3.2 and 3.3 edexcel alevel business definitions

economies of scale definition

the cost advantages a business experiences as it increases its scale of production

internal economies of scale

technological, managerial, financial, purchasing, marketing, risk bearing

law of diminishing returns definition

at a certain point employing an additional factor of production causes a relatively smaller increase in output

external economies of scale

labour cost, ancillary and commercial service, cooperation, disintegration

reasons to grow

increased market power, increased market share and brand recognition, economies of scale, increased profitability

problems with growth

diseconomies of scale, overtrading, communication issues

Merger definition

when two companies agree to join together to form a single unified business

Takeover definition

when one company gains control of another by purchasing over 50% of its shares

Horizontal integration definition

when two firms at the same stage of production join together

Vertical integration definition

when firms at different stages of the supply chain merge

reasons for external growth

form synergies, economies of scale, market power, access new markets, access technology, diversification and risk spreading, defensive reasons, quicker

risks and challenges of external growth

financial risks, cultural clashes, integration problems, diseconomies of scale, regulatory and legal barriers, reputation and stakeholder backlash

organic growth definition

when a business grows naturally by selling more of its products using its own resources

methods of internal growth

new customers, growing output/capacity expansion, new products, new markets, franchising

benefits of organic growth

retain control, maintain clear strategic direction, smoother process, internal sources of finance used, doesn’t risk short term financial security

drawbacks of organic growth

slow, may result in unhappy shareholders, opportunity costs

reasons for staying small

owners preference, personal service, lower costs, may be a monopoly already

objectives of small business

survival, profit, customer satisfaction

how do SMEs survive

flexibility, customer service, product differentiation and USPs, E-commerce

why is increased market power important

stronger influence over suppliers, greater control over customers, ability to set prices, competitive advantage, probability and growth

downsides of increased market power

regulatory intervention, reputation and consumer backlash, slowdown of innovation, supplier and stakeholder tensions

benefits of a strong brand

customer loyalty, competitive advantage, influence in the market, revenue growth

causes of overtrading

rapid expansion, insufficient finance, high stock levels, large credit sales

consequences of overtrading

cash flow problems, operational strain, risk of insolvency, damage to reputation

payback period defination

the time it takes for a business to recover or payback the initial outlay for a project

payback calculation

(outstanding amount/net cash flow in a year) x12

advantages of payback period

straightforward, good for cashflow problems, good if lots of changes

disadvantages of payback period

based on estimates, ignores profitability, doesn’t create decisions, doesn’t take time value of money into account

Average rate of return calculation

ARR = (Profit per annum/initial outlay) x100

Advantages of ARR

shows clear profitability, allows comparison, easy to identify opportunity cost, creates decision

Disadvantages of ARR

doesn’t take into account time value of money, focuses on profit instead of cash flows, ignores timing of returns

Average rate of return definition

an investment appraisal technique that helps evaluate the profitability of an investment

Net present value definition

an investment appraisal technique that calculates the present value of money coming in from the project in the future

advantages of NPV

takes time value of money into account, places value on earlier cashflows, reduces impact of long term less likely cash flows, creates decisions

disadvantages of NPV

complicated, difficult to select the most appropriate discount rate, sensitive to the initial investment cost

qualitative considerations of investment appraisal

influence of customer relations, assessment of strategic fit, environmental/social impact

probability definition

the chance of something happening

expected value definition

the financial value of an outcome calculated by multiplying the estimated value by the probability of it happening

decision tree definition

a mathematical model used t help managers make decisions

net gain definition

the value to be gained from taking a decision

net gain calculation

expected values of each outcomes - costs of the decison

Advantages of decision trees

easy to calculate, visual aid, risk focussed

disadvantages of decision trees

based on estimates, ignores external factors, potential bias in probabilities

Critical path analysis definition

a project management tool that uses network analysis to plan complex and time-sensitive projects

benefits of critical path

maximises and improves efficiency, prioritisation of tasks, budget and resource management, reduced risk, visual tool

limitations of Critical path analysis

based on estimates, relies on managers implementing it well, focuses on speed not quality, too many activities may make it overly complicated

Factors impacting trends

consumer trends, economic variables, actions of competitors

time series analysis definition

involves analysing historical data to identify trends and patterns over a specific period, usually smoothed out using moving averages

variation calculation

sales - centred average

how to calculate moving average

average a set number of data points over a specified time period

advantages of Time series analysis

make key decisions, good if: short term, revised frequently, in slow changing markets, market research available, makes it easier to predict as smooths out variations

limitations of Time series analysis

reliance on past data, uncertainties can make extrapolation unreliable, assumes stability, doesn’t take qualitative factors into account, depends on data quality and availability

Float calculation

(LFT - duration) - EST