Business Jan exam revision


The Boston Matrix

All new products start as problem children and they have a small market share and a high market growth. These products aren’t yet profitable and have a chance of succeeding or failing- they will need heavy marketing. A business can do several things with these products, brand building, harvesting (where sales and profits are maximised in the short term) or divestment (where the product is sold off).

Cash cows have a high market share but a low market growth, and so are in their maturity stage of the product lifecycle. They have also been promoted by the businesses marketing function and so they are produced in high volumes with low costs, meaning they bring in an important guaranteed supply of money to the business.

Stars have a high market growth and a high market share, they are in their growth stage and so have the most potential- and will become cash cows in future. However competitors are most likely to try and gain an advantage of this growing market too and so a firm is forced to spend a lot of money promoting their good in order to maintain market share. Money will also need to be spent increasing capacity in order to keep up with demand.

Dogs have a low market share and low market growth. They could be considered as a lost cause, however if the good is still profitable ie still popular but sales are not growing, the business will want to harvest profit in the short term, and may be sold off in future if the extension strategies are not working.

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The Boston Matrix

The Boston matrix is a model used to analyse a business’s product portfolio. The model compares market growth with market share, the circles displayed within the grid represent different products and the size of each circle represents the sales revenue of the product.

The matrix is a valuable way of showing how a business’s products are positioned in a market, this means that often a business’s marketing decisions are based off their products positions in the matrix, however the matrix cannot predict exactly what will happen to a product, and a business’s profit may actually be different to what the matrix suggests eg. a dog can have a strong cash flow and still be profitable despite falling sales.  

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Elasticity of Demand- Price

The price elasticity of a product is how much the price change affects demand. This can be found using the formula:

Price elasticity of demand = % change in quantity demanded / %change in price

Price elasticity of demand is always negative (a positive change in price causes a negative change in demand, and a negative change in price causes a positive change in demand) so a minus sign can just be ignored.

If the price elasticity of demand is greater than 1 (whilst ignoring the – sign) the product is price elastic. If the price elasticity of demand is less than 1 the good is price inelastic eg, -1.5 is price elastic, and -0.5 is price inelastic.

IE price elastic goods= demand is sensitive to change in price- % change in demand is higher than % change in price

Price inelastic goods= demand is not sensitive to changes in price- % change in demand is less than % change in price.

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Price elasticity affects revenue and profit

Sales revenue = price of product x quantity sold, hence price elasticity shows how price affects sales revenue.

If a product is price elastic a price increase will make sales revenue go down. As the money lost from the % decrease in sales will be more than the money gained from the % increase in price. So when a company has price elastic products they should reduce price, as it will increase sales and hence revenue.     If a product is inelastic a rise in price will mean that revenue will increase. The money lost from the decrease in price will be less than the money gained from the increase in price. For price inelastic, decreasing the price will make sales increase slightly, but sales revenue goes down because the price has fallen and only a few more units sold.  

The price elasticity of demand depends on the ease of switching products. This means that necessary goods such as bread and milk are price inelastic- people may swap to different brands in which case demand would become elastic. To try and stop this from happening businesses aim to differentiate their products so customers feel brand loyalty who won’t switch if price rises so the good becomes less elastic. Price elasticity increases over time when customers have more of a chance to find more alternatives, increasing elasticity.

Product types tend to be inelastic, whilst brands are more elastic. Goods which cost a larger amount of a customer’s income is more likely to price elastic- eg a 10% rise in the cost of a car will cause customers to stop and think about if they really need to make the purchase.  

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Elasticity of Demand- Income

Income elasticity of demand = % change in quantity demanded / % change in real income

Normal goods have positive income elasticity of demand that is less than 1. This means that when income rises demand rises, but at a slower rate than the increase in income.Luxury goods have a positive income elasitsty of demand more than 1. This means that the demand for luxuary good rises faster than the increase in income.

Inferior goods refer to cheaper value products, eg. Tesco own in comparison to Heinz. Inferior goods have a negative income elasticity as demand falls when income rises.

Looking at elasticity as a whole helps a business to decide whether to change the price of a good. They can see what will happen to sales and hence the effect it may have on revenue.  It also helps them to see what will happen to sales figures if the economy grows/shrinks.  

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Sales revenue calculation

sales revenue = price of product x quantity sold 

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Sole Traders

Owner has full responsibility and financial control of their business, because of this responsibility the owner has unlimited liability. There are minimal legal formalities associated with this type of business, they are able to just begin trading!

+ freedom, profit, simplicity, save on fees          

-risk, time, expertise, finance, vulnerability, unlimited liability

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Stakeholder maps

A business has to think about which stakeholders are the most important to them, to do this stakeholder mapping helps them to identify how much influence and intrest each group has in the business.

The map helps the business to decide how to manage its stakeholders, each of the quadrants shows how much communication and attention is paid to views when decisions are made.

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Stakeholder relationships

On top of stakeholder power and interest other factors can influence a business’s relationship with its stakeholders. Eg, In a recession the business will be more focused on not going bankrupt than investing in the needs of the local community.

It is important for businesses to think carefully of how to manage relationships, as often one stakeholder is satisfied at the expense of another it can lead to disputes negative to the business. To do this the business may consult key stakeholders before making any major decisions- who will feel more valued. Hence good communication is vital in ensuring that stakeholders are happy.

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Share price calculations

Shares are sold by companies in order to raise money. This money is called ordinary share capital and is usually used for long term investment. In return for their investment shareholders are paid a dividend (a proportion of the company’s profits split between shareholders in relation to what percentage of the company they own. However the business doesn’t always choose to pay out dividends but may reinvest the money back into the business.

Market capitalisation is the total value of all the ordinary shares issued by a company.

Market capitalisation = number of issued shares x current share price

Eg, 2019 25000 shares issued at £1 = £25000 ordinary share capital, by 2020 shares on the stock exchange have risen to £4, share capital remains at £25000 but market capitalisation will be 25000 x 4 = £100,000.

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Factors Affecting Share Price

LTDs have control over share price because shares are privately sold between family and friends. However shares in PLCs are sold on the stock market and the price of shares will be determined by demand and supply. If more people want to buy than sell the shares, the price will rise.  This demand is affected by:

The performance; better= more profit, and more dividends. 

Speculation of new products= creates interest and if the speculations picture the company with more profit share demand will rise 

Current share price= if it is low investors may be encouraged to buy the shares when they are cheap in order to sell them on when they are worth more. 

Interest rates= when rates more people are encouraged to buy shares as the reward from dividends is likely to be more than the interest they could gain in a bank. 

Economy= when the economy is strong more people are encouraged to invest with the confidence their money will be returned. 

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Blake Mouton Grid

Assesses managers based on how much they care about their employees and how much they care about production.

Impoverished = low concern for people or production. Poor management of all resources, resulting in low motivation and low productivity. 

Produce or perish = authoritarian focus on work with strict rules neglecting workers needs causing demotivation leading to high absences and staff turnover 

Country club = over concerned with worker welfare, not productive as workers are not motivated to increase output. 

Middle of the road = average concern for workers needs and average for production leads to mediocre results although production could be higher 

Team style = ideal leadership style, high concern for employees and production so workforce is motivated and productive, often uses non-financial motivation. 

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Product Lifecycle

The product lifecycle is used when choosing how to use the marketing mix, as the stage of a product in the lifecycle can identify how to use the marketing mix correctly. 

Development= focus should be on product and price research, and looking into how they will promote it 

Introduction= place and promotion, get the good out there and raise awareness 

Growth= people, physical environment and process

Maturity= price and promotion once again, eg price reduced and promotion to stay competitive

Decline = if extension strategies are not used the business may cut the product and the 7ps altogether. 

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Public limited companies

Can sell shares to the public, prospectus issued to inform customers about the business before they are bought. Share price quoted on stock exchange. Shares freely transferable and bought from stockbrokers or banks. Need £50,000 in share capital before can be registered on the stock exchange- at least 25% of shares must be available to the public.

The companies act says that that certain documents must be drawn up before a business can begin trading. This includes the memorandum of association and the articles of association. These must be sent to the companies house, the register of companies then issues a certificate of incorporation and then they can begin trading as a company,. The company is now also obliged to produce annual financial reports.

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Ethical objectives

Social objectives relate to benefiting society and people in need. Ethical objectives are based on moral principles about how the owners believe the business should operate treating people and the environment. Eg. Fairtrade or the environment

Non-profit organisations are mostly set up to achieve a social or ethical objective. For profit businesses focus on making a profit, but within their firms social and ethical objectives are becoming important as consumers are more conscious.

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