RS businesss Theme 3 Edexcel A level Flashcards

What is investment appraisal?

It is a technique used by firms and investors to decide whether a capital expenditure project is profit making.

What does simple payback method measure?

It measures the time taken to recover the initial cost of an investment.

See Theme 3 document for worked example (pages 1,2)

Example Working out

P2 needs 95,000 after year 3 only have 90,000, this means we need a further 5,000

to see when you will break even in year 4 you do

Amount needed that year/Amount that year in total X12

5000/60,000 X12 = 0.9 round up to 1 month

Project 2 takes three years and one month to cover initial cost

Limitations of simple payback

does not consider what is most profitable, just what makes money back the quickest,

as it is a cash flow forecast - inflows might be inaccurate

Average Rate of Return (ARR)

ARR is a profitability measure calculated as (Average Annual Profit ÷ Initial Investment) × 100.

Example for ARR - working out method

Sum all cash inflows over the project's duration -> subtract the initial cost -> divide by the number of years -> take the figure and divide by initial cost x 100

Example

Step 1 Add up all the cash inflows from years 1-5

Step 2 - Then minus the original cost of the project = 80,000 = 70,000

Step 3 - divide this by number of years the project runs for

70,000/5 (number of years) = 14,000

Step 4 - Take the figure and divide by cost of project (-80,000) then multiply by 100

Step 5 multiply by 100

14,000/80,000 x 100 = 17.5%

Net Present Value (NPV)

NPV accounts for the loss in value of money over time.

NPV calculation

1. Multiply each future cash inflow by its discount factor

2. add up all these discounted values

3.subtract the initial investment

Mission Statement

It is a formal summary that outlines an organization's aims and values.

benefits of a mission statement

It communicates the business's aims, gives employees a sense of purpose, and informs stakeholders about the business direction.

drawback of mission statements

They can sometimes be unclear, unachievable, or unmeasurable.

What are Corporate objectives?

They should flow from the mission statement and be specific, measurable, achievable, realistic, and time-bound (SMART).

- Increase operating profit by 4% over the next 24 months

department objectives

Each department will set their own objectives that should flow from the corporate objectives

Ansoff's Matrix

It is a strategic tool that outlines four growth options and their level of risk:

New = new to business

New markets - market development less risky, and diversification most risky

Existing - market penetration, product development

Ansoff's Matrix - Market Penetration

Selling more of the same products in existing markets.

how can you sell more of the same products to current markets?

- Discounts

- BOGOF

- Improved customer service

- Promotions

- Reducing price to increase purchasing

- Loyalty schemes

Ansoff's matrix - Product development

Creating and introducing new products to current markets.

Example businesses

- Sony

- Microsoft

- Apple

- Clothing and Technology Industry

Ansoff's Matrix - Market development

Selling existing products in new geographical or demographic markets.

how can you sell the same products to new markets?

Introduce new distribution channel - e commerce

Enter new market - Location

Change Pricing strategy to attract new market

Advertising

Ansoff's Matrix - Diversification

Selling new products in new markets.

1. Lack of Market Knowledge

The business may not fully understand the needs, preferences, or behavior of the new market, increasing the chance of failure.

2. Unproven Product

The product is new and may not have been tested or validated, so there's uncertainty about whether it will be successful.

3. High Costs

Developing a new product and launching it into a new market can be very expensive, with no guarantee of returns.

Most Uncertainty of the 4

Benfits and Drawbacks of using Ansoff's Matrix

A benefit of using Ansoff's matrix is that it allows businesses to consider opportunities for expansion whilst considering risk.

Limitations include that it only shows part of the picture, oversimplifies the market, Large MNC's may need thousands of sub options and categories.

Porter's Strategic Matrix

It is a framework that outlines three generic business strategies: cost leadership, differentiation, and focus.

These help a business to gain a competitive advantage

Cost Leadership

Cost leadership - making products at the lowest cost, may include outsourcing, lean management, low-cost products

Differentiation

Differentiation - the product or service is unique and the USP adds value to the product

Cost Focus

Cost Focus - the product or service will serve a very small specific niche, high costs are passed on to customers, have no idea of costs as lack of substitutes

Stuck in the middle

when a company has no competitive advantage and is doomed to below-average performance

Attempting to simultaneously pursue both a low cost strategy and a differentiation strategy

Difficult to achieve low cost with the added costs of differentiation

Drawbacks of porters strategic matrix

Not useful in dynamic markets or crisis situations, oversimplifies the market

Strategic decisions vs tactical decisions

Strategic decisions are long-term and proactive, while tactical decisions are short-term and reactive.

SWOT

Strengths, Weaknesses, Opportunities, and Threats.

Purpose of a SWOT analysis

To identify and evaluate internal strengths and weaknesses alongside external opportunities and threats.

Advantages and Disadvantages of SWOT

Simple to lay out and understand

Allows organizations to identify strengths and develop weaknesses into opportunities

Helps to identify opportunities for growth

Identify strength to use in marketing strategy

Can identify threats and minimize impacts

Negatives

Could oversimplify complex data

Only looks at known strength's

weaknesses etc not unforseen factors.

Subjective opinion based

Doesn't prioritse threats

Cannot act on every opportunity

PESTLE analysis

To examine external influences by analyzing Political, Economic, Social, Technological, Legal, and Environmental factors.

Name Porter's Five Forces

Bargaining power of suppliers

Bargaining power of buyers

Threat of new entrants

Threat of substitutes

Rivalry among existing competitors

How it minimise impact of each of porters five forces

Suppliers - Limit the power of suppliers by looking for new suppliers, takeover of supplier (buy their business)

Customer's - make it expensive to switch

Threat of new entrants - Create barrier to entry to prevent new entrants, Heavily advertise to build strong brands

Threat of substitutes - Continuously invest in R and D develop patents (similar to copyright) , Buy up patents of rivals and shelve to prevent production

Rivalry - Takeover/Merging with a rival, invest in advertising heavily to maintain market share, Offer a USP

Purpose of economies of scale in growth

To reduce unit costs by spreading fixed costs over a larger output as production increases.

unit costs or average costs fall, as a result of an increase in level of output.

What is Overtrading?

When a business expands too quickly without having the financial resources to support such a quick expansion so the business cannot fulfill orders

What is diseconomies of scale?

Diseconomies of scale happen when a company or business grows so large that the costs per unit increase

Difference between a merger and a takeover

A merger is when two businesses combine to form one, whereas a takeover (acquisition) is when one business purchases another.

Organic growth

Growth that occurs from within the business without mergers or acquisitions, such as through new product launches or store expansions.

Inorganic Growth

Expansion by merging with or taking over another business

Advantages of organic growth

it often presents a more manageable growth rate, lower financial risk, and greater control over business direction.

Horizontal Integration

takeover/merger between two businesses operating in the same sector. Hovis take over Warburton's

Vertical Integration

takeover/merger between two businesses who operate in different sectors. Walkers decide to takeover/merge with their potato farm.

Reasons a business might choose to remain small

To retain a unique selling proposition (USP), maintain flexibility in customer response, and sustain high levels of customer service.

Limitations of Sales forecasting

Seasonality , Competition, Publicity, Market changes, Changes in legislation, Time consuming - opportunity cost less time to create marketing material etc

New businesses cannot do it, previous data does not guarantee future sales, data may be out of date and not useful

Quantitative sales forecasting

A statistical technique that uses historical sales data to predict future sales levels.

Function of a moving average in sales forecasting

It smooths out fluctuations in sales data by averaging sales over a set period, such as 3 or 4 years.

Centered moving average

An average computed over adjacent periods to smooth data and better reflect the underlying trend.

Purpose of using decision trees in business decisions

They help analyze different options by mapping out possible outcomes and their probabilities.

Critical Path Analysis (CPA)

It identifies the sequence of critical tasks in a project and calculates the minimum time needed to complete the project.

Float in Critical Path Analysis

Float is determined by subtracting the task's duration and its earliest start time from its latest finish time.

Float = LFT - duration - EST

Bottom middle top

Balance sheet

A summary of a company's non-current assets, current assets, liabilities, and net assets.

Working capital calculation

Working capital = Total Current Assets - Current Liabilities.

Gearing ratio

Gearing ratio NCl/CE X100 (total equity)

GR If low around 10-20% most equity comes from shareholders good as no loans bad as giving control of business away, dividends essentially benefits and drawbacks of share capital

GR if high around 80% genuinely seen as worse, more equity from loans have to pay back with interest however can keep control of business.

Return on capital employed (ROCE)

ROCE OP/Capital employed X100

Absenteeism

Number of work days lost through absence/Total possible days worked X100

Labour productivity measurement

Labour productivity = Total Output ÷ Number of Workers.

Labour turnover

Number of employees leaving/Average number of employees X100

Absenteeism measurement

It is the percentage of possible workdays lost due to employee absences, calculated as (Days lost ÷ Total possible workdays) × 100.

Ways to improve employee motivation

Through financial rewards, job enlargement, rotation schemes, and empowerment initiatives.

Power culture

A centralised culture which focuses on key decision makers

Role culture

A culture in which each member of staff has a clearly defined job title and role, employees placed in role based on qualifications and expertise

Task culture

refers to an organizational culture focused on specific tasks and projects

Person culture

When individuals are given the freedom to express themselves and make decisions within the business