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Factors of Production:
Land
Labour
Capital
Enterprise
Primary Sector
Extraction of raw materials from the Earth. E.g. Mining, Fishing.
Secondary Sector
Processing of raw materials into finished or semi-finished products.
Tertiary Sector
Service Industries. E.g. Transport
Quaternary Sector
Hi-tech industries. E.g. Trading, Health.
Great demand for raw materials in the UK has been increasingly met by imports
Many manufacturing businesses have relocated overseas where production costs are
cheaper.
Remaining UK-based manufacturing businesses have been forced to continually
lower their prices because of low-cost imports.
Disposable Income
Income remaining after deduction of taxes and other mandatory charges
Opportunity Cost
The next best alternative given up by choosing another item.
Specialisation/Division of Labour
When the production process is split up into parts and each worker performs one of these
tasks.
Advantages
Increased efficiency
More work in less time
Disadvantages
Value Added
Not the same as profit. It is the difference between the selling price of a product or service
and the cost of bought in materials and components
Sales turnover
Share Capital
Profit
Market Share
Number of Outlets
Lower Price
Increasing Advertising
Selling in different locations
Sell on credit
Merger
Takeover
Conglomerate
Horizontal Merger
Merge or takeover a firm in the same industry at the same stage of production.
Vertical Merger
Merge or takeover a firm in the same industry, but at a different stage of production.
Conglomerate Merger
Merge or takeover a firm in a completely different industry. AKA Diversification.
Financial Limitations
Size of the Market
Government Controls and Laws
Human Resources
Environmental Constraints
Consumer Action and Pressure Groups
Economies of Scale
The advantages of the company being big. Leads to a reduction in average costs
Purchasing Economies
The unit cost of each item decreases as large numbers of components are bought
(buying in bulk)
Marketing Economies
Purchase its own vehicles for distribution rather than rely on other companies. Sales
staff numbers will decrease and the size of advertisement will increase
Managerial Economies
Specialists and highly qualified individuals will prefer to work with a well known
company that can afford them, unlike small companies that cannot
Financial Economies
Raise capital more cheaply as banks believe it is less risky to lend to a bigger
business. A lower interest rate is therefore charged
Technical Economies
Flow production Specialists need advanced equipment to be bought and
maintained . Smaller businesses may not be able to afford these expenses
Diseconomies of Scale
The disadvantages of the being big. Average costs increase as business grows beyond a
certain size
Poor Communication
This makes sending/receiving messages much more difficult. Managers decisions
will be responded to in longer amounts of time and top managers will be so busy
directing affairs that they have no contact with employees/customers
Low Morale
Employees will feel unimportant and will not establish any relationships with fellow
employees. Managers will not work closely with subordinates, making them feel
unvalued, reducing efficiency
Tax
As the size of the business increases, the higher the amount of corporation tax it will
have to pay
Aims
The long term intentions of a business.
Objectives
Targets that must be achieved in order to realise the stated aims of a business.
Aim
Objective
Unlimited Liability: Owners are responsible for all debts and may have to sell
personal possessions.
Limited Liability: Owners can only lose their investment even if the company has
huge debts.
Stakeholders
Any individual or group with a direct interest in the performance and activities of the
business.
The business will try to please all stakeholders and achieve their aims, however, sometimes
there are conflicts. I.E. Win some, lose some.
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Low Unemployment
Keep Inflation Down
Economic Growth
High Balance of Payment
VAT
Income Tax
Corporation Tax
Road Tax
National Insurance
An increase
in income tax
A decrease In
disposable
income
A decrease in
demand for
products
A decrease in
companies revenue
An increase in
corporation
tax
An increase
in costs
A decrease in
retained
profits
A decrease in
shareholders
dividend
A decrease in
VAT
A decrease in the
price of
companies
products
An increase in
demand for
products
An increase in
companies revenues
Public Sector
A monopoly is when a single company owns all or nearly all of the market for a given type of
product or service.
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Workers work hard as they can keep most or all of their income due to low or nonexistent taxes
Businesses compete with each other, meaning low prices
The law
Providing assistance to business
The government as a customer
Controlling monopolies
Interest rate
A cost for borrowing, or a reward for lending or saving.
= Interest Paid
Inflation
Inflation causes the price of raw materials to rise The business reacts by raising its prices
Customers cant pay the higher prices The business sells less Its staff demand pay
rises to match that inflation rate The business gives its staff pay rises The business
must raise its prices again.
8
Economic Growth
Recession
The value of output of goods and services produced in the country during one year.
Includes all primary, secondary & tertiary sectors.
Balance of Payments
Comparing the difference of the amount of exports and imports. A negative balance of
payments means that more money is flowing out of the country than coming in, & vice
versa.
Electronic Commerce
E-commerce is the selling and buying of goods or services over the internet.
Increased competition
Slow adoption
Purchasing the equipment
Maintenance
Training staff
Increased convenience
Greater choice
Cost effective
Product details
Customer reviews
No human interaction
Returning goods
Fraud
Stock issues
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International Trade
Consumer choice
Increased competition
Business growth
Free trade (workforces and technologies anywhere in the world)
Specialisation
Consumers benefit from imported goods otherwise not available to them
Competition
Economies of scale
Best workforces
Competition
Movement to less well developed economies
Negative balance of payment
Global demand may be dominated by certain developed/developing economies
They restrict consumer choice and opportunities for new businesses and business
growth
They protect inefficient domestic businesses with higher costs and often lowerquality products
Other countries will retaliate by introducing their own trade barriers
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Language Barriers
There are increased risks of non-payment
Different cultures, customs and tastes will need to be understood
The business must manage exchange rate risks
The business must comply with different laws, regulations and taxes
Overcoming Problems
Management
Controlling
Measure and evaluate the work of all individuals and groups to ensure that they are on
target. It is the managers job to find out why targets are not being met and then correct the
problem
Planning
Planning for the future of the organisation by setting aims and objectives in order to give
the business a sense of direction and purpose. It also involves planning which resources will
be needed and setting strategies in order to achieve the set aims
Organising
Delegating tasks, responsibilities and resources to others in the organisation
Co-ordinating
Ensuring all departments in the organisation work together to achieve the plans originally
set by the manager
Commanding
Ensuring all supervisors and workers are keeping to targets and deadlines. Instructions and
guidance must be provided
Motivation
Improving the work ethic of employees through constant praise and rewards e.g. pay rise
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Training
Giving knowledge to employees to help them achieve targets
Intelligence
Initiative
Self confidence
Assertiveness and determination
Communication skills
Energy and enthusiasm
Autocratic leader
A leader or manager in a business who doesnt delegate authority to the subordinate and
takes all the decisions by himself e.g. Police and defence
Democratic leader
A manager or leader who accepts the opinions of subordinates, discusses with them,
delegates authority and then takes the decisions
Laissez-faire leader
A leader or manager in a business who gives full freedom to the subordinates in their area
of work
Strategic decisions
Important decisions which can affect the overall success of the business
Tactical decisions
More frequently and less important
Operational decisions
Day-to-day decisions taken by a lower level manager
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Departments in a Business
Accounting
Prepares budgets
Control cash flows
Marketing
Market research
Extends product life cycle
Plans new products
Human Resources
Recruit staff
Interviewing and selecting staff
Keep staff records
Production
Orders stock
Extends product life cycle
Decides production method
Administration
Communication
If there is effective communication, there is high motivation.
Obtain information
Decide on a course of action
Communicate plans for action
Communication Mediums
Oral Communication
Letters
Fax
Meeting
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Communication Problems
Technology
Reduce the number of layers the communication has to go through (Delayering)
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Exchange rates
How Are Exchange Rates Determined?
Most currencies are allowed to vary or float on the foreign exchange market according to
their demand and supply of each currency, just as the prices of goods can vary according to
the demand and supply in a free market. Exchange rates will vary between currencies on a
day by day basis depending on supply and demand for currencies.
Globalisation
When the world becomes one large market rather than a series of separate national
markets
Free trade agreements and economic unions have reduced protection for industries. No
import controls.
Improved travel links and communications between all parts of the world. Easier to
compare prices and quality.
Advantages
Competition
Consumer choice
Cheaper prices
Higher standard of living
Disadvantages
Protectionism
When countries protect their industries from overseas competition
Problems
Retaliation
Price rises
Inefficient Industry
European Union
Organisation of 27 countries working to strengthen their economies. This leads to a single
market within Europe. Selling goods anywhere in the member states is easier. No tariffs or
controls.
- Creates a huge market for goods and services. Benefit from economies of scale
- Increased competition. More choice and lower prices, new higher quality
products
Common Currency
All euro. Same interest rates. Could lead to same tax rates. The UK has not joined yet.
Motivation
The desire of workers to work hard and complete tasks well. Not the same as morale. High
morale means workers are happy. This does not necessarily mean they work harder.
Higher Productivity
Higher Quality
Flexible Working Pattern
Financial Rewards
Non Financial
Person with the most authority is at the top. Least authority is at the bottom. This is known
as the chain of command. Orders are delegated down the chain of command. the number
of people each manager is responsible for is known as the span of control.
Support mechanism
Rewards
Appraisal
Delayering
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Theories of Motivation
F.W.Taylor
Division of labour breaking a job into small repetitive tasks, each of which can be
done at a speed with little training.
Piece work Means payment by result, e.g. per item produced
Tight management Ensure the workers concentrate on their jobs and follow the
correct processes
Sense of achievement
Recognition for effort and
achievement
Nature of the work itself
Responsibility
Promotion and improvement
opportunities
Hygiene/Maintenance Factors
Working conditions
Supervision
Pay
Interpersonal relations
Company policy and admin, inc,
paperwork, rules, red tape
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Accounting
Breaking Even
The break-even point is the level of output where an organization will just cover its
costs. When a business first starts up, its financial objective is likely to be to breakeven particularly if it is a small business. If the business sells more than this, it will
make a profit
Fixed costs
Costs that do not vary with output or sales e.g. Salaries, rent, Insurance, Interest and loans
Variable Costs
Costs that vary with the quantity produced or sold e.g. costs of raw materials, sales staff
commissions
Profit
Difference between total revenue and total costs
Contribution = Selling price Variable Costs
Total Revenue = Selling Price x Quantity
Total Costs = Variable Costs + Fixed Costs
Example:
No. of Guests
0
20
40
60
80
100
120
Fixed Costs
200,000
200,000
200,000
200,000
200,000
200,000
200,000
Variable Costs
50,000
100,000
150,000
200,000
250,000
300,000
Total Costs
200,000
250,000
300,000
350,000
400,000
450,000
500,000
Sales Revenue
100,000
200,000
300,000
400,000
500,000
600,000
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Limitations
External changes (cannot deal with sudden changes such as wages, prices and
technological changes)
Not all produced is sold
Fixed costs change with scale of production
It can apply to a single product or single mix of products
Rejects owners objectives of expansion (Fixed Costs)
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Opening Stock
Goods at the beginning of the year
Closing Stock
Goods that are left at the end of the year
Expenses
Extra costs that help operate a business
Dividends
Return payments to shareholders for investing in the company
Direct Costs
Costs which can be identified directly with the production of a good or service e.g. Raw
Materials
Indirect Costs
Costs which cannot be matched against each product because they need to be paid whether
or not the production of goods or services take place e.g. Rent on the premises
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Balance Sheets
Shows the assets and liabilities of a business
Fixed Assets
Anything that you own as a business that can be useful for longer than one year e.g.
Buildings, machinery
Current Assets
Last less than 12 months e.g. Cash, stock, debtors
Debtors
People who owe your business money
Current Liabilities
Things that a business will need to pay out for within 12 months e..g. Creditors, Overdrafts
Creditors
Groups that your business owes money to
Overdrafts
Money that must be paid back to the bank within 12 months
Capital Employed
The money you initially begin with
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Ratio Analysis
1. Liquidity
The ability of the firm to pay its way
2. Investment/Shareholders
Information to enable decisions to be made on the extent of the risk and the
earning potential of a business investment
3. Gearing
Information on the relationship between the exposure of the business to loans as
opposed to share capital
4. Profitability
How effective the firm is at generating profits given sales and or its capital assets
5. Financial
The rate at which the company sells its stock and the efficiency with which it uses
its assets
Return on Capital Employed =
Gross Profit Margin (%) =
x 100
x 100
x 100
Current Ratio =
Acid Test Ratio =
Gearing Ratio =
x 100
Operating Profit
Net Profit before Tax & Interest & Dividends
Advantages of ratio analysis
Evaluation of performance
Setting targets
Comparison with competitors
Budget
An estimate of income and expenditure for a set period of time.
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Cash Flow
The majority of businesses who do not survive their first year of trading, fail because of cash
flow problems. Without sufficient cash to pay day-to-day bills, even a highly profitable firm
will be unable to survive.
Overdraft
Banking facility that enables a firm to spend more than the balance of the account
Opening Balance
Cash you have at the start
Inflows
Funds that come into a business or organisation e.g. money, sales, debtors, loans
Outflows
Funds that leave the business or organisation e.g. Creditors, overdrafts, wages, bills
Net Flow
Inflow - Outflow
Closing Balance
Opening Balance + Net Flow
Debt Factoring
Business sells its debts to a debt factor who advances payments against the debts, for a fee
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Week 1
Week 2
Week 3
Week 4
30
-5
10
Pocket Money
10
30
Wages
20
70
Total Inflows
20
15
70
30
Canteen
10
10
10
10
Travel
Clothes
40
Music
10
10
Social
20
10
Total Outflows
45
25
55
30
-25
-10
15
-5
10
10
Inflows
Outflows
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Sources of Finance
Owners Funds
When the person who starts the business brings their own savings into it
Retained Profit
When a business uses its own profits to help expand in the future
No interest
Doesnt have to be repaid
Bank Loan
The business borrows and amount of money which is repaid in instalments with interest
Trade Credit
Buying goods from suppliers and not paying them for 30-60 days
Overdrafts
When a business is allowed to spend more money in its account than it has
Interest
Grants
When the government or EU provides the business with money as it is beneficial to the
economy
Government restrictions
No interest
Can be expensive
Issuing Shares
Investors buy these from limited companies in return for a dividend each year
No interest
Selling Assets
Selling buildings or pieces of equipment that it no longer needs
Venture Capital
Finance from a company which specialises in lending to successful small businesses
often in exchange for shares
Lost control
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Marketing
The management process responsible for identifying, anticipating and satisfying customer
requirements profitably
Principles of Marketing
Objectives of Marketing
Market Segmentation
Where the market has been divided up into groups of consumers who have similar needs
(segments). E.g. by income, age, region, gender, use of the product, lifestyle.
Market share
How much of the consumers the business owns, as in how much percentage the business
products are bought from the total consumers buying the product.
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A brand is a named product which customers can identify with and which is seen as
different from other similar products
Generic products are products made by a number of different businesses, which
customers fail to recognise and differences between e.g. Mp3 player
Own brand is one which is sold under the brand name of a supermarket, not the
company that manufactured it
Design. Make each product have different features, quality, build to others in the
range. Make your product features different to those of competitors
Name. Make each name unique. Either make the name reflect the product e.g. Gold
blend coffee or make the name obscure to imply that it is highly technical e.g. Intel
Pentium Processor. Some firms market themselves under the company name brand
e.g. Cadbury, whereas others prefer to do it through individualised branding e.g.
Nestle with Kit Kat and Yorkie.
Quality. Value for money
Packaging. Attractive appeal, protect the product, instructions
Range. Appeal to different market segments
After Sales Service. So the customer gets help when they need it
Advantages of Branding/Differentiation
Repeat Custom
Premium prices. A strong brand may allow firms to charge a higher price than rivals
Greater Consumer Awareness. Consumers are more likely to buy a high profile brand
rather than a rivals less well known brand
Increased Sales and Market Share. Retailers will devote shelf space to well known
brands
Disadvantages of Branding/Differentiation
High costs needed for massive promotion to establish and maintain the brand
A single bad event will affect the whole brands products
Launching a new version of the brand may lead to a risk of failure and damage to the
brand
Brand names may be difficult to protect in a world market fake products
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Extension Strategy
Extending the maturity stage to benefit from high sales & profit
Slightly changing the product to give it a fresh appeal to it its target market
Appeal to new segments
Repositioning is directing the product and its benefits to different segments E.g.
Lucozade went from sick people to targeting new segments
Wider Product Range is giving different variants to the same product E.g. Wrigleys
gum and their flavours
Aiming the product towards Specific Target Markets
Changing the appearance and packaging
Saturation
When everyone has the product
Market Research
The process of gaining information about customers, products, competitors through the
collection of primary and secondary data
Quantitative data is about facts that can be statistically analysed and/or expressed as
numbers
Qualitative data is about opinions
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Questionnaire
Interviews
Detailed information
Can explain verbally/visually
Expensive
Interviewer may travel some distance
Focus Groups
Cheap
Response rate is good
Panels
Detailed
Show how opinions change over time
Sampling
Product Samples
Easy to do
Response rate is good
Not representative
People reluctant to give criticism
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Cheap
Instantly available
Wide collection of opinions
Time saving
Open Questions
Allow respondents to give opinions without being tied to a set answer E.g. What do you
think about our product?
Closed Questions
Questions that require specific answers with a limited range of responses E.g. Do you use
our product?
Bad Questions
Bias/Leading Questions Make people answer it in the way you want them to
Weasel Words Phrased so badly that it is misunderstood
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Competitive Pricing
Competition is strong. Customers have a wide choice of suppliers to buy from. Businesses
must set their prices close to the prices of competitors, having regards to the quality of the
product and any unique selling points (USPs)
Price Skimming
New product is likely to generate a high volume of initial sales and is priced high to
maximise profits. Price is reduced when initial demand has subsided
Penetration Pricing
Low initial price when entering the market to try and capture a share of the market. The
price is then raised when more customers are aware of this product to maximise profit.
Promotional Pricing
Charging low prices for a short period of time to attract new customers and increase sales
Psychological Pricing
Pricing strategy that pays attention to the effect that a price will have on the way a
customer thinks E.g. 1.99 instead of 2
Calculation complication
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Destroyer Pricing
When a business lowers its products pricing so much that all competitors are destroyed
Reduces profits
Small profit cannot be used on
growth/extension
Price Discrimination
Dependant on the customer. E.g. Health insurance for an old person in comparison with a
young person
Prices are driven by market forces called demand and supply
If price goes up, demand goes down and vice versa
If price goes up, to take advantage of higher profits, supply also goes up.
The place where the two lines cross is called the equilibrium, where the same number of
goods are demanded and in supply resulting in no leftovers
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The popularity of substitute products (products that can be used instead of the
product)
The popularity of complimentary products (products that require each other or are
used together)
Changes in income
Changes in taste and fashion
Changes in advertising
Taxes and Subsidies Higher taxes means higher costs. Subsidies lead to lower costs.
Climate (for agricultural products) Supply of crops depends on weather
Improvements in technology Makes it cheaper to produce goods
Costs in supplying goods to the market
- Price of raw materials
- Wage rates (because of inflation)
Price Elasticity
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Channel of Distribution
The route and stages the product goes through to reach the final customer
Method #1
Customer convenience
Cost saving as consumers are close
Method #2
Method #3
Breaking bulk
Reduce storage
Provide credit to small retailers
Breaking Bulk
The wholesaler buys in large quantities from the manufacturer and sells to the retailer in
small quantities
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Method #4
2. Sales Promotions
Extra % fee
Free Gifts
Coupons
Events
Competitions
Free Samples
3. Public Relations
The actions of a corporation promoting good will between itself and the
public, the community. Employees, customers etc.
Newsletters, Press releases, blogs, photos, social media.
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6. Sponsorship
Production
- Labour
- Natural resources
- Suppliers
Cost of premises
Government influence (Grants Limits on production (CO2 emissions - tax)
Business rates (Monthly payments E.g. Power, Water)
Transport and communications
Information Technology
Customers
History and tradition
Climate
Personal preferences of the owner
Competitors
Exact Requirements
Job satisfaction
High quality goods
Design is flexible
Expensive
Time consuming
Advantages of economies of scale are
lost
Batch Production Produces a number of similar items. Created in parts that are put
together at the end.
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Flow Production When the product is standardised and can be made using a
production line method. Continuous process takes place.
Improve efficiency More produced in the same amount of time. Less costs, more
profits
Labour productivity When workers are trained, skills are developed and used more
efficiently to produce more in the same amount of time.
Training staff
Specialisation
Improve technology/machinery
Reduce downtime
Improve motivation
Better quality raw materials
Lost customers
Cost of reworking or making product
Cost of replacement or refunds
Wasted materials
Quality Management
Quality control
Quality assurance
Total quality management (TQM)
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Quality Control
Detection, not prevention. This makes it very expensive. Identify faulty products. This
involves inspecting and sampling products as they are produced.
Maximises production
Sampled at regular intervals to check
for errors.
Quality Assurance
How the product is designed to minimise the chances of a fault prevent. The focus is on
the development stage. If production is well controlled, then quality will be built in. if
production is reliable, there is less need to inspect production output.
Quality is built in
A quality standard is set
Time consuming
Workers must be trained
Lean Production
Reducing waste
Improving efficiency
Improves quality of products
Kaizen
Continuous improvement. Overall progress comes from small improvements being made all
the time, even when the process/product seems to be working. Groups of employees meet
regularly to discuss ways in which production quality can be improved.
Kanban
System that uses two components. One being used on the production line, while the other
is being made ready. E.g. Component bins, one with materials to build car. Bin 2 is being
filled and will be delivered when bin 1 is empty.
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Cell production
Where work is organised into team and are given responsibilities. This leads to improved
productivity as a result of increased motivation (team spirit and added responsibility) and
specialisation.
Just In time
Focus is on reducing or eliminating the need to hold stocks. Raw materials are ordered when
order is placed, delivered just in time to be used in the production process. Making of parts
are just in time to be used in the next stage, and the product is finished just in time to be
delivered to the customer.
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Boston Matrix
Describes products according to their market share they enjoy and whether the market has
any potential to grow.
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