolete. If they were valued in the business' books at their cost price it would give a false picture of their true worth and it would cause the business in general to be overvalued.

• If it was known that the business was window-dressing its accounts in such a way, it would affect the business' reputation and may affect their ability to borrow money.

• By depreciating the value of their machinery, the business is in a better position to appreciate its real value and hence the need for putting money aside in order to purchase replacement machinery in the future.

• There is also a legal requirement to devalue fixed assets in order to reflect their true worth.

ICT and Decision-making

Computer technology can be used by businesses to make many day-to-day decisions.

• Stock Inventory - Decisions on when to order new stock, how to manage deliveries, or on staffing levels can be calculated and implemented by IT systems.

• Information systems can collect inputs from several sources, organise the data then distribute the data to make the most efficient decisions.

• IT systems in an ice-cream factory can monitor sales in supermarkets through Electronic Point of Sale (EPOS) systems, take in forecast of future sales and weather data, and from this determine levels of production, rota staff shifts and arrange delivery schedules.

• Buying online allows:

• Analysis of browsing and purchasing habits. This is used to determine search results and what is seen on screen.

• Cookies allow retail websites to present choices that are most likely to meet a browser's needs. • Database marketing is based on data-mining, searching through patterns in gathered customer information and using these buying behaviours to create directed advertising - all automatic.

• Decision-making models such as decision trees and critical path analysis can be carried out by computer models which save time and help accuracy.

Investment Appraisal

Investment Appraisal is a technique used to evaluate planned investment by a business and measure its potential value to the business.

There are several different IA methods used to compare projects that may be competing for a business' investment capital.

• Payback period

• Average rate of return (ARR)

• Discounted Cash Flow (DCF).

Payback Period

The payback period is the time it takes for the project to pay back the initial outlay.

Month of Payback = Income needed in period/ Contribution per month

advantages to payback period

• Easy to calculate and simple to use.

• Helps with managing cash flow.

• Considers timings of cash flows.

• Effective to use when technology is changing at a fast rate, such as hi-tech projects, in order to recover the cost of investment as quickly as possible.

diadvantages to payback period

Ignores what happens after the payback period.

• May encourage a short-term attitude.

• Ignores total profitability, the focus is just on the speed to which the initial outlay is repaid.

Net Present Value

The NPV is the value of future money if you had it now (considering inflation and the potential for earning interest on investment capital or cost of finance on raising investment capital). In other words, money in the future is worth less than the same amount today

Advantages:

• Allows for future earnings to be adjusted to present values.

• Easy to compare different projects.

• Allows for impact of inflation on value of future cash flows.

• Discounts can be changed to accommodate changes in the economic and financial climate. • Allows for effect of risk on estimated future cash flows.

Disadvantages:

• Complex to calculate.

• Discount factors could be incorrect which makes the NPV inaccurate.

• Difficult to set discount factors far into the future, the longer into the future we go the less reliable the discount factor.

• Interest Rate estimations over time period may be inaccurate.

Discounted Cash Flow

The discounted cash flow method of investment appraisal considers the time value of money i.e., the realisation that the value of money changes over time.

NPV Using the Discount Table

A discount factor is given (which is based on bank interest rates). These are normally given in tables to show how much future values will be discounted to give its present value. The further into the future the earnings go the lower the discount factor will be.

Average Rate of Return

This is an investment appraisal technique which calculates the average annual profit of an investment project, expressed as a percentage of the sum of money invested.

The option/project that has the highest average rate of return is chosen.

ARR = Average Annual Return/ Initial Outlay x 100

adantages to ARR

• Uses all the cash flows over life of the project.

• Focuses on profitability.

• Easy to make comparisons (compare % returns on different investments).

• Allows comparison with costs of borrowing for investment.

Disadvantages of ARR

• Ignores timings of the cash flows.

• Does not allow for effects of inflation on values of future cash flows

Determinants of location

Access to markets

Cost and nature of factors of production

Social reasons

Historical reasons

International Location - The Main Determinants

Maximising economies of scale

Access to international markets

Tax advantages

Freedom from restrictions

Footloose businesses

Profit and Loss Account

An accounting statement showing a business' sales revenue over a trading period and all the relevant costs incurred in earning that revenue. (Income and expenditure.)

Cost of Sales

All costs of production used. Any direct costs, such as raw materials, wages, used in the production process

Formula: Opening stock + Purchases - Closing Sales

Gross Profit

The difference between the revenue from selling the product and the direct costs of making it.

Formula: Sales Revenue - Costs of Sales

Net Profit

It is the profit that belongs to the sole trader following the reduction of all expenses from the Gross Profit. The sole trader must pay income tax on this profit.

Formula: Gross Profit - Expenses

Rationalisation

Rationalisation is the reorganisation of a business in order to increase its efficiency. This reorganisation normally leads to a reduction in business size, a change of policy or an alteration of strategy relating to products

eg: Closing of branches

Transferring of production

Trimming of product ranges

Incorporation of IT systems to replace paper systems.

Outsourcing

Outsourcing occurs when outside suppliers are involved in activities that could be undertaken internally by a business. These suppliers are not directly employed by the business.

For example, the outside suppliers or sub-contractors may deal with phone enquiries, computer processing and production of components or even produce finished products.

Outsourcing can lead to increased efficiency and lowered costs. The outside businesses who take on the job will often carry out the same work for a lower cost.

Pros and Cons of Outsourcing

Advantages:

• Significantly reduced staffing costs.

• Well trained staff provided by the outsourcing company will reduce HRM costs such as recruitment and training.

• Existing workload and stress levels are reduced. This is very important if a business is operating near or at full capacity.

• Less investment risk. Instead of investing in new production facilities, let the outside supplier take the risk of investing.

• Capital needs are reduced. Because there is less investment, there is less need to raise finance.

Lower costs increase profits giving more capital for research and development, therefore speeding the development of new products.

Disadvantages:

• Potential of poor customer service (call centre related), with communication made difficult because of cultural differences.

• Existing employees may feel demotivated if they believe their jobs are at risk. This demotivation can increase staff turnover and reduce productivity.

• Quality of production / product cannot be guaranteed. Quality may be maintained, but it is difficult to keep up with improvements in quality from competitor companies.

• More difficult to implement JIT systems, which reduce the need for working capital.

• Breakdown of communication in the production chain. It is often difficult for functional departments to talk to each other when they are not in the same building.

• Loss of security of data. There have been cases where customer data has been made available to external organisations from subcontracting businesses.

• Lost tax revenues to the home government when offshoring is used.

Special Order Costing

Sometimes businesses receive orders which are unexpected, from a new customer or for a new product perhaps. On these occasions a business must decide whether to accept the order. The business will consider whether the order is profitable, however, even if the order is not profitable it may still be accepted. This may be because the business is considering the size of the CONTRIBUTION when making the decision to accept the order.

Accepting Special Orders

Before going ahead with such special orders, QUALITATIVE FACTORS (non-financial factors) would also need to be carefully considered:

• Capacity - does the business have the space and resources to accommodate the new order or is this the best way to utilise the spare capacity?

• Labour demands - would the special order be completed in normal hours or would extra hours have to be paid to employees?

• Future orders - will completing this special order lead to future orders for the company from the customers?

• Existing customers - how will existing customers react if they find out that the new customer got the same product for cheaper?

• Product adjustment - would the special order require a product slightly different to the regular product?

• Current utilisation - an unprofitable order may be accepted to keep employees occupied.

• Retaining customer loyalty - a business may accept an unprofitable order from a regular customer as a favour to retain their loyalty.

This could involve changing the production process, using different materials and training employees.

Should the Business Accept the Order?

Reasons to accept the order:

• Further orders may follow. Some businesses will accept an unprofitable special order if there is a possibility that it will result in a profitable regular and long-term order.

• Spare capacity is used, increasing return on capital invested.

• The new order may give access to new markets and new opportunities e.g., is it from overseas leading to new export markets or is it in a different market?

• Increasing production can have HRM benefits, such as increased wages for employees and payment of bonuses.

• Also, it can be useful to keep employees busy if the normal orders are not sufficient due to poor economic conditions. Special orders can help keep employees in their jobs.

Arguments to decline the order:

• Working at near or at full capacity can put pressure on quality. If the business is already operating at full capacity how can it cope with existing customers in addition to the special order?

• What if existing customers discover the discounted price offered to the new customer? Will they demand the same? They may become resentful and could look for a new supplier.

• Will the new customer demand even lower prices in the future and will there be a requirement to prioritise the new order over existing customers? This could have an adverse effect on loyal and long-term customers.

• The new customer may undercut existing customers when selling the finished product. This could impact on their sales, which could then impact on future orders.

SWOT

A SWOT analysis is used to identify and analyse the internal strengths and weaknesses of an organisation, as well as the external opportunities and threats created by the business and economic environment.

Benefits of carrying out a SWOT analysis

: • It makes a business assess its current market position in terms of its strengths and weaknesses

. • It enables a business to build on its strengths and protect itself against its weaknesses.

• It will show where there are market opportunities to exploit.

• It will enable a business to reduce the impact of any threats.

Drawbacks of carrying out a SWOT analysis:

• It may be assumed that all strengths, weaknesses, opportunities and threats have been thought of, whereas something important might have been missed which means the business may take a wrong direction.

• There may be unexpected exogenous shocks, such as a recession.

Once the SWOT has been completed, the information can be used to help develop a strategy that uses the strengths and opportunities to reduce the weaknesses and threats and to achieve the objectives of the business.

Strengths (swot) Internal

A strength is only a strength when a business is good at something and also takes advantage of this strength.

eg: • Effective distribution networks

• Strong brand identity

• High staff motivation

• Thought of as a price leader

• Good industrial relations

• High levels of productivity

Weaknesses [Internal] swot

A weakness occurs when a business performs poorly in an important area of operations or when it fails to take advantage of an existing strength

eg:

• Limited product range

• Poor investment record in technology

• High levels of staff turnover

• Failing to achieve industry benchmarks

• Bad debt or cash-flow problems

Opportunity [External] swot

An opportunity is an external condition that could positively impact on the business's performance and improve competitive advantage provided positive action is taken in time. eg:

• Changes in technology and competitive structure of markets

• Changes in government policy related to the business's field

• Changes in social patterns, population profiles, lifestyle changes, fashion etc.

Threats [External] swot

A threat is an external condition that could have a negative impact on the business's performance and reduces competitive advantage.

eg: Economic recession

• Changing consumer incomes or tastes

• New product launches by competitors

• Environmental legislation

• New or increased taxes

• New technologies being used by competitors

Ansoff Matrix

The Ansoff matrix outlines the options open to businesses if they wish to grow, with a view to increase profitability and revenue. The Ansoff matrix considers whether the marketing strategy is targeted at existing customers or new customers and if existing products should be used or alternatively, if new products should be developed.

Market penetration

product development

market development

diversification

Product Development

Involves the development of new products for existing markets.

• Improve or relaunch the product into existing markets by changing an existing product (for example, repackaging or adding extra ingredients).

• Developing new products (such as Mars ice cream).

• Requires businesses to innovate and look at new ways of extending the product life cycle of their existing product

Threat of New Entrants

If businesses can easily come into an industry and leave it again if profits are low, it becomes difficult for existing businesses in the industry to charge high prices and make high profits. This can be countered by erecting barriers to entry to the industry. These may take the form of: • Applying for patents and copyright to protect its intellectual property. • Attempting to develop strong brands which attract customer loyalty and make products less price sensitive. • Spending large amounts of money on advertising. • Pricing

Threat of Substitutes

The more substitutes there are for a particular product, the fiercer the competitive pressure on a business making the product.

A business can reduce the number of potential substitutes through:

• Research and development and patenting the substitutes themselves. (Sometimes a business will buy the patent for an invention from a third party and do nothing with it simply to prevent the product coming to market.)

• Marketing tactics, such as predator (destroyer) pricing.

Diversification

Developing new products and new markets.

• It involves offering a new product in a different area. It is when a business expands its activities outside its normal range, for example, farmers starting up quad biking or Cadbury's moving into the market for toilet bleach.

• Developing new products for new markets involves changes to both a business's product and market. Diversification may be attempted if a business sees a new opportunity and has investment funds available.

• Diversification carries the greatest level of risk (compared with market penetration, which is low risk and the other two options considered as medium risk strategies) because it involves changes in both the market and the product. Virgin Trains have had limited success, but Virgin Money has been more successful.

• Diversification spreads risk for a business as it allows a business to reduce its reliance on existing markets and products. If sales are falling for existing products or in existing markets, then a successful launch and growth of a new product in a new market can help to maintain the overall performance of the business

Market Development

Finding and developing new markets for existing products.

• There are two broad market development strategies. Identifying users in different markets with similar needs to existing customers (the market could be in a different country). This strategy can be risky as different counties have different tastes and needs - the product may have to be adapted. Also new distribution channels may have to be used.

• Identifying new customers who would use a product in a different way. For example, using Lucozade as a sports drink rather than something to have next to your bed when you have flu or measles. Repackaging and resizing the product may open a new market. For example, a business selling food to the hotel or restaurant market may start selling to consumers by repacking the product in small quantities.

Market Penetration

Concentrating on sales of existing products to existing markets.

• Attracting customers who have not yet become regular users, but are occasional users, by increasing brand loyalty. • Taking customers from competitors (aggressive pricing). Internet service providers are continually trying to win customers from competitors through pricing strategies and promotional activities.

• Persuading existing customers to increase usage perhaps by reducing the price or offering promotions e.g., Sky offers packages or bundles to get existing customers to increase their monthly subscription

Porters Five Forces

Michael Porter outlined five forces or factors which determine the profitability of an industry. He argued that the aim of competitive strategy is to cope with and ideally change those forces in favour of the business

Threat of New Entry

Bargaining Power of Suppliers

Threat of Substitutes

Bargaining Power of Buyers

rivalry among existing competitors

Bargaining Power of Buyers

Buyers want to obtain goods and services for the lowest price. If buyers or customers have considerable market power, they will be able to beat down prices offered by suppliers. Strategies to reduce the bargaining power of customers are:

• Forward vertical integration (taking over a customer).

• Make it more expensive for customers to switch to another supplier. (For example, games console manufacturers make their games incompatible with any other games machines.)

Rivalry Among Existing Business

The degree of rivalry among existing business in an industry will also determine prices and profits for any single business. Businesses can reduce rivalry by:

• Forming cartels or engaging in a broad range of anticompetitive policies. (In UK and EU law this is illegal but is not uncommon.)

• Taking over their rivals (horizontal integration). (This is legal, but Competition Law may prevent it from happening.) • Not competing on price but competing by bringing out new products, and through advertising.

The Bargaining Power of Suppliers

Suppliers want to maximize their profits. The more power a supplier has over its customers, the higher prices it can charge and the more it can reallocate profit from the customer to itself. Limiting the power of its supplier, therefore, will improve the competitive position of a business. It has a variety of strategies it can use:

• Backward vertical integration (taking over a supplier). • Seek out new suppliers to create more competition between its suppliers.

• Engage in technical research to find substitutes for a particular input.

• Minimize the information provided to suppliers in order to prevent the supplier realising its power over customers.

Reasons for Takeovers and Mergers

• Takeovers can help a firm grow. As a result, it can benefit from economies of scale such as bulk purchasing; manufacturing economies; use of specialists and marketing economies of scale.

• Increased market share leads to increased market power in the market and a reduction in competition.

• Diversification - businesses will benefit from spreading their risks across several products and markets.

• Acquiring new products and technology. A takeover is one way of acquiring technology that may be protected by patent or may be expensive or time consuming to develop internally.

• Strong brands also are likely to attract a high degree of customer loyalty, which also reduces risk and allows for long-term planning.

• Control of supply chain.

• Rapid growth. • Higher returns to shareholders.

• Benefit from synergy - the two businesses fit together in a way that allows costs to be reduced and profits increased.

• Acquisition of technology and expertise. • Underperforming management teams can be removed giving an immediate boost to performance.

Business Growth

Organic growth or internal growth is when a business expands by selling more of its existing products/expansion. This is a less risky but slower growth strategy. This can be achieved by:

• Expanding the product range

• Targeting new markets

• Expanding the distribution network, such as opening more stores or selling in new places.

External growth is growth by acquisition, takeover or merger. A quicker method of growth than organic growth. It can be via mergers, takeovers or acquisitions

Arguments for growth: Eliminate competition; increase market share; exploit new markets; benefit from economies of scale.

Arguments against growth: Costs involved; issues with HR; diseconomies of scale; bad publicity.