Theme 3- Business Decisions & Strategy
What is at the bottom right corner of the node?
The latest finish time of a task- LFT
Latest Finish Time
The latest time that a task in a project can finish.
Window Dressing
The legal manipulation of accounts by a business to present a financial picture that is to its benefit.
Total Float
The time by which a task can be delayed without affecting the project.
Long Termism
The time period where decisions have an impact on the vision, mission and objectives of a business- typically longer than 5 years.
Short Termism
The time period where decisions only have an impact on the operational activities of a business- typically less than five years.
Productive Capacity
The total goods and services that the business can produce.
Extrapolation
The use of trends established by historical data to make predictions about future values- the basic assumption.The act of estimation by projecting known information and assuming what is happening now will happen in the future.
Present Value
The value today of a sum of money available in the future.
Corporate/Organisational Culture
The values, attitudes, beliefs, meanings and norms which are held by people and groups within an organisation. NORMS AND VALUES Charles Handy - 'the way we do things around here'
What is the Law of Diminishing returns?
There is a point on the economies of scale graph, where raising production and output would cause average costs to rise- the level of profits and benefits gained is less than the amount of money invested. So these additional resources does not increase productivity. -If a firm then expands the scale of its operations over time, the same level of output can be produced more efficiently- bigger plant for example would produce lower average costs
Capital
This is the money introduced by the owners of the business- shares etc
How do you calculate Net Financial Gain?
Initial Investment- Final amount for each decision
What is the distinction between organic and inorganic growth?
Inorganic growth refers to the growth through mergers and takeovers, joining together to become a much larger business. Inorganic growth is natural and happens by the business selling more of its output using its own resources. -The key difference is the speed with which the growth occurs, inorganic is much faster as it is possibly to instantly double in size whereas organic is normally much slower as it takes time to develop and grow the business with own resources -Another difference is the potential risk involved in the growth, with organic growth being argued as the safer strategy because owners expand their business by using their current expertise and there is not much risk involved in doing more of the same. In contrast M&T have lots of risk as the integration process can cause and create many problems such as culture clashed with conflict, delays and instability -Stage of the business- early stages in business development, after initial launch and settling down period- organic growth strategies used- entrepreneurs cautious and grow gradually- selling more to existing customers or attracting new ones. Once business owners have built up confidence and generated some cash, they may be tempted to speed up growth by making acquisitions.
Finance Cost
Interest paid by the business on any borrowed money.
Finance Income
Interest received by the business on any money held in deposit accounts.
What does ratio analysis take information from?
-May use both Statement of Financial Position and Statement of Comprehensive Income
Net Cash Flow
Cash inflows minus cash outflows.
Operating Profit
Gross Profit- Selling and admin costs generated from firm's core activities
What is Acid Test Ratio also known as?
Quick ratio- used commonly to judge the financial health of the business
Correlation
The relationship between two sets of variables.
Net Assets
Value of all assets minus value of all liabilities- same value as shareholder equity
What are likely to be the focus of bigger firms for objectives?
-Tend to be mostly financial- due to stakeholders needing to be satisfied- easier to communicate with interested parties as mostly quantifiable.
What are the three ratio types?
*PROFITABILITY gross profit margin operating profit margin return on capital employed *LIQUIDITY current ratio acid test ratio *FINANCIAL EFFICIENCY gearing
What are the MAIN benefits and drawbacks of theory models?
+ provide an aid for problem-solving or decision making - they tend to be simplified versions of the area of concern
What do I need to remember about retained profit on a balance sheet?
- NOT CASH- amount owed to shareholders that has accumulated over years of trading- some of retained profit may have been used to buy more assets. Only if company was liquidated would profit be returned to shareholders.
What are low industry profits associated with?
- Strong suppliers - Strong customers (buyers) - Low entry barriers - Many opportunities for substitutes - intense rivalry- high threat
What are high industry profits associated with?
- Weak suppliers - Weak customers (buyers) - High entry barriers - Fewer opportunities for substitutes - Little rivalry- low threat
What does the net gain tell us?
- You can see if both options are better than doing nothing, if they are worth investing in then eradicate the do nothing decision -Whichever net gain is the highest! Choose that one.
Why is operating profit used in ROCE?
-(Net profit before tax and interest) Tax is ignored because it is determined by the gov thus out of the control of the company Interest is excluded because it does not relate to the business's ordinary trading activities
How much has the average holding period for shares bought on the stock exchange fallen by?
-6 Years to 6 Months- pressure on institutional investors who want to make a quick return- little concern for long term prosperity
What are the signs of a weak culture?
-> Little interest/ alignment with business values -> Inconsistent behaviour- unclear on how to behave -> A need for extensive bureaucracy and procedures- lack flexibility, centralised decision making -> often leads to business failure -> demotivated workforce -> inconsistent customer service -> may have sub-cultures in all of the different stores
What are the features of a strong culture?
-> staff identify, understand and respond to culture -> little need for policies and procedures -> consistent behaviour -> good communication with employees -> focus on core values and wellbeing of employees -> has common goal -> recruitment is about finding the individuals who best fit the business -> usually based around history, tradition and founders of the business
What are the uses of decision trees?
-A business may use a decision tree to analyse the probability of a success in a choice of strategies eg new product launch, new marketing campaign etc, the likely results can be compared to find the most profitable option -Helps to minimize risk
What are the benefits of horizontal integration?
-A common knowledge of the markets in which they operate -Reduced competition- may charge higher prices -Less likelihood of failure than merging two different areas of business -Similar skills of employees• Cost synergies (savings) from the rationalisation of the business -Less disruption -More likely to achieve economies of scale • Potential to secure revenue synergies • Wider range of products - (i.e. diversification) • Reduces competition by removing key rivals - this increases market share and long-run pricing power • Buying a existing and well-known brand can be cheaper than organically growing a brand - this can then make the entry barriers higher for potential rivals
What might be the impacts of an ageing population?
-Greater demand for services to support older people (e.g.healthcare) -Increasing disposable incomes of older people reflected in higher demand for goods and services (e.g. holidays)
What are the difficulties in changing an established culture?
-A culture consists of interlocking components which are hard to change and replicate- (Kay's Distinctive Capabilities- Architecture) involving the set of goals, roles, processes, values, communications practices, attitudes and assumptions Professor Ed Schein argues that management should always see the culture as a source of strength even if the elements are dysfunctional- should never start with the intention of changing a culture-if major changes are needed, try and build one existing cultural strengths -Need to find the issues and assess whether the culture gets in the way of solving those issues -Much harder to change peoples attitudes and beliefs than tangible factors such as policies, rules and working practices -It is a long process
How are hostile takeovers and friendly takeovers different?
-A hostile takeover means that the victim business tries to resist the bid, resistance usually co-ordinated by the board of directors- they attempt to persuade the shareholders that the company will e protected if remains under control of existing BOD (directors)- they then weigh up this -A takeover may be friendly and invited, a firm may be struggling with cash flow problems and may wish for current business activity to continue but under control of another, stronger company- new company will inject cash in exchange for control- the business referred to as a white knight
What are the strategical reasons to takeover or merge with another business?
-Access to new markets -Improved distribution networks -Improved brands
EXAM TIP
-Analysis and Evaluation- extent to which a business decision is a right one consider this from different angles- it is always 'it depends'- on the type of business, the market in which it operates, economic conditions, staff recruitment and retention -The exam board doesn't allow marks for discussion of opportunity costs in relation to profit vs ethics
What is Specialisation (managerial) Economies?
-As the firm grows (has money and resources to attract most productive managers), it can afford to employ specialist managers- make most effective business decisions and have expertise in finance, marketing etc. These specialists may increase efficiency in running the business and average (unit costs) costs will fall eg a full-time accountant.
How have businesses responded to concerns about CSR?
-Auditing (inspecting evidence against established standards) relevant activities - made available in a report to the public in the same way as financial accounts- this is voluntary- no rules of how audits should take place. This is difficult to measure in a quick and easy manner- overall measure of how the business is doing- not all financial measures
What are Environmental objectives?
-Avoid negative impacts of businesses- no damage
What is the probability figures based on?
-Backdata- the previous outcomes of similar decisions- opening stores -Research Data- might carry out market research to find out how customers would react to a new product design
What are the benefits of Backward/Forward Vertical Integration?
-Backward- Guarantee and control the supply of components and raw materials- possibly better quality, availability, control over fixed costs Forward- gives manufacturers guaranteed outlets for their output -Forward- increased customer base, however lack of choice may deter purchases -Increased job security in both? -Backward -Remove the profit margin which the supplier or firm in next stage of production would demand- can no longer exploit the business and may have lower costs as a result -Ensures the business is in a stable and sustainable position in the market
What are the Vertical integration parts of Porter's forces?
-Bargaining power of suppliers -Bargaining power of customers (Getting to the customer through supply chain)
What might a business do to tackle low competitiveness?
-Be aware of competitors actions and be prepared to react to them -Benchmark with similar businesses and make sure keeping up -Invest in R&D to keep innovating and bringing new products to market -Investigate new and emerging markets- eg BRIC economies, expanding EU
How is a 4 year moving average calculated?
-Because there is not a centre point, simply placing the figure between two years may result in misleading predictions in the future. CENTRING IS USED- a four and eight- year moving total to find the mid-point -4 years of figures are added up and then two of the 4 yr figure totals are added up to make an 8 year moving total -This 8 year total is then divided by 8 to create the 4 year period centred moving average
What are likely to be supplier objectives?
-Long term contracts -Regular orders -Fair price for goods or services -Paid at a reasonable time
How can labour productivity be improved?
-Better recruitment and selection processes to ensure find the right person -Supply training to enhance skills and attitudes -Appropriate remuneration and non-financial benefits -Improved working practices -Improved technology or equipment -Involve employees in changes and communicate effectively -Piece-rate payments- paid according to what they produce- Taylor theory- rewards productive workers, performance related pay, bonuses- reward for effort- results and attendance
What are Risk-Bearing Economies?
-Bigger companies can spread their risk by investing in more products and more markets- diversification -Has more customers and offer a larger range of products than a smaller business. -Reduces market and financial risk if demand falls for one particular product, it loses a major customer or during a recession has bad times.
What are manager objectives?
-Budgets -Targets -Profit -Promotion -Bonuses
What are solutions of threats of new entrants?
-Build brand and reputation so differentiation= loyal customers- less price sensitive -Large amounts of advertising can be a deterrent- represents a large cost which entrant may have to match -Economies of scale -Apply patents and copyright to protect IP and prevent other businesses using it
What are examples of internal stakeholders?
-Business Owners- stand to gain or lose financially from performance of the business- some senior managers and members of the board may be shareholders, along with employees being likely to own shares -Employees- work for the business, rely on wages, some employees are represented at work by trade unions- in this case trade unions also become stakeholders -Managers and Directors- if small business-undertaken by the entrepreneur however in large businesses the key decisions are made by a board of directors- then responsibility of managers to implement
Conflicts between shareholders and government?
-Business may break the law to maximize profits- such as tax avoidance, however this is resolved by justice system -Gov criticized if businesses avoid paying taxes- must pursue or risk losing political support -Taxes erodes profit and business wants market dominance
What is the Law of Multiples?
-Businesses employ a variety of machines with different capacities, a slow machine may increase production time -As firm expands and produces more output, it can employ more of the slow machines to match that of the capacity of the faster machines- operate together to run at full capacity
What does Threat of Substitutes depend on?
-Buyer's willingness to substitute -The relative price and performance of subs -The costs of switching to subs
What is the Bargaining Power of Customers?
-Buyers are the people/ organisations who create demand in an industry. -Make it too expensive for a customer to switch -Forward vertically integrate -Customers want to obtain products at the lowest price but still keeping good quality, if you have market power- beat down prices with suppliers -Would be high if... -There are few dominant buyers and many sellers in the industry -Products are standardised -Buyers threaten to integrate backward into the industry- manufacture own products -Suppliers do not threaten to integrate forward into the buyer's industry -The industry is not a key supplying group of buyers -Suppliers can be customers- component suppliers for example - If there are few customers, increased power, so in -Supplier businesses- selling- may encourage other businesses to set up in market to reduce the buyer power of customers over supplier
What are the stages to a business continuity plan?
-Carry out a business impact analysis- functions and processes that are essential to the running of the business, identifying financial consequences - loss of revenue- all info such as questionnaires need to be analysed and reviewed -Formulate recovery strategies- actions taken to restore the business to minimum acceptable level after an incident - identifying the resources needed- setting up agreements with other businesses to share resources and support each other etc -Plan development- detailed plan so recovery strategies are carried out in an organised way- likely to appoint recovery teams, develop relocation plans and document recovery strategies etc -Testing and Training- once plan has gained approval, train staff in roles during execution of recovery plan- design testing exercises, recovery teams will be the main focus of training- review and update the plan to take into account any discoveries made during the process and update on a regular basis to take into account any changes that have occurred in the business such as vital equipment.
What are the change and effects of transformational leadership?
-Change may occur as a result of a change in management or leadership- new CEO brings new ideas and changes to the company. Might be in the form of a new vision or strategic direction of the business- particularly if in a period of poor performance- catalyst for change in new and fresh ideas
Conflicts between shareholders and customers?
-Charges prices that are too high -Higher prices boost shareholder returns but reduce purchasing power of customers -Levels of customer service are poor or business fails to invest in research and development and bring out new products- cut backs on r and d expenditure can pay shareholders higher dividends
How might a diseconomy of scale impact Microsoft?
-Communication problems with more staff transferring as the business grows. This is likely to cause the business to separate into departments and specialise through this separation. Although this would make labour more efficient in some ways, it is likely to create communication and coordination problems with every department fighting for business resources separately. This may hinder objectives and result in costly mistakes or misunderstandings in strategic decision making. Thus, the business may suffer unexpected costs as a result.
What are the changes a business may make to tackle bad financial performance?
-Compare sales estimate with available production capacity -Budget for necessary increases in staff and capacity -Produce new cash flow forecasts -Discuss how to raise any extra capital
What is the effects of changes in business performance? (competitiveness, productivity, financial performance, stakeholders, business performance)
-Competitiveness- = poor competitiveness- need to invest in R&D -Productivity- low productive capacity fall in sales, productivity and profitability, low rate of capacity utilisation- threat of rising costs and excess capacity? HUMAN RESOURCE PLANNING! - flexible workforce, changing to meet needs of the business -Financial Performance- likely to be subject to liquidity problems- a reduction in sales= reduction in cash flow and this might lead to cost cutting- important to find ways of being leaner and more efficient -Stakeholders- brings uncertainty- this can have a negative impact on motivation within the workforce. Managing low morale and giving reassurances. signals redundancies and this can be extremely difficult process to manage - likely to lose value on the stock market
What are the effects of changes in organisational size? (competitiveness, productivity, financial performance, stakeholders, business performance)
-Competitiveness- increase competitiveness economies of scale in the long term despite costs being high in the short term, brand recognition and financial security- reach bigger market -Productivity- more productive as grow in size, to capitalize, a business will have to alter the scale and methods of production- may require investment -Financial Growth- need to invest from retained profits but often borrowing, highly geared is risky - often bring increased profit though- high dividends -Stakeholders- job security, growth brings new opportunities for bonuses and promotion, recruit new employees, may be dangers however of firm losing connections with its customer base. Larger organisations= more difficult to offer a personal service. May create pressures for local communities from expansion- negative externalities- pollution -Poor business performance- poor performance= quick change. Regain customers and sales and reputation- improv-May happen as the business expands internationally- growth- very sudden change if merge or takeover or selling more of the same
What are the effects of change to market and other external factors (PESTLE)? (competitiveness, productivity, financial performance, stakeholders, business performance)
-Competitiveness- the impact is determined by how quickly a business is able to respond/react to these changing forces- innovate (invest in R&D) and adopt a new technology- responds fastest, may be able to gain an advantage over its competitors- must be aware of competitors actions and be able to respond. Benchmark with similar business to ensure keeping up. -Productivity- New tech can feed into the processes of a business- manufacturer or service provider- opportunity for increased scale, productivity and efficiency- economy grows through periods of boom or slump, need to change to cope with different levels of capacity utilisation- requires fast expansion or need to rationalise (reorganisation to increase efficiency) -Financial Performance- in most instances, any change in these external forces means an increase in costs for the business- revamp, new developments- however it is likely that costs will have to be absorbed by whole industry and not just one firm -Stakeholders- likely to be felt- any impact of rising costs through legal implications is likely to be passed on to consumers- new tech may require retraining or could lead to parts of workforce being made redundant - worst case
What are the disadvantages of adopting an ethical stance?
-Conflict here because a trade off exists between profit and ethics, the cost of acting ethically an acceptance of lower profit?Acting ethically when not required to do so by law can have a negative impact on profit in a number of ways: -It can raise costs- paying higher wages, adopting an ethical code of practice, sourcing materials - staff made aware and trained to implement it, takes management time- if competitors aren't using CSR, does not necessarily make it a competitive advantage- it could just make a more expensive product -It can reduce revenues- may lose contract if it refuses to give a bribe - selling medicines cheaper would make total revenue lower -May be possible to see it as a fad- consumers may grow tired of it and move on to something else- may just be the motive of good pr -Care- the customers may not be worried or fussed about where the products they are buying were supplied from -There may be stakeholder clashes- shareholders may not agree with extra expenses
What are the advantages of decision trees?
-Constructing this diagram may show possible courses of action not previously considered -They involve placing numerical values on decisions- this tends to improve results -The use of probabilities enables the risk of the options to be in some way addressed -Set out in a logical and easy to understand way -They force management to take account of the risks involved in decisions and help to separate important from unimportant tasks
What is the solution to threat of substitutes?
-Continually invest in R&D and develop patents- improve performance and reduce costs and therefore prices and by differentiation- PORTER -Buy up patents of rivals and shelve to prevent product production -Businesses may also use marketing tactics to stop the spread of sub products- predatory pricing etc
What are Local Community Objectives?
-Contribute to the prosperity of the community -Be good corporate citizens -Create employment -Build links with schools and charities -Maintain open communications -Avoid and minimize congestion and pollution
What are the problems with absenteeism?
-Cost of covering the worker- temp staff- increased costs, have to pay sick pay -Reduced output- temp staff not as productive as absent workers, permanent staff have to cover -Dissatisfied customers -Poor reputation -Prolonged absence can lead to major disruption if the worker is key to a particular area of work or a new project- missed deadlines -May demotivate staff who are left to cope with problems-may cultivate a culture of absenteeism- the higher the rate, the more likely it is workers will report ill, becomes acceptable for workers to take extra days holiday by reporting sick -Overtime costs- permanent employees have to work overtime this is paid at a higher rate
How do you calculate a 3 year moving average?
-The 1st year sales are dropped out -The next year's sales are added (3 years for 3 yr moving average) -Then divide by how many to get an average -The new calculation goes next to the middle year
What are the types of synergy?
-Cost- combined companies have reduced costs eg combine their warehouses and eliminate redundant storage expenses- E of S negotiate lower prices with suppliers due to bigger purchases and influence -Financial- Smaller companies often have to pay a premium when borrowing money relative to large companies -Revenue- generate more sales collectively- value existing distribution channels and existing client relations to drive more sales
Who are likely to be concerned with a firm's gearing?
-Creditors for example banks who charge interest on loans would want a low gearing (the business has less debt and relies on money from owners and shareholders (may still have debt but it is low) -The higher the gearing, the more risky it is for creditors as the business has more loans relative to its share capital
What are the benefits of being highly geared?
-Debt can be relatively cheap source of finance compared to dividends -Less shareholder control
What are the features of decision trees?
-Decision Points- at the start! A square which represents where decisions have to be made- different courses of action will stem off. There may be more than 1 decision point- always a square! Represents the initial investment amount. May be a 'do nothing' option -Branches/Outcomes- represented by circles called 'chance nodes'. May be shown here that a course of action might result in a number of outcomes-which may be more than just 2- may be 'great success', 'average success' or 'failure'. May be many option branches such as 'Wait one year', 'seek planning permission', 'sell land now' etc etc. -Probability/Chance- the likelihood is represented by possibilities, the chance of a particular outcome occurring given a value- will be given this data. Add up to 1 so can fill this in if missing. -Expected Monetary Values- the predicted profit or loss of an outcome and this is shown in the right hand side- may be negative or positive. You multiply the profit or loss by the probability, then add up each section
What are the signs that a corporate culture needs changing?
-Declining profits and sales -Inadequate return on investment -Low quality customer service -High staff turnover -Communication is closed and restricted -Failure to innovate
Why might labour productivity vary?
-Differences between factories or plants may be accounted for by differences in equipment- eg new vs old -Varies with the different processes of a business and its industry- if highly automated, likely to have a higher labour productivity than labour intensive -Manufacturing industry would have higher average than service industries because more capital is used per employee in manufacturing
What are the disadvantages of a strong corporate culture?
-Difficulties may arise when trying to make changes to work practices -Difficulties when merging two firms -Difficulties when reacting to outside events eg credit crunch -May make the firm less flexible and adaptable which is difficult operating in a dynamic market
Why might Stakeholders resist change?
-Disagreement with the reasons for or necessity to change -Fear of the impact -Lack of understanding -Disagreement with the process involved in delivering the change -Lack of involvement -General Inertia- satisfaction with the current situation- ways of working
Why is the comparison between capital raised in loans and from ordinary shareholders different?
-Dividends paid back to ordinary shareholders doesn't have to be paid whereas fixed interest rates on loans is a fixed commitment -The business must pay interest even when trading becomes difficult
How should I consider change in two ways?
-Does it pose a threat to the business? (often yes) -What can the business do to manage the threat and negate the impact? -Change may bring opportunities that the business can capitalize on. If so, how can the business lever these opportunities to create a competitive advantage?- PORTER
What are the disadvantages of ARR?
-Does not take into account the time value of money, there is no certainty what the same amount of money will be worth in the future so the business doesn't know what you can buy for the same amount of money tomorrow, and the longer it takes you to earn back your investment, the greater the risk involved with sustaining the purchasing power of that future money value- oversimplified, masks opportunity cost of time value -Firms prone to liquidity problems and cash flow issues are less likely to use this method as it doesn't prioritise time that it takes to pay the initial outlay back. The business may not have the ability for this- they may need to see which is likely to give their cash back as quick as it can -Ignores money received after payback Can be difficult to establish a target payback period
What are the disadvantages of the Payback method?
-Doesn't consider the time value of money- one project may generate more cash flow to begin with and therefore provides higher interest (in the bank quicker) and therefore there is no clear determination as to what project to select -Ignores a project's profitability, just because a project has a short payback period does not mean that it is profitable. If the cash flows end at the payback period or are drastically reduced, a project might never return a profit and therefore, it would be an unwise investment. -Doesn't take into account the fact that the years after the payback time may be the most lucrative, the investment may give back significantly high returns after that period and when comparing, this method only prioritises when the money will be given back- not the potentially high profits of the future
What are the positives of adopting a stakeholder approach?
-Good employment policies= better applicants. motivate and keep staff- retention and increase profits -Effective customer care-higher sales and profits -Suppliers- get value for money for purchaser, easier to sort out late deliveries -Environmentally friendly- lower overall costs save money fuel efficient increase profits -Socially responsible- reputation and deflects pressure group criticisms- increases its positive social impact- attract customers associated with ethical and responsible business -Good PR- help sell products and attract good applicants for jobs
What are the features of uncompetitive markets?
-Dominated by a single producer or a few large businesses- oligopolies and monopolies -The monopolies may attempt to exploit customers by charging higher prices and preventing competition- erecting barriers to entry -As a consequence, the government is obliged to monitor the activities of monopolies closely -Oligopolies- if three businesses own 70% of the market between them- a key feature is interdependence- actions of one business will affect another- if gain percentage of market- others will have lost -Usually high barriers to entry and larger firms can exploit economies of scale -Due to interdependence, prices tend to remain stable for long periods of time- all firms in market are afraid of price war -Oligopoly businesses are more likely to engage in non-price competition such as advertising and promotion.
E-commerce- Small Businesses
-E-commerce makes it easier for smaller firms to compete more easily with larger firms- not difficult to set up an online business and if the website is attractive and professionally presented- may easily be seen as a large firm -Little cost and can initially be run at home- eliminates the need for business premises- Online Shops compete alongside larger business quite effectively -May offer online services- social media running companies -Also businesses can sell successfully through third parties such as EBay and Amazon -Information and advice sites-make money through providing this or bringing people together who have common interests - blogging sites - high volumes of traffic- generate revenue- money earned from selling banner advertising -Tutoring, training, mentoring- foreign language, offer marketing training, skills and academic courses- freemium - charge for upgrades
How is a line of best fit drawn appropriately?
-EXTRAPOLATION -Matches the general slope of all points of the trend -Plotting the trend figures on graph paper accurately and then adding line of best fit 'by eye' so that points fit equally either side of the line -Extending the line carefully should give a reasonable prediction
What are two indicators of market conditions?
-Economic Growth- assess changes in economic growth- value of output in the economy- vary depending on the economic cycle -Market Demand- how much of a good or service that a customer wants and is able to pay for
What did Kotter and Schlesinger propose as the eight steps necessary to manage successful change?
-Education and Communication- explain why it is needed, whats involved, what will the implications be- early and effective communication- needs to be delivered consistently- how imperative it is that the business needs to change -Participation and Involvement- getting employees involved in the process, in project teams that implement the change- get on board, involved -Facilitation and Support- bound to raise issues of self interest of how they will be affected- actively listening to concerns and training- recognising this -Manipulation or Co-option- being selective about the info you provide to people to encourage them to behave in a certain way. Co-option bringing individuals into the main change project who might otherwise oppose it -Negotiation and Bargaining- providing incentives in following the proposed change or encourage to leave if oppose it- financial rewards taking up leave- delayering or large scale redundancies -Explicit (told exactly what the implications are) and Implicit (suggesting the likely negative consequences) Co-ercion- last resort, don't agree there are implications- threats is that it damages trust- always remember how organisation makes them feel.
What are the uses of Critical Path Analysis?
-Efficiency- help to operate efficiently - shows tasks that can be carried out at the same time- helps to save production or installation time and use of resources- highlighting what delays are crucial to the timing to help the business meet deadlines- if don't meet= costs for the business and orders may be lost as a result -Decision making- more scientific and objective method of making decisions- estimating the length of time a project will take based on past information and an analysis of tasks should lead to deadlines being met more effectively and implications of delays can be assessed and prevented -Time -based management- techniques used to minimise the length of time spent in business processes, identifying tasks that have to be done in orderso can be done together and tasks that may delay the project if not completed on time helps to ensure that the least time is taken. -Working Capital Control- when resources need to be available as required, helps business to manage its working capital cycle- network diagrams allow a business to identify exactly when materials and equipment will be used in a project and any delays taken into account- particularly if business operates a 'Just in Time' approach to stock- won't have to borrow to purchase materials so no costs in this wayCan be used in a range of industries -Helpful tool when managing large projects that may take ages to complete -Help to aid planning and organisation of a project, launching a new product onto the market, installation of something etc
How might stakeholders be affected by change?
-Employees- unsure about future- uncertainty about job security -Managers may be worries about duplicate roles and redundancies, or possibly see the change as positive with new opportunities -Shareholders may be reluctant to invest while there is a period of change happening, until the circumstances are more settled within the business -Customers- may be delighted with new range of products or improved quality -Suppliers- may see the change as an opportunity to renegotiate old contracts with more favourable terms
What are the types of indicators are measured in audits?
-Employment Indicators- how well business treats staff- accidents, pay, pensions, training -Human Rights Indicators- trade union negotiating rights with the company? work councils? child labour? -The communities in which business operates- what impact does it have in the community? charities? -Business integrity and ethics- break legislation? political contributions? -Product responsibility- social impact of the products sold by the business? health and safety? -The environment- form separate audit, amount of energy used, water, pesticides, recycling- impact on protected areas, bio-diversity
What are the tactical reasons to takeover or merge with another business?
-Ensure an increase in market share -Access to technology -Access to staff -Access to intellectual property such as patents
What should I look for on a SOCI?
-Expenses decreased=the business has become more efficient -Profit increased- better performance, higher dividends or put retained profit into bank to gain interest, or purchase assets -The business may have expanded its operations- growth -Increase in selling expenses= more on advertising which may have boosted sales rev -Seasonality -Increase in Interest Rates -Increase in cost of production CAUSES OF CHANGE, EFFECT ON ACCOUNTS, OVERALL IMPACT OF THIS ON BUSINESS
What are the reasons of mergers and takeovers?
-Exploit synergies that may exist following a merger or a takeover- this means that two businesses joined together form an organisation more powerful and efficient than the two companies operating on their own. The whole is greater than the sum of the parts. Eg economies of scale, asset stripping potential , reduction of risk through diversification. -Quick and easy way to expand the business- quicker to buy a company that already owns stored and convert them instead of building new premises. Also, buying a business is often cheaper than growing internally. -A firm may be struggling with cash flow problems and may be invited to so current business activity may continue -Good use of cash that is available and wants to be used -Defensive reasons- consolidate its position in the market. If a firm can increase its size through merging, it may avoid being the victim of a takeover itself. Eliminate competition -Response to economic changes- greater security, large firms are more likely to have the resources to survive a recession and are more expensive to acquire so less vulnerable to hostile takeovers -Overcome barriers to entry to target markets or enter new segments of an existing market- merging with a business in a different country is one way in which a business can gain entry into foreign markets- may also avoid restrictions that prevent it from locating in a country and avoid paying tariffs on goods sold in the country - the globalisation of markets has encouraged mergers between foreign businesses- allowing a company to operate and sell worldwide rather than in a particular country or region- spread risk by diversifying -Economies of scale that can be gained as a result- lowering costs by joining another firm -Asset strippers- some firms are asset strippers and buy a company to sell off profitable parts and perhaps integrate other activities into the existing business -Management may want to increase the size of the company- growth as a main objective -Acquire new skills (e.g. research) -Secure better distribution -Acquire intangible assets (brands, patents, trade marks)
Gearing Ratio
-Exploration of the capital structure of the business by comparing the proportions of capital raised by debt and equity. Analyse the capital structure of the business. Calculated by... Non-Current Liabilities/ Capital Employed (x100)
How do you calculate the critical path from information?
-Firstly, you work out the earliest start time, so you would begin with 0 on the 1st task and then add the activity between the nodes onto that number to ascertain the next EST -This continues until the end, however if there are two tasks happening at the same time, you would take the highest of the two- one that takes the longest time -To calculate the LFT you work backwards and the end node has the same number at the bottom as the top (takes the same amount of time) and you take off the largest number- one that takes the longest time -Make sure you fill it all nodes and don't guess the critical path, then you will find that the nodes that have the same number as the EST and LFT are the critical path -Use the letters outlining the activities to describe the critical path. The critical path will show the tasks which, if delayed, will lead to a delay in the project
What are strategies to reduce absenteeism, improve productivity and lower turnover?
-Flexible working practices- such as flexitime, homeworking and job sharing, part-time -Interesting and challenging jobs -Improved working conditions -Improved employee/employer relations -Make workers feel valued and involved -Attendance bonuses- offering money if attendance targets are met- however the systems must not penalise employees who take time off to which they are entitled -Employee share ownership- company shares remuneration, put aside monthly pay for a fixed number of years- when reaches important performance targets- paid out in cash bonuses, may have capital gain. Better motivated and loyal to the company, focus on business improvement -Consultation strategies- involved in decision making- less resentful of changes, see their views as being valued-- Pseudo- consultation= informing employees of decisions, Classical consultation=involving employees through representatives in discussions of matters which affect them, have a influence on decisions, Integrative consultation- democratic method of decision making- discuss and explore matters of concern- come to joint decision through problem-solving techniques= improve motivation an productivity, own ideas of the staff may improve business, less likely to be frustrated and leave- takes too long? -Empowerment Strategies- making better use of talents, knowledge and experience, granting more authority, positive work environment and productive. Training- skills, provide necessary resources to undertake certain tasks, hand over authority- need to have confident in the employee's complete authority, Inspire confidence- feel confident in new role- emphasising strengths and praise, provide feedback- how they have performed- guide and build confidence- less likely to leave. However, excuse to cut costs, delayer and make managers redundant- more work same pay?
What is the use of scenario planning?
-Forces decision makers to consider the future and plan for possible changes -Clarify some future uncertainties, identify risks and opportunities and prepare for their eventuality- it can aid and maintain business survival despite exogenous shocks- can still operate -Teach managers how events may transpire, develop and affect a business -Understand the causes and effects of change in a business and how to manage it LIMIT THE RISKS and problems- prevent bad repuation and publicity
What is a way in which changes in sales can be taken into account? (even happen in slow moving markets)
-Forecast range-prepare three sets of figures=one pessimistic value, one optimistic and a central forecast -Two outlying would have a low probability of occurring but would indicate best and worst scenarios -Central forecast has the highest probability of occurring -Shows departments an indication of the possible variations they may have to face- even prepare plans for every eventuality
What are the positives of adopting a shareholder approach?
-Gain more investors= gain more finance for causes, maximize profits and then shareholders are likely to put part of the profit into funding projects at a later stage -Large amounts of share capital- easier and faster way of achieving goal
Why might a business window dress it's accounts?
-Gain potential shareholders- attract praise and perhaps rewards and prevent criticism -Raise new capital from investors -May make accounts look worse as a way of lowering the amount of tax that has to be paid
What ratios should I use if a 20 marker asks to use Ratio Analysis?
-Gearing -Return on Capital Employed -Liquidity- current assets/ current liabilities -Profit Margins
What are the benefits of high labour productivity?
-Generally assumed to increase competitiveness -Should drive down costs, allowing a business to either lower its prices (giving the business competitive advantage and increase market share) and pass it on to the customer so they receive higher sales, or keep the price the same but increase profit margins -Output per employee will be higher so there is more output to sell- this would also raise revenue and profit
What are likely to be customer objectives?
-Good quality products -Fair price -Clear and accurate info about products -Good quality customer service -Choice and innovative new products -Safety in products
What are the advantages of organic growth?
-Growing company by exploiting own strengths and expertise leads to a flexibility which enables the business to adapt to changes in the market -Entrepreneurs can experience the satisfaction of seeing their business develop and flourish and can choose the pace of growth - a rate that is comfortable for their own personal needs- eventually, owners may choose to sell the business and cash in on their investment and hard work -Entrepreneurs will retain more control when growing this way, as the growth process does not involve any outsiders with any controlling interest- eg opening a new store, they can recruit the staff and ensure the store is run in the way that has proved a success in the past and then move on to the next. Business has full control and much easier to organise. Joining businesses would often lead to half the control -Financial position of the business might be better protected with organic growth- can be raised through internal finance such as retained profit. Some growth is gradual- less strain on financial resources, as a result, cash flow is stronger and the business will retain more liquidity. Inorganic often requires a huge outlay of money- such high expenditure can put financial pressure on the business -Organic growth less likely to encounter diseconomies of scale as no sharp increases in unit costs are to occur if growth is steady and measured. It may be easier for the business to spot in advance any difficulties resulting from scale increases and help to keep costs under control -Less risky than other growth strategies, growth can be achieved by extending practices that are well-known and understood. This can prevent errors, as the culture, norms and practices of the business are already established and effective. Can also avoid the complications that might arise when integrating with another organisation -Relatively cheaper than using other methods- financed from retained profit which is likely to the cheapest of all finances. There will be an opportunity cost but the financial cost is zero- growth inorganically often requires borrowing or fresh capital adding to the costs of growth. Organic avoids the premium prices that can be paid when buying other businesses. -Retains the company culture which keeps staff motivated
What influences the capital structure of the business?
-HIgher equity if there is a greater business risk- eg a start up -Where there is more flexibility required- don't have to pay dividends -Higher debt when interest rates are low so debt is cheaper to finance -If profit and cash flow is strong and can easily pay back debts
What are the key negatives of Subjective Decision Making?
-Hard to justify for business decisions involving risk. -Too risky- based on opinions and emotions
What is Lewin's Force Field Analysis of Change Management?
-He argued that successful businesses tend to be constantly adapting and flexible. 2 parts to the forcefield- left= driving forces, those pushing for change, whereas the right are restraining forces- which is stronger or weaker -Strong force number- if unbalanced change is either possible or not- see what the differences are between the forces, if equilibrium then there will be no change Supporting forces may be rivals, shareholders, economy, new ideas Resisting forces may be finance, staff unions, disagreement and fear
Customer Service Offered By Small Businesses
-High quality customer service= adding value to the products, giving it a competitive edge in a market and allowing smaller firms to survive in markets dominated by large corporations -Efficient service and fast delivery will help to persuade customers to spend with them rather than a competitor -A lot easier for small businesses to offer customers a personal service- attach value in dealing directly with the owner and can charge a premium- simply, friendly handshake at a restaurant -Geographical advantage- local= convenient, get to know customers, carry stock which caters directly to local needs & provide extra assistance to customers not given elsewhere -Communications are easier and more effective in smaller firms, not automated machines but can easily get access to someone of authority to deal with a specific problem- issue addressed and solved immediately -Building relationships with customers- customer care, a lot easier for small businesses to do because they are usually closer to customers- small businesses can respond positively to feedback effectively as closer to customers
Why is high labour turnover such a problem for a business?
-High recruitment and selection costs to replace people -High induction and training costs for new staff, time taken to become competent -Reduced productivity due to disruption- new staff take time to learn essential skills so business may not function efficiently and mistakes may be made -Reduced sales and quality -Loss of essential skills and knowledge -Low morale, unsettled workers and damage to culture
What are signs of overtrading?
-High revenue growth but very low gross and operating profit margins (compared with key competitors • Persistent use of a bank overdraft facility • Significant increases in the payables days and receivables days ratios • Significant increase in the current ratio • Very low inventory turnover ratio • Low levels of capacity utilisation (alongside high levels of investment in capacity)
What might be the impacts of continued high immigration?
-Higher costs of (but greater demand for) public services (e.g.education, health, housing) -Increase in size of labour force -potentially keeping wage rates low
Conflicts between shareholders and employees?
-Higher wages and better conditions= costly negative impact on profit and dividends -Employee pressure to ensure their objectives are met by threatening industrial action -However if too disruptive= jeopardize survival of business -Rewards to employees at expense of dividends -Zero hour contracts
What are non-financial factors that should be taken into account in investment appraisal?
-Human Relations- impact on staff or customers etc -Ethical Considerations- important to take an ethical stance when choosing courses of action so no negative publicity- enviro damage- if good stance, may help to enhance the image of the company -Risk- financial position of the business would be important- economy and market its in aswell- long payback investments are riskier than ones that are shorter due to uncertainty over long period -Availability of Funds- some projects fail to get started because business unable to raise money that is needed- small businesses may have problems persuading investors, and lenders to provide finance -Business Confidence- entrepreneurs, managers and businesses tend to have different attitudes and cultures from each other- confidence or optimism- may be cautious, unconfident and delay or abandon possible projects- this would be an important influence on decision-making
What are the key steps in succession planning?
-Identify the characteristics a successor should possess- job description and person specification giving the characteristics of the person who currently occupies the key role- any skills an traits required -Decide how the successor should be found- looking at the credentials of every prospective internal candidate- or outside agency may be employed to headhunt possible candidates from outside- may use both approaches -Undertake a rigorous selection process- examine strengths and weaknesses of all candidates- important to involve key personnel and other specialists - gain a broad view of the candidates -Make the decision- analyse and evaluate the performance of each candidate and make an appointment - failure to may demoralise and undermine internal candidates- they think they are not valued -Communicate the decision- important for everyone affected by the decision to be informed about the appointment -Implementing a training and preparation plan- the person will need to be trained and prepared for the final transition into the post when needed- may involve shadowing the person who currently occupies or going to specialist courses to enhance skills and knowledge
When is overtrading most likely to occur?
-If the business does not have enough capital- particularly at the start- undercapitalised- started trading with insufficient capital- does not have enough cash to buy resources needed to meet growing orders -Offers too much trade credit to customers- the business has to wait extended length of time and during this time there may be a shortage of cash to buy resources needed to meet new orders -Is operating within slim profit margins- in order to make an impact in the market, a new business may offer its products at lower prices- may not be able to generate enough profit to fund the growing volume of the business
What are the negative of the stakeholder approach?
-If there are so many stakeholders to keep satisfied, this could lead to confusion, inefficiencies resulting in an increase in costs which may not be the case if the business adopts a shareholder approach
How do you calculate the average seasonal variation in a certain quarter of the year?
-If you were looking for the fourth quarter, you can add the previous two years (or more) forth quarter and then divide by how many. This number will be a positive or a negative and then it is -/+ from the to the figure prediction on a best fit line (when it is carried on on the graph).
In what ways can a business react to Pressure Groups?
-Ignore them- negative publicity- hope it goes away and say nothing -Work against it -oppose and fight- negative publicity -Work with the groups- work together to improve working practice put in CSR Policy- good publicity
What are the key benefits of Evidence Based Decision Making?
-Increasing common and automated supported by data analysts- greater sophistication of skills etc -Data will always be used wherever possible- particularly where a decision is significant to the business
What are the two types of change (in terms of speed)?
-Incremental change-many small changes which take place as a business develops and responds to subtle changes in the external environment, Usually involves little resistance, arises as strategy develops, often not noticed, a culture of accepting and embracing incremental change may develop -Step Change-dramatic or radical change in one fell swoop, often required when a business has suffered from strategic drift, often involves significant alteration in the business, gets it over with quickly / decisively, may require some coercion to overcome resistance -Disruptive Change- form of step change that arises from changes in the external environment which impact the market as a whole. Changing the established business model and rapid improvements in technology are the main driver of disruptive change since tech innovation provides new ways of delivering g and s and reducing barriers to entry
Why might absenteeism be high?
-Indicates demotivation, low morale and low commitment -Poor management and communication -May be genuine illness The job wasn't what they expected -Little coaching or feedback- not valued or recognized -Few growth and advancement opportunities -Stressed
What are the limitations of CPA?
-Information that is used to calculate the critical path may be inaccurate- based on past performance and estimates, but new project may have special requirements and take longer -Time consuming to draw up diagram when could get on with the project -One delay may cause the entire project to fall apart- rigid and no flexibility- suppliers may be messed about and if work has been booked in- would still have to pay -All about speed and not quality- which may cause a problem if the business has a USP which focuses on 'differentiation focus' of niche high quality -Changes sometimes occur during the life of the project- may need contingency plans for unexpected events- EXTERNAL FACTORS- such as weather which would need to be taken into account -Critical Path analysis identifies times when resources might be used elsewhere, these resources may be inflexible- may not be feasible to move large equipment to be used elsewhere- needs dismantling -May be too complex- with many many tasks- however a computer may simplify the approach
What are the variety of interest rates operating in the external environment?
-Interest rates on savings in bank and other accounts • Borrowing interest rates • Mortgage interest rates (housing loans) • Credit card interest rates and pay day loans • Interest rates on government and corporate bonds
What questions should I ask myself about Stakeholder questions?
-Internal or External? -What power do they have? -What interest do they have in the business? -Do their objectives conflict with the directors/owners?
What are the changes a business may make to tackle bad productivity?
-Invest in new machinery and equipment -Change production methods -Change quality management methods -Retrain managers so their skills meet the new technologies used
EXAM CONSIDERATIONS
-Is the trade off short term or long term? -How does the decision affect revenue- is it guaranteed or uncertain?, what levels, how much is expected to be made?is it worth all of the costs? -How does the decision affect costs- what have been the costs of the decision? Where is the money needed to cover costs going to come from? -How much profit is likely to be made? is it worth it? Does the decision make a loss? level of risk? Is the profit made in the short term more or less than the expected profit made by a more long term decision? -How are the different stakeholders affected? -Do you feel the decision is a positive or negative one- to what extent? -Does the decision go with the business aims/objectives? -Is the decision one about ethical marketing- in the pursuit of product differentiation but at the cost of manipulating customers- thinking a product is healthier than it is
What are the disadvantages of PESTLE analysis?
-It can't offer the full picture- analysis is about investigating six external factors. Unfortunately, in strategic planning, you'll need to know more than these six. PESTLE only gives provides an outside perspective about businesses. You shouldn't forget about internal factors. Or your competition- leaves gaps- more helpful in combination with SWOT for internal discussion -May go out of date very quickly as factors in the external environment can change unpredictably and drastically- thus changing the result of PESTLE -So many sources on the internet and media so need to make sure research and sources are credible- some info may be difficult to find, otherwise may render the analysis completely inaccurate- takes time to thoroughly research- info may be oversimplified
What are the drawbacks of Porter's Five Forces?
-It is a static model-the model was developed in the 1980s and since then market dynamics have changed and become significantly more fast paced- like today's technology having an influence on constantly changing markets. Very few market structures have remained static and circumstances such as new entrants can change to such a degree that business model/position needs to be changed radically to retain market position. This causes uncertainty about how suitable this framework. -Without regular updates, any knowledge gained from using Porter's model will quickly be out of date as it was only designed to provide a snapshot of any particular market. The model is not able to provide you with meaningful information about how best to take preventive actions. It does, however, offer suggestions as to where the challenges and threats to your organisation are most likely to occur through its examination of substitutes. -Does not consider external non-market forces such as inflation etc that may have a stronger impact than the forces have. Businesses have to respond to more than market forces and need to be able to understand the implications of gov legislation, ethics and their social responsibilities The internal culture and ethos of a business will also carry significance when forming a strategy.
What are the advantages of the Payback method?
-It is simple- very easy method of comparing projects -Should be more accurate than, say ARR, because it focuses on only near term cash flows- likely to forecast with greater reliability than distant ones -Extremely helpful for firms that may adopt this method due to cash flow problems and liquidity issues making them more concerned with how long it would be until they shall receive returns- can trust that the project chosen will pay itself off with the investment more quickly than others. Investments are risky so would want the quickest one to payback and see profits quicker -Invaluable for businesses in the tech industry (and other dynamic markets) as with tech changing rapidly, they would need to ensure they recover the cost of investment before a new model or equipment is designed
Why do businesses use averages and not raw data?
-Raw data can fluctuate quite drastically so difficult to identify trends- averages allow us to smooth data out- remove these anomalies- obvious pic of trend -Shows trends= more reliable and can make more accurate sales forecasts- smooths out large fluctuations that may be down to weather etc-uses more data than raw so is more detailed
What are the benefits of quantitative sales forecasting?
-It is the basis for planning the following: * CASH FLOW AND BUDGETS- how much you can afford to spend- expenditure budget -Allows the business to predict what is likely to happen in the future- forms basis of common parts of business planning in many areas- profit *Staffing- how many staff you need *Production- how much you need to make -Very helpful to see overall trend and gives the business an idea of how well it is doing -It gives businesses an idea of how much sales revenue they are likely to receive-> they can then set targets which should motivate their staff to work harder-> also allows the business to gain a better idea of what price to sell their products for to obtain the predicted sales-> the business can plan its activities appropriately without overspending -Reduces risk- often produced using advanced computer models and algorithms -Allows business to plan output- keep stock levels good
What is an advantage of ROCE?
-It relates profit to the size of the business -Evaluates the overall performance of the business -Provides a target return for individual projects -Benchmark performance with key competitors- comparisons over time with rivals is useful
What are difficulties that a sports retailer such as sports direct might face when attempting to grow organically?
-It stocks specific brands of clothing such as Adidas and Nike - main source of revenue, they would struggle to launch their own products as these brands are well-established and have a good brand image. -Also, due to the fact they aren't producing their supplies, this would mean an increased capacity or more technology would not benefit them -In addition, they are a retailer distribution channel for these sport brands and it is likely that people use the internet instead- difficult to build market share other than expanding premises
What are the advantages of NPV?
-It takes into account the effects of interest rates and time in investment decisions as it calculates present values of future earnings- takes into account the time value of money- accounts for the fact that money in the future will be worth less due to the interest it could have made if it had it now and inflation -The discounted rate can be changed as risk and conditions in the financial markets change- more accurate -Unlike Payback, it takes into account the whole lifetime of a project past the payback time- these years may be the most lucrative.
Why might diversification be a bad idea for a fast growing firm?
-It takes the business out of its area of expertise which is currently making them a profit and it would be difficult to establish market share due to barriers to entry of competitors. -May lack control over finances -Overtrading? -May be shortages of resources if fast growing -Alienation of customers -May not take the culture of the new country into account
Why should a business consider Ansoff's Matrix before making a takeover bid?
-It would need to take into account the level of risk which threatens the business as there is a strong need to be careful so as not to collapse.
Why might a firm choose to remain small?
-Kay's Distinctive Capabilities may be maintained and strengthened from remaining small -Personal Service- some people prefer to do business with the owner directly and are prepared to pay higher prices for the privilege - eg accountancy practices. Many businesses serve niche markets - easier to deliver a personal service in this circumstance- tailor made products etc and design -Owner's preference- entrepreneur may be content with the current level of profits and remaining below a certain VAT threshold avoids administrative burden of more correspondence with HMRC- some avoid the added responsibilities that growth brings. -Flexibility & Efficiency- small firms are more flexible and innovative- able to react more quickly to changes in market conditions or technology. Management can make decisions quickly without following lengthy procedures -Lower Costs- small firms may have lower costs than larger producers in the same market- may have to pay employees nationally agreed wage rates- small firm may be able to pay low wage to non-union workers -Low barriers to entry- some types of industry such as window cleaning, the set up costs are relatively low- little to stop competitors setting up in business -Small firms can be monopolists- many small firms survive because they supply a service to members of the local community that no other business does such as local village shops- convenient, nearby place saving them trouble of travelling.
What would a weak positive correlation for advertising spend lead a business to do?
-Keep budget the same as last year
What must I remember about calculating ratios?
-Keep to 2 dp -Ensure I look at the table/graph for if the figures are 000's, 000000's etc
What are examples of external economies of scale?
-Labour -Ancillary & Commercial Services -Co-operation -Disintegration
What are Financial Economies?
-Large firms can benefit from cheaper loans and wider sources of cheap finance (investment for shareholders) as they are seen as less risky than smaller businesses -Interest rates are based on the level of risk -Wider variety of finance sources to choose from -They have large assets to offer for security
What are the features of competitive markets?
-Large numbers of buyers and sellers -Products sold likely to be close substitutes to each other -Barriers to entry are low -Businesses have very little control over the price charged -Free flow of info about the nature of products, availability at different outlets, prices, methods of production and the cost and availability of production factors
What is Managing Resistance to Change as a factor in change?
-Likely to face resistance from the workforce for a number of reasons including (GENERAL INERTIA) ->Fear of the unknown- often feel insecure in job and aren't familiar with work practices, conditions and relationships- fear unemployment, new tasks stressful- lack of involvement and understanding ->Employees and managers may feel that they will be unable to carry out new tasks, may be made redundant or may face a fall in earnings ->Individual workers might be concerned that they will no longer work with preferred colleagues or may be moved to a job they dislike - Customers may resist change-do not wish to change their own practices- not want to use the internet but go into the store- eg try clothes on -Culture resists change Need to take these fears into account, only if employees feel they can cope with change will the business be able to operate to its full potential *Owners- may also be resistant, fear operating in unknown markets and conditions- not want the costs of the changes- feel not able to adjust to new situations and be forced out of business
What does high gearing mean?
-Loans are high in relation to share capital/owners finance -Considered more risky by creditors
What are the drawbacks of short termism?
-Long term profitability may be at risk- lucrative long term opportunities might be overlooked-lack of investment -Lose competitive edge in overseas markets- ability to compete internationally may be hampered if long term performance ignored- need to invest in new technology to reduce costs etc- eventually lose market share- less job and wealth creation- economy suffers -Quarterly financial reports are required to force companies to be disciplines- dangerous waste of time, less productivity and more likely to make the wrong long time decisions -Short term contracts reliance inappropriate- cost of resources when acquired on a temporary basis can be higher than longer time periods-not good relationship with supplier, so won't help if having stock issues, agency staff higher than full time rate for permanently employed worker -Low customer satisfaction and loyalty -Miss out on interest of long term bank if invest money
What is the solution to limiting the bargaining power of suppliers?
-Look for new suppliers- to create more competition amongst suppliers- engage in technical research to find subs for a particular input to broaden the supply base -May also minimise the info provided to suppliers in order to prevent the supplier realising the power over the customer -Backward vertically integrate- acquire a supplier or setting up own business growing organically upwards
What are the negative of adopting the shareholder approach?
-Lose core values- reputation -Dissatisfaction amongst other stakeholder groups
What are the benefits of a high labour retention rate?
-Lower recruitment and selection costs -Lower induction and training costs -Competent in role- skills and knowledge -Continuity -Stable workforce -No toxic culture of leaving- feel a part- take pride
EXAM TIPS FOR INTERPRETATION OF FINANCIAL STATEMENTS
-Make sure I elaborate on my points- extend further to who it might affect -State what the data is and was- make sure my numbers are accurate!! -WORK FROM THE TOP= Revenue and operating profit -Calculate the exact figure- show us the real difference -State why don't just explain a difference -State whether current or non current liabilities/ Borrowings/ Assets -State the rate that you would get at a bank- 7%? -Remember the correct liquidity ratios- 1.5-2 and 1:1 -Come to an overall judgement of whether or not I would recommend investing etc etc -Show whether enough working capital- current ratio is usually key
What courses of action would a Short-Termism approach be likely to use?
-Maximise short-term profits- aim to increase shareholder value- eg higher prices, invest heavily in persuasive advertising -Invest less money in R&D- can be a big drain on cash reserves, prefer to fund short term objectives. R and D is risky and may take ages for financial returns. -Invest less in training- expensive and returns are not immediate- better motivated and equipped and lower turnover but takes time to materialise -Return cash to shareholders-large cash reserves may pay special dividends to shareholders instead of investing long term -Engage in asset stripping- prof table parts sold for cash and loss -making shut down- practice often seen as unethical as no regard for the future of the company and its stakeholders- short term wuick cash return for shareholders of the predator -Arrange more short term contracts-rely heavily on these with suppliers- employ more agency and temp staff and favour short term leases in machinery and essential assets- no commitment to any long term objectives -Pursue external growth rather than organic growth-may be considered too slow for companies with a short-termist approach- growth through mergers and acquisitions is much faster and may generate swifter returns if successful
What are likely to be the objectives of Shareholders?
-Maximize value, measure of the company's performance that takes into account the size of dividends and share price -They want this to grow over time and if not satisfactory, the external investors may sell their shares- fall in share price and vulnerable to takeover
Conflicts between environment and shareholders?
-Maximizing profits= neglect responsibility to environment -Attracting attention from media and environmental groups
What are the problems with M&As?
-May be a culture clash-for example a role culture takes over a task culture- lack of compatibility between companies- would need to decide which culture to follow in advance- fail to enhance shareholder value due to this -May deliver better returns for shareholders than it does to the two companies -Morale and motivation- a hostile takeover creates unrest and resentment -Loss of human capital: The business may suffer a loss of personnel & customers post acquisition i.e. people who do not wish to buy goods and services from an enlarged company. -Diseconomies of Scale- may be more positions in the hierarchy= larger chain of command and more difficult to communicate so lead to higher costs- productivity may decrease due to unmotivated staff -Share price- the need to raise fresh equity through a rights issue to fund a deal which can have a negative impact on a company's share price. Over the three to five years after the deal on average, the share price of the acquiring company tends to drop -Inefficient communication and lack of transparency- ensure no discrepancies after merger/takeover leading to discontentment in the firm -May have different technology systems which are difficult to combine and integrate- expensive -May be sacked staff and closed shops which staff aren't made aware of -FINANCIAL RISK- inaccurate evaluation of target enterprises- may overestimate the value of the business being acquired as the business may utilise the opaqueness of information to conceal the financial weaknesses, using accounting methods to modify financial statement or conceal actual accounting info therefore the initial cost of the takeover may be so high that this was not taken into account and may leave the business with financial difficulties. The business may have wanted to deter/forestall a bid from another business so offered a substantial premium. Need significant capital and may underestimate how much this is. -Focus taken away from the changing market and customers they are providing to- the cost of the merger/takeover would take up most of the cash flow and endanger companies' ability to adapt to changes in the external environment-- heavy debt burden of M&A leads to lack of short term financing, used most of liquidity capital and self-adjusting ability to change of external environment- heavily reliant on loan-finance -May be unable to reach the desired cost savings in terms of synergies and economies of scale
What are the issues faced by the business as a result of growth in size?
-Re-structure and adopt policies and processes to manage expansion -Maintaining corporate culture -Motivating staff during the expansion -Increased labour costs with hiring of new staff -Training of new staff
What are the benefits of adopting an ethical stance?
-May be used for marketing purposes- strong ethical stance draws in customers who are attracted by this- sometimes leads to gaining more customers - but it is no guarantee of success- improved brand awareness and recognition -Can act as the equivalent of an insurance policy- businesses don't want to be seen as acting unethically and face serious penalties for breaking the law or see sales fall at protesting against the behaviour- may otherwise lose its major customers and close down. Customers have become less tolerant of businesses that behave unethically -Stakeholders are happy- employees are more motivated on good pay and proud of the business they work for- lower staff turnover, many investors seek CSR businesses and more funding and investment would become available, customers more loyal to the business and have positive support, trusted relationships in the community built, suppliers may choose CSR company due to ethical stance -Cost Reductions- not having to re-hire staff- energy saving, reducing waste, keeping loyal customers -May be able to charge higher prices -New products, new markets- working in a CSR way would stimulate innovation (ways to save energy for example) -Good public relations- show the business in a positive light
Why might a business use an external company to help with a change process?
-May require specialist involvement if issues have occurred before and minimise risk - may also be cheaper for the business if know it will be gotten right first time -Managers wouldn't like this as they would feel as if they are not given the responsibility and their work is simply being passed on- the business doesn't have the confidence in them
How can labour turnover be improved?
-Monitoring and benchmarking- targets for staff -Exit Interviews- find out why workers left to see if it is something the business can change -Better recruitment and selection- get the right person first time -Financial rewards- bonuses, unlikely they would want to leave the business- only paid if targets are met, or reward staff for loyalty -Induction and training- high quality helps new staff settle and motivates -Reducing turnover of long term workers- avoid losing essential knowledge and skills, the firm may have invested a great deal of money over the years
Why do some businesses have higher absenteeism than others?
-More people in certain sectors and some industries may be more stressful than others -Repetitive, monotonous, fragmented lead to low job satisfaction and demotivation as opposed to interesting and rewarding jobs -Large businesses tend to have higher absenteeism than smaller business- less commitment and feeling of teamwork in big businesses- may feel like no one will suffer if take day off work -Health and safety- if bad procedures, likely to suffer more illness related absenteeism- some jobs are inherently more dangerous to health than others -Culture of the workplace- overworked and climate of intimidation and bullying by superiors of subordinates, needs of workers ignored, work related stress becomes more common- often take months off -Oversupervised and feel that they are not trusted by their superiors to accomplish tasks -If underpaid, more likely to take time off work- see it as compensation for lack of monetary reward they receive- low pay is demotivator -Public sector- providing a service, subjective, may have complaints that lower morale
How is Cyclical Variation calculated?
-Most accurate= Actual Sales- Trend -Extending the best fit line through the trend
What are the effects of corporate culture?
-Motivation- it can have a direct effect because the way in which staff treat each other impacts motivation- if respected likely to be higher, if highly competitive it may have good or bad impact, however if culture leads to success of business likely to be motivated anyways -Organisational Structures- different size of hierarchy and layers of management depending on culture- if number of key workers- likely to be specialist roles assigned- role culture -New Management- appointed-the greater the change needed, the more likely it is that the new management will have to confront the existing culture- may be part of the problem -Mergers and Takeovers- likely to have different cultures which may be conflicting and would need to be changed to resemble the whole organisation.
How can the risk of overtrading be managed?
-Reducing inventory levels • Scaling back the pace of revenue growth until profit margins and cash reserves have improved • Leasing rather than buying capital equipment • Obtaining better payment terms from suppliers • Enforcing better payment terms with customers (e.g. through prompt-payment discounts)
Corporate Timescales
-Refer to strategy -Refer to the expectation of when return on investment will be achieved
What are the possible scenarios facing a business?
-Natural Disasters- earthquakes, forest fires, flooding (UK businesses in particular- farmers) etc- devastating effects with high levels of damage, death and disruption- particularly affecting multi-nationals- more exposed to this risk in other countries- hotels may benefit when volcano affects airplanes -IT Systems Failure-the dependence would vary between businesses- larger the business, the more investment in this- cyberattack, used for data storage and communications, research and website display. Hackers steal data -Loss of key staff- may cause difficulties if CEO- especially if preparations have not be considered, dominated by a particular person, long term illness, death, retirement- most likely causes of event, main member dies may be closure for business- no successor, remaining may not have the resources or desire to take ownership of the company- outside agent to take over is difficult- need to replace so business can continue as normal as this seriously affects stakeholders
What are the external diseconomies of scale?
-Negative effects of an industry growing in one area- overcrowding in a particular area- land, labour, services and materials might arise as firms compete for a limited amount ->Rents and house prices increase ->Traffic congestion- inefficiency- travelling workers and deliveries are delayed ->Overcrowding in industrial areas ->Price of land and labour rises
What should I look for on a SOFP?
-Net Assets -Abnormalities
What are the methods of growing organically?
-New Customers- easiest as rely on driving sales from existing activities- gradually stepping up production as more and more customers, building an extension if reaches full capacity or moving to larger premises. Find new customers by exploiting new distribution channels eg supermarkets. This approach may need marketing to increase customer base -New Products- development through innovation and research and development commitment. May also identify customers with different needs and may adapt or modify existing products to meet their needs- may invest some profit into product development -New Markets- finding new markets for products, opening stores in new location- all practices etc replicated , new premises can be refurbished in a style that has already been successful or some businesses may look to overseas markets- this approach carries more risk because of unfamiliarity of markets abroad- growing by selling in new areas is sometimes called geographic expansion -New Business Model- developments in tech or social change may give rise to this- start an online operation - could see the business grow super quick because size of potential market opened up could be considerable- possibly global -Franchising- this operation and approach allows other entrepreneurs to trade under the name of the original business- outlets is a good method to grow as the operator runs the business but the original business gets a percentage of the profits
What are some types/methods of growth?
-New Products -Expansion into New Markets -New Distribution Channel -Merger with competitor -Takeover of competitor -Acquiring a supplier or major customer -Joint venture overseas
What is the Threat of New Entrants?
-New entrants can raise the level of competition thereby reducing its attractiveness, largely depends on barriers to entry (economies of scale, capital/investment requirements/access to industry distribution channels/the likelihood of retaliation from existing industry players) -If barriers are low, businesses may enter the industry when profits are high and simply leave when they are low- difficult for existing industries to charge high prices and make high profits -Profits rise too much then will attract new suppliers to the market who undercut -More competitors means depleted market share for the businesses already in it and constant pressure -Create barriers to entry to prevent new entrants -Heavily advertise to build strong brands
How might high labour turnover be beneficial for the business?
-New staff with new ideas and experience come into the business from elsewhere -If a business is shrinking in size, reducing the size of the workforce would lead to high labour turnover -May have some ineffective staff- encourage them to leave so more motivated members can be a part of the business- can be helpful and avoid future redundancies- natural wastage- students hired for the holidays etc -Can keep the low wages and poor working conditions- better to have high turnover if low skilled as changing working practices and conditions is too expensive- may be more profitable this way
What are the limitations of decision trees?
-Not accurate and exact information- much of the info is based on probabilities which are not exact- how were they calculated and on what basis? Some managers use experience or secondary data not objective- based on 'back data' historical figures- may become out of date by time lags in decision making -Doesn't take into account the attitude to risk of the entrepreneur and by assumption the level of intuitive management present in the organisation- eg some situations a decision tree approach would show to not take but in taking it could be extremely successful -Does not take into account dynamic nature of business- sudden change in economic climate might render a decision based on a decision tree obsolete- decision making tool, does not necessarily reduce risk -Decisions are not always concerned with quantities and probabilities- often involve people and are influenced by legal constraints or people's opinions. Qualitative data may also be important- not shown by quantitative values. -Time- consuming process using up valuable business resources- however, computerized decision making may be used to analyse decision trees and save time
What are the benefits of being low geared?
-Not overburdened with debts- less risk of defaulting on debt -Lenders have less control over the business -Attractive to creditors
Flexibility for Customer Needs for Small Businesses
-Offering customer flexibility in the sense that they are quick in identifying new opportunities and meeting the changing needs of customers -Large businesses have complex organisational structures which means that decision making and approval is elongated and constrained unlike small firms -Promoting the features of product/services - quality to customer needs- may involve undertaking market research -Can edit and change customer orders even though a start has been made to production- change design and specification to the customer requirements- can accommodate changes -Respond to changes in external environment- shifts in exchange rates or legislation quicker than rivals- new product on the market quicker as fewer people involved in its creation- fewer processes- large businesses have to evaluate and analyse info and gain many approvals- FIRST MOVER IS GOOD -Small businesses can cater for special/specific requests because they do not have rigid systems- small dealership for cars may accept variable payments or agree a time period in which has to be paid.
Product Differentiation & USP For Small Businesses
-Offering something to customers that larger rivals do not makes survival possible- people prefer to buy products which are different from the majority of others on the market to stand out from the crowd -High quality- durability/design- no perceived substitutes -Non-price competition- a differentiation strategy will focus on other ways of attracting customers -Develop customer loyalty- how often do you go to the local takeaway -Eg in a large firm dominated chocolate industry, there are hand-crafted chocolate makers who travel to source their own cocoa and this unusual approach shows the story of their commitment to craft is a USP -Smaller businesses may offer a larger product choice than rivals with accessories related
What are the advantages of a strong corporate culture?
-Often employees feel identify and feel a part of the business and are therefore instils motivation, thus are committed and improve productivity -Less absenteeism -Communicate easily, share ideas, solve problems organically- INCLUSIVE CULTURE- aspiring to achieve the same goals -Staff know the purpose and values of the firm -Managers can control the behaviour of workers -Lower staff turnover- less likely to be a cost for the business through sick pay and recruitment and training costs that would result from resignations -Very effective in a laissez faire leadership style- needs the freedom of creativity to flow
What are the calculations involved in decision trees?
-Once all info on the diagram, you multiply the success and failure probabilities with the predicted profit or loss -Then you add up each section- value of each outcome (each decisions success and failure or 3 options- 'great success' etc) -Then the final values are analysed- whatever is highest would be followed as the expected value is highest- potentially most profitable -Then you calculate Net Financial Gain by minusing each total from the initial investment -NOTE- view the costs of implementing each course of action-if there is any other costs for the project take this away from the expected value to get the overall
What is the difference between external and organic growth?
-Organic Growth- also known as internal growth and it happens when a business expands its operations- eg increasing existing production capacity and development of new products. -External Growth- is where a business merges with, or takes over another organisation eg combining the two firms increases scales of operation.
What are the key factors in change?
-Organisational Culture -Size of the Organisation -Speed of Change -Managing resistance to change
What are the financial risks of mergers and takeovers?
-Original purchase cost too high? Bidding Wars- possible that one business attracts more than one buyer- price would rise like an auction. If use retained earnings to finance, there would be lower dividends in the short term. If borrowing, there is increased risk and interest to pay -Cost of change into a new business -Redundancies of duplicate staff eg two marketing managers, two finance managers etc= - short term cost -Cost if it all goes wrong- may underestimate costs, regulatory competition intervention- may make you change the model -Inaccurate evaluation of target enterprises- may overestimate the value of the business being acquired as the business may utilise the opaqueness of information to conceal the financial weaknesses, using accounting methods to modify financial statement or conceal actual accounting info therefore the initial cost of the takeover may be so high that this was not taken into account and may leave the business with financial difficulties. The business may have wanted to deter/forestall a bid from another business so offered a substantial premium. Need significant capital and may underestimate how much this is. -Focus taken away from the changing market and customers they are providing to- the cost of the merger/takeover would take up most of the cash flow and endanger companies' ability to adapt to changes in the external environment-- heavy debt burden of M&A leads to lack of short term financing, used most of liquidity capital and self-adjusting ability to change of external environment -May be unable to reach the desired cost savings in terms of synergies and economies of scale
What are the negatives of a business to the community?
-Pollution- noise, -If a business that employed alot of people closed- lots of redundancies- devastating
What are the key causes of change?
-Poor business performance -New ownership -Transformational Leadership -The market and external factors (PESTLE)-Poor *Business Performance- may happen if the business experiences poor sales, low profits or slow expansion-would need new objectives and new direction, need some new strategies to compete- Ansoffs, look at what is necessary it improve performance which may mean delayering or redundancies. *Productivity- change scale and method to increase productivity- on a larger scale so would need to invest in equipment and machinery- if high capacity utilization the machinery may break or labour= unmotivated *New Ownership- May happen if the business has been bought or merged with another business or there has been management buyout, or if owner has died or left (May be role duplication synergies- redundancies, Clash of cultures, Issues of communication between businesses as they change and merge. Also may move from ltd to plc *Transformational Leadership- may happen if the new leadership is brought into the organisation that seeks to change it (the business will need to reinvent itself to achieve competitive ad, new business culture which challenges managers to develop new ways of thinking, encourages the development of new ideas) *The market and PESTLE- may happen if there have been new entrants to the market (Porter's five forces) or due to EU expansion or changes in the market (the business may need to respond by increasing their research and development budget to introduce more innovative products to their portfolio, they may need to change the corporate objectives). Invest in new and emerging markets (BRIC's)e before insolvency and closure. very quick- focus on corporate objectives or change corporate strategy - new management- change in higher management in particular- strike a new course
What are Porter's Five Forces?
-The Bargaining Power of Suppliers -The Bargaining Power of Buyers -Threat of New Entrants -Threat of Substitutes -Rivalry among Existing Firms
What are the internal diseconomies of scale?
-Poor communication as more complicated, many layers of management- this means that mistakes may be made, more wastage which would affect higher average unit costs- large firm is divided into departments -Co-ordination and control is more demanding, added responsibility and supervision- more difficult to control a larger, more complex business- as a company grows and takes on new staff, makes new products, buys new premises there is a more prominent need for all of this to be co-ordinated -Workers need monitoring which can add to costs -May need more managers- increases average cost per unit -Motivation- workers in large companies may feel demotivated due to lack of say in their work life- (cause) and then the effect is increased absenteeism and lateness leading to a reduction in productivity, lower output per worker and ultimately increased unit costs. Poor relations between management and workforce -Loss of management focus- but good managers should be able to reduce economies of scale -Technical diseconomies- if business has one large plant but a breakdown occurs, there may be halt in production completely- better with two smaller ones.
What are the different types of Corporate Culture?
-Power Culture -Role Culture -Task Culture -Person Culture
What are the disadvantages of organic growth?
-Prevents business from reaching its full potential and may miss out on lucrative opportunities and get left behind in the market -The pace of organic growth may be too slow for some shareholders and in a plc they may want quicker returns on their investments than organic growth can deliver. If unhappy with current pace, the may sell their shares and as a result the share price would fall, possibly making company vulnerable to takeover. Long period between investment and return- quicker with M&A's -Growth may be limited and dependent on the reliability of sales forecasts -May prevent the business 'tapping into' resources owned by other businesses- may miss out on profitable developments such as new technology and it may be better for it to buy a company that already has a proven track record in these fields rather than trying to acquire expertise from scratch- companies may be specialists and provide knowledge and experience required -Growing slowly means the business gets left behind in the market, if competitors are growing vastly, the business may end up being small in comparison. As a result, it may lose its ability to compete effectively - may not be able to match the advertising budgets of its larger rivals -May take a long time for the business to be able to exploit economies of scale, this could mean that the business is having to operate with higher costs for longer periods of time- lowering profit margins and making it less competitive. Some lines of business need large scale investment for vast production before trading can begin- thus may be a barrier for organic growth businesses into these industries -If rapidly growing market, organic may not be appropriate such as technology. Businesses making the best progress were those that were growing through mergers and acquisitions -Franchising has its downside- may be hard to manage effectively and may lose control over how customers are served etc and this may affect reputation if a bad outlet -If looking to expand abroad, this may however be more risky than M&T's as the business is inexperienced in these areas and won't benefit from the experience and help other businesses may offer if merged- joint venture
What factors cause variation in disposable income?
-Price Inflation • Wage Growth • Employment Levels • Interest Rates • Govt. Tax Policy
What factors mean that a small business can survive/give it a competitive advantage- KAY?
-Product Differentiation and USP -Flexibility in responding to customer needs -Customer Service -E-commerce
Why is labour productivity the most important measure?
-Productivity can be directly linked to a firms competitiveness -Improved productivity increases output and lowers labour cost per unit- labour costs are a high proportion of total costs so v important
What are the positives of a business to the community?
-Provide jobs and employment -More overtime -Possibly higher pay Prosper and shops, restaurants and cinemas may benefit from extra spending
What are the key benefits of Subjective decision making?
-Quick- may not be time for a scientific approach- may preferable to be speedy -There may be a lack of current, accurate and meaningful info so this approach may be the only option- often quite normal in industries such as fashion- what collections of design
If a scatter graph showed a strong positive correlation with a spend on advertising, what would the business be likely to do?
-Raise the budget
What are selling expenses?
-Range of expenses that are directly related to the selling of its products. Sales commissions, promotional costs etc.
What are the advantages of Ratio Analysis?
-Ratios help compare current performance with previous records. -Ratios help compare a firm's performance with similar competitors. -Ratios help monitor and identify issues that can be highlighted and resolved -Shows how effectively a business is using its assets and what returns are being earned from an investment
What are the 3 elements of Statement of Comprehensive Income?
-Revenue -Expenditure -Profit
What are the benefits of growing?
-Revenues will be higher- increased profits- particularly beneficial for companies with shares, attract more investment in the future. As profits grow, returns to the owners also grows - shareholders and stock price rises. More profit to invest and innovate- ma make acquisitions to grow further -Unit costs are likely to be lower- economies of scale, growing the scale of output- improve competitiveness- larger profit margins or reduce price to gain market share. Larger amounts of retained profit which is essential if needed for R &D to innovate or attract more finance due to dividend payments.- Depends on whether E of S is external or internal however. -Bargaining Power of Suppliers- when a business grows, it is likely to be a strong provider of business to a certain supplier and thus, if the business looks for elsewhere and threatens to take business elsewhere, the (usually small is best) supplier is unable to keep the prices high or increase the prices for fear of this. Due to the large orders, there would be more power for the business to negotiate. The business may even choose to backward integrate and supply its own goods -Bargaining Power of Customers- when a business is growing, it would be more convenient for a customer to go to their business and less convenient to leave- eg some companies may find ways of 'tying' customers in with attractive perks such as loyalty cards/points and large expenses if the customer leaves. Thus, keep customers and revenues high. The business if a supplier may choose to forward integrate and become a retailer such as a car retailer.- However this would depend on the industry as not all industries can make it difficult for the customer to leave - supermarket= no but gas supplier- yes. -Barriers to Entry for smaller businesses!- Porter -Business will have a higher profile with a larger market share- brand recognition which links to higher profits- can dominate the market as the market leader and manipulate the prices themselves- customers become more aware of the brand because it is advertised more so differentiation from rivals, customer loyalty, enhance product recognition, develop an image, launch products easily, charge higher prices.- attract media attention which further promotes the company. -Increase market power-in terms of customers and suppliers- larger firms may be able to exert greater bargaining power over suppliers and/or customers in order to gain a competitive advantage. Rivals are left with a smaller market share and some weaker businesses even forced to close down. ->Customer terms- business may be able to charge increased prices if competition in the market is limited. If lack of competitive pressure, there is also less need to develop new products- dominant firm will not have to meet the costs of expensive and risky innovation- product choice remain limited for consumers ->Supplier terms- force costs down- particularly good if supplier relies heavily upon them for custom- HOWEVER- if the business becomes too dominant it may attract the attention of the authorities- exploitation= investigation by the industry
What are the ways of managing risk?
-Risk Acceptance- acceptance that there is an element of risk in every business venture - the cost of reducing the risk could be greater than the cost of the risk- particularly the case for small businesses -Risk Limitation- ensure things are backed up, have fire extinguishers etc, become ltd to gain limited liability- ICT firewall - most common risk management approach -Risk Avoidance- the opposite of risk acceptance- risk avoidance seeks to avoid compromising events entirely. Eg a multinational pulling out of a unstable country, don't sell abroad due to exchange rate risk etc -Risk Transfer- buy some insurance! Or outsource operation such as payroll
Why might a business become less competitive despite labour productivity?
-Rival businesses might increase their productivity at a higher rate -New rival businesses set up which might pay a considerably lower wage- keeping low costs, so they can employ 3 instead of 2 people for same price -Limits to output- costs begin to rise once met the optimum -Other factors may change adversely in the business- may have low demand compared to other businesses who bring out a far better new product- customers may prefer this and productivity and cost are irrelevant
What is the process of Evidence-Based Decision Making?
-Scientific approach, more data available -Identifying Objectives- corporate objective such as growth or survival in a poor trading period- decisions are likely to be complex- directors or lower level- junior managers- depends on stage of growth, form of business. Also needs to develop criteria to measure whether it has achieved its objectives (often solve a problem) -Collecting Info and ideas-amount would depend on decision- could take a while (sales levels, customer reaction, costs of production, hold discussions in the firm). There may be a working party who would collect the info and ideas and then produce a report or make a presentation or could be individuals and departments -Analysing data and ideas- test the alternatives before decision is carried out -Making a decision- commitment to one course of action -Communication- personnel need to be informed- instructions passed on and action taken- this may take time -Implementing the decision -Monitoring and evaluation- outcome of the decisions, may be necessary to modify
What may be the solution to bargaining power of customers?
-Selecting a niche market- to operate so are fewer substitutes to switch to -Make it too expensive for customer to switch -Forward vertically integrate
What are the 4 reasons for resisting change according to Kotter and Schlesinger?
-Self-Interest- perceived threat to position in organisation and to financial rewards -Low Tolerance and Inertia- the feeling that rather keep things as they are, particularly if business has been successful, if change has already occurred there may be lower tolerance- more likely to resist -Different assessment of the situation- disagreement between those proposing the change and those affected- disagreement of what the business needs- strategy -Misinformation or Misunderstanding- not had right info to assess the position, not yet understood rationale- usually failure of communication, particularly between managers and employees
Conflicts between shareholders and directors/managers?
-Senior managers and directors employed to further the interests of shareholders- conflict when prioritize their own objectives- maximizing remuneration,expenses, perks and benefits -Too high- dividends and profit may suffer -Most likely if shareholders lose control over the business- divorce of ownership and control shares held by a large number of different holders and not any has control significantly -Balance between paying dividends and retaining profits for investment
What influences Corporate Decision Making?
-Set strategy- has long term objectives and short term goals- short term decisions may not fit with strategy as attempt to boost profits and have adverse effect on long term performance. -Corporate Culture- influence decision making dependent on how open, flexible and innovative- more likely to involve change, whereas if more resistant to change, decisions are likely to be more cautious and involve less risk-less innovation and loss of competitive edge -Stakeholder perspective- whether they take a shareholder or stakeholder approach- would either influence decision making or marginalise views -Business ethics- strong ethical stance likely to make decisions that take into account the impact- CSR. A corporation that does not take ethics into account will still be influenced by these issues or potential bad publicity -Attitude to Risk- business culture -Objectives and Budget of the business
What are some risk mitigation strategies to reduce damage caused by serious disruptive events?
-Set up in locations that are not vulnerable to natural disasters -Ensure buildings are constructed according to building codes for safety and protection -Organise back up power- generator -Ensure valuable assets are as protected as they can be -Ensures adequate communication styles are set up to deal with crises
What does low gearing mean?
-Share capital/Owners finance is high in relation to loans -Less in debt -Considered more attractive to creditors
What is the stakeholder interest in Statement of Comprehensive Income?
-Shareholders- owners of the business interested in profit for the year (net profit). Rising profits indicate improving performance. Can also see growth if revenue rising. Dividends. Investors- profitability- worth it? -Managers/Directors-Setting annual targets for growth in revenue and profit, also see whether targets have been met before. Monitor progress -Competitors- interested in what has caused increase- training? -Employees- Wage increases- access info when presenting a claim -Suppliers- check whether to provide trade credit, looking at trading history if several years of authenticated accounts, this would show whether able to pay what they owe at the end of the credit period- particularly if constantly profitable -Gov- tax authorities to assess how much to pay- HMRC- documentary evidence. Statistical information also required (Office of National Statistics) economic data presented for public cosumption
What is the stakeholder interest in Statement of Financial Position?
-Shareholders-asset structure/liquidity-whether investment capital is being used effectively- how the funds raised have been put to use, different sources of funds used by the business, assess the solvency- solvent if enough liquid assets to pay bills -Managers and Directors- monitor working capital levels to ensure that the business doesn't overspend, if considering raising more finance, it would need to consider current capital structure before choosing suitable source- avoid borrowing if already in debt- assist financial planning and investors- whether or not good to invest -Suppliers and Creditors- Most interested in solvency- trade credit- need enough working capital- ability to pay bills -Employees- afford a pay rise and whether jobs are secure -Gov- office of national statistics- extract info to compile for public
What are examples of external stakeholders?
-Shareholders-purely have a financial interest as investors to get return, are entitled to vote at the AGM of a plc, vote to re-elect or dismiss current directors- however often if unhappy just sell shares and invest elsewhere -Customers-engage with business every day buy goods and services, provide the revenue and profit needed to survive- most are consumers or may also be other businesses, availability, promotions -Creditors-Lend money to the business- venture capitalists, family, private etc financial interest and expect interest payments to be met and their money returned at the end of the loan period- also want clear communication links with the business -Suppliers-provide raw materials etc relations between business and them need to be goodso good qual resources for reasonable price, prompt delivery and flexibility, trade credit. Suppliers want prompt payment and regular orders- mutual dependence -The local community- people in the surrounding area and would be affected by business -The government- interest in all businesses- provide employment, generate wealth, pay taxes- taxes from businesses and employment fund gov expenditure-pay for NHS etc, if businesses fail has reverse effect- pay more benefits to unemployed etc. Also require businesses to abide by the law- legislation to protect those who may be exploited if business becomes too powerful -The environment-impact- waterways, wildlife. Representatives of the environment would take an interest and becoming more influential on decision making -Competitors- Market share, market size, promotions and customer loyalty
What are the corporate timescales?
-Short-term- operational in nature and are designed to achieve goals in the next year- monthly profit, weekly sales goals- even daily sales targets -Long term- affect vision, mission and objectives of the company
What is a manager's role?
-Show leadership, solve problems, make decisions, settle disputes and motivate workers -Implement the policies and strategies which the board of directors have made decisions on -Often employed to run the different departments- responsible for the work carried out in them and the people employed and their own behaviour- are accountable to senior managers -Likely to help plan the direction of the business with the owners and control resources
What are likely to be managerial objectives?
-Similar needs to employees -Remuneration linked to performance- want it to do well -Bonus payments -Expense allowances when travelling on company business -Benefits such as company car, more flexibility -Some see power as an objective- shareholders lose ability to influence key decisions
What are the benefits of extrapolation (line of best fit)?
-Simple method of forecasting -Not much data is required -Quick and easy
What are the advantages of ARR?
-Simple to understand and easy to calculate -Focuses on the overall profitability of an investment project so would be in the interests of owners who want to see return -Takes into account the entire lifetime of a project, so the years after payback are involved in the calculation and these may be the most lucrative years -Easy to compare ARR with other key target rates of return and very useful in appraising the viability of an investment- to help make a decision and can compare to interest rates too. Whether or not it is a project worth investing in. Allows a range of projects to be compared- shows profitability in annual percentage terms so differing size and duration investments can be compared- other uses of investment finds aswell- eg if gain more from interest, this may be a better use of money- may postpone the investment.
What are Managerial Economies?
-Specialist managers can be employed to help reduce unit costs and boost efficiency -Smaller firms are often unable to afford managers with specialist expertise (e.g. in finance, HR, marketing). As a firm grows it is better able to bring in specialist managerial expertise which should enable it to be more efficiently run.
What are the financial rewards of mergers and takeovers?
-Speed of growth- grow far faster in M&T's than growing internally, benefits of growth such as larger market share, lower costs resulting from e of s, more market power and higher profitability- enjoyed more immediately which benefits shareholders -May be able to enter new market- competitive advantage- saves research costs, however, not experts in new market and may have problems- are there market leaders? -Higher remuneration for senior staff- after a merger or takeover likely to rise because now responsible for running a much larger business- also a bonus or performance related payments if part of a remuneration package linked to growth rates -Rewards to previous owners- owners of taken over business get significant financial rewards when it is sold -Increased Profitability- future revenues will be higher because market share will be higher -Increased revenue. Combined with e of s, long term profits should rise -Economies of Scale- unit costs likely to be lower- -Higher profile- with a larger market share- may be able to dominate the market and generate bigger profits -Usually a higher stock price value- in most cases, the target company's shares will rise to a level close to that of the acquirer's offer, assuming of course that the offer represents a significant premium to the target's previous stock price. In fact, the target's shares may trade above the offer price if the perception is either that the acquirer has low-balled the offer for the target and may be forced to raise it, or that the target company is coveted enough to attract a rival bid.
What are the benefits of using CPA?
-Stakeholders will be able to see the total time frame for the project to be complete- in particular the minimum time and maximum -Parallel activities can be scheduled to save time on the project -Helps identify 'float' where resources can be used elsewhere- better allocation of resources -Very useful for businesses in the Fast-Moving-Customer-Goods market where speed is important -Reduces the capital tied up in resources waiting around to be used -Many larger businesses get involved in projects that are complex and involve significant investment and risk. Thus, it becomes even more necessary to identify the relationships between the activities involved and to work out the most efficient way of completing the project.
How does the diagram work?
-Starts with a list of tasks and it will show how long each task will take (duration) -It will also show what order they should be carried out- preceding activities -There are nodes which are split into three. The left shows the number of activity, EST at top right and, LFT at bottom right -The start of the project is the first day so would be zero- shown by the circular node at the start -Nodes represent a point in time when an activity is either started or finished with the line linking them representing an activity which takes time to get to the finish- a description of activity is displayed on the line with the duration -Shows the prerequisites tasks that go before
What statements are required by law from plc's and ltd's at the end of the financial year?
-Statement of Comprehensive Income- profit and loss (SOCI= P&L)- profit or loss for the year and then shows other items of comprehensive income- such as gains on currency transactions -Statement of Financial Position- balance sheet- shows assets, liabilities and capital
What are director objectives?
-Strategic objectives -Profit
Why might there be changes in competitive environment?
-Structure of markets is likely to change- competition may intensify as new businesses enter the market- innovative new entrant, alternatively newcomer may be established and want to diversify into a new business area -Gov's try to make markets more competitive by reducing the amount of regulation- easier to do business, however, also may be some consolidation in some markets where there are now fewer businesses-Mergers and Takeovers. ->Eg, retail has become more competitive due to the increasing use of online shopping ->Consolidation of airline industry- lots of mergers
How are decisions ultimately made in a business, regardless of statistical models and forecasts?
-Subjectively- the judgement is made by someone in the business- there may be contention (disagreement) despite the sales forecasting. From this forecast decisions can be made such as ordering materials, marketing, staffing etc.
What is the Bargaining Power of Suppliers in Porter's Five Forces?
-Suppliers want to maximise profits, higher prices charged for customers- so reallocate profit to themselves over business. -Businesses limiting the power would improve the competitive position of the business -The cost of items bought from suppliers (raw materials, components) can have a significant impact on a company's profitability. In theory, less attractive if suppliers have high bargaining power. The bargaining power would be high if there are many buyers and few dominant suppliers, there are undifferentiated, highly valued products, suppliers do not threaten to integrate backwards in the industry. -Limit power of customers to look for new suppliers- lowers ability to change from one to the other -Backward vertical integration and merge or takeover the supplier
How is Corporate Culture formed?
-Surface Manifestations- visible on surface by influence of heroes or founders, language, mottos, legends or myths, rituals , songs, symbols -Core Organisational Values- below surface manifestations, including words and policies thought-out mission statement to impose a culture for the business from founder or top hierarchy -Basic Assumptions- unsaid beliefs, ways of working, general attitude -Size and development of the business -Leadership and management style -Environmental factors born into- history and heritage -The type of product- technological complexity would possibly need a skilled role culture, pace of change and need for innovation
CSR Approach
-Taking into account all stakeholders, not just shareholders. Linked to the stakeholder approach and ethics as a sole consideration.
What are the limitations of Ratio Analysis?
-The balance sheet is just a snapshot of the business on one day- not enough, ratio data based on this figure so not good for dynamic markets as liable to change- may not be representative of the business's circumstances throughout whole year -The ratios are only as good as the information provided- needs to be reliable- balance sheets and income statements, there may be change in monetary values caused by inflation and can affect the quality of accounting information- rising prices distort comparisons made between different time periods -Possibility of accounts window dressed eg may manipulate its sales by increasing the level of revenue recorded on the income statement- increase profit in that accounting period- suppress costs by choosing when to 'write-off' bad debts etc -Need comparison with previous data to be useful- changes over time, however a great deal of care must be taken in this due to companies diversifying and changing rapidly, growing, shrinking- affect the way ratios can be used as a measure of performance, also need to compare companies in the same industry, but even those would have subtle differences- may be selling more of a certain type of product than another so direct comparison is less meaningful -Ratios must be seen in the industry context as there were poor ratios in the time of recession
What are the limitations of quantitative sales forecasting?
-The business has made certain assumptions when predicting figures- no other factors were likely to have changed to affect the trend- likely to be inaccurate if there are changes with competitors(hard to predict significant reason why they prove over-optimistic), population changes, level of promotion, legal changes, recession in the economy- NEED TO APPRECIATE PESTLE analysis -Uncertainty- qualitative factors such as customer tastes may change and there may be less demand in the future- hard to predict this -May make managers inflexible- sales targets must be reached and instead of adjusting they may encourage staff to work harder. However this is not how it should be- the best way is to adjust the sales forecast every quarter to take into account and recognise the changes in the business environment. In this way, the rigid targets may end up lowering staff morale and cause frustration in the workforce. -Product life cycle-trends don't continue into the future in dynamic markets -Only as reliable as the accuracy and age of the data -May be internal factors - such as leadership and future planning and direction, failure to adapt and innovate, poor use of capital, unmotivated staff, narrow customer base, lack of funds -Doesn't take into account value or money OVERALL- must be treated with caution as external influences may have a big impact so must be taken into account with the business objectives and they are only estimates- wider economic factors may make estimated levels of sales unlikely
What are the issues as a result of the market and external changes?
-The business may need to respond by increasing their R&D budget to introduce more innovative products to their portfolio -They may need to change their corporate objectives -Move from labour to capital intensive
What does a current ratio below 1.5:1 mean for a business?
-The business may not have enough working capital to cover all their bills -They may be overborrowing or overtrading and will have cash flow problems
What are the issues faced as a result of poor business performance?
-The business will need new objectives and new direction -The business will need some new strategies to compete (Ansoff) -The business will need to look at what is necessary to improve the performance this may mean delayering or redundancies
What are the issues as a result of transformational leadership?
-The business will need to reinvent itself to achieve competitive advantage -A new business culture which challenges managers to develop new ways of thinking -The business encourages the development of new ideas
What are examples of oligopolies?
-The car industry -The confectionery industry -Potato Crisp Industry
What would economies of scale depend on?
-The competition in the industry -Negotiations with suppliers -Depend on whether internal or external E of S as if they occur within the industry externally, unlikely to benefit from competitive advantage- may trigger a price war
What are external labour economies?
-The concentration of firms may lead to a build up of labour force equipped with the skills required by the industry- thus, training costs would be reduced if workers gain skills from other firm ->local schools etc may offer training courses aimed at the needs of the local industry
What are the disadvantages of NPV?
-The discounted rate can change as risk and conditions in the financial markets change- includes data far into the future= reduce reliability. Values are based on analyst predictions and needs to be changed to reflect the fact that external factors are constantly changing -Very complex- not used by smaller businesses due to this and difficult with investments of differing size and time periods -Results are dependent on the rate of discount used- it is critical as the higher the rate the more likely it is that the project will be rejected as unprofitable. A lot of gambling and guesswork in producing the figures and it is difficult to tell how external factors will change- very complicated process
In what ways are sales forecasts likely to be more reliable?
-The forecast is only for a short period of time in the future- such as 6 months -Is constantly revised frequently to take into account of new data and information -When the market is slow changing -Market research data is available
What purposes do businesses use pay and remuneration for?
-To attract employees with the right experience , skills and knowledge- supply and demand- more skills and rare= high wage -To reward and motivate existing staff- to the best of their ability. Maximize productivity levels- well motivated= more productive
What does the long run average cost curve tell us and its effect on economies of scale?
-The graph shows a U shaped curve, where typically, there is a range of output over which average costs fall as output rises -When over the average costs, the business enjoys competitive advantage over smaller businesses and enjoy economies of scale. -The business may then buy another factory or purchase more machinery in the long term- further causing average cost to fall -However, there is a point where raising output too far causes average costs to rise and law of diminishing returns- having diseconomies of scale -A business may invest in expanding scale of operations- bigger plant which would increase efficiency- same level of output but just more efficient
What is the Threat of Substitutes?
-The presence of substitute products (meet same needs of customer- same performance) can lower industry attractiveness and profitability as they limit price levels +reduce profits. Depends on buyer's willingness to substitute, the relative price and performance of subs, the costs of switching to subs. -Continuously invest in R&D and develop patents would reduce number of potential substitutes -Buy up patents of rivals and shelve to prevent product production -Depends on the performance of sub, willingness of customer to switch and customer loyalty
Why must a business be careful when making decisions off of calculations such as coefficients?
-The quantity of sales may be due to factors other than advertising- such as forms of promotion -There are some examples of 'nuisance correlations' these are coefficients which appear to show a strong relationship between variables but it is purely coincidence.
What would rivalry among existing firms depend on?
-The structure of competition- rivalry is more intense where there are may small or equally sized competitors, less when the industry has a clear market leader. -Number of competitors in the market- intense if many! -Growth prospects- if market has potential likely to be increased competition -The structure of industry costs- industries with high fixed costs encourage competitors to fill the unused capacity by price cutting -Degree of differentiation- industries where products are commodities/low differentiation (steel, coal) have greater rivalry, industries where competitors can differentiate their products have less rivalry. -Substitutes are available and buyers are strong- rivalry is intense -Customer Loyalty- if high, competition is less intense -If expensive to leave- more competition -Strategic Objectives- when competitors are pursuing aggressive growth strategies, rivalry is more intense , where competitors are milking the profits in a mature industry, the degree of rivalry is less
In what circumstances is the Bargaining Power of Buyers/Customers high?
-There are few dominant buyers (few of them- not easy to get customers) and many sellers in the industry (wide range of supply firms) -Switching is easily done- easy and inexpensive to alternative suppliers- exert pressure to drive down prices or increase the required quantity for the same price (e of s)if difficult to switch then less likely -Products are standardised -Buyers have a credible threat to integrate backward into the industry -Suppliers do not threaten to integrate forward into the buyer's industry -The industry is not a key supplying group of buyers- particularly if the customer/business purchases a significant proportion of output of an industry
In what circumstances would bargaining power of suppliers be high?
-There are only a few large suppliers and many buyers • The resource they supply is scarce- essential for the business and is uniqueness- no suitable subs • The cost of switching to an alternative supplier is high • The product is easy to distinguish and loyal customers are reluctant to switch- highly valued products • The supplier can threaten to integrate vertically backward • The customer is small and unimportant- there is lots of competition for input into industries • There are no or few substitute resources available
What should I remember about decision trees in the exam?
-There may be more than 2 options coming off 1 decision -THE EXPECTED VALUE- NET GAIN- is not the same as the generated profit or loss from a particular course of action. Depends on success of it whether it is profitable or fails but it will not be the expected value as this includes both. Does not represent the actual money made.
What are the issues faced as a result of new ownership?
-There may be significant role duplication (two marketing managers) so there would need to be redundancies- synergies -There may be a clash in cultures -There may be communication issues as they change and merge
What is the impact of new products on the business environment?
-When new product appears, businesses may be forced to make changes of their own- may adapt their own products, lower the price of existing ones or invest in an aggressive marketing campaign.
What are the problems with growth? (Particularly rapid growth- M&T's)
-There may be a shortage of cash to meet expansion costs (overtrading)-drain on resources- could cost a lot of money and business has to be well resourced as it is financially stretched and may impair aspects of the business. Initially physically integrating both companies is complex, expensive and time consuming to physically integrate the two organisations- organisational and personnel changes- redundancy/severence pay, tech changes etc. Not uncommon to underestimate costs and encounter problems when carrying out consolidation process- culture clash -Shortage of resources AND OVERTRADING- doesn't have capacity or resources to produce- resulting in demand for these resources driving up prices and this may happen when there is a shortage of skilled labour and wages are driven up -Coping with change- COORDINATION IS LACKING + ISSUES- AND INTERNAL COMMUNICATION- integration process can be challenging with lots of changes- difficult to impose a new culture on a business and there may be resistance - if changes are forced too quickly, without proper consultation, resistance likely to be stronger - such problems more intense if growth is rapid and combining cultures too quickly -DISECONOMIES OF SCALE-business expands its operations beyond the minimum efficiency scale -There may be resistance from employees as morale may drop if staff cannot cope with heavy workload and culture merging there may be resistance-intense DEMOTIVATION, productivity decrease and diseconomies of scale- also more absenteeism and turnover of staff-vital knowledge could be lost as staff leave- hiring and training new staff takes time and money- loss of core competency- challenging with lots of changes to overcome. Resistance also due to job losses due to duplicated resources- may disrupt proceedings by going on strike if on a large scale -Regulatory Intervention- may attract attention of market competition authority if against the interest of the customer - order an investigation which could cause delays and hinder proceedings -May outgrow the space- not enough for everyone to work effectively -Loss of strategic direction +Loss of control by senior executives, some extra layers of management- may lengthen communication channels and impact negatively on chain of command- costs may start to rise as a result -The quality of products and services could drop, causing an increase in customer complaints- may even lose customers to competitors -Management under pressure- operating reactively over proactively -May lose touch with customers- brand loyalty lost- alienation of customers- growing too fast, too much attention and resources focused on the process of growth, as a consequence- customers needs may be overlooked- change of name may confuse customers with the values- damage the image of the company and result in the loss of customers
What are the positive aspects of PESTLE analysis?
-This aids strategic and tactical decision making, objective setting and helps a business to reach its goals. Strategic thinking for strategic planning -Cost Effectiveness-only cost is time- simple and straight forward- doesn't require training of high skill to perform- an individual or a team can do it quite successfully- the business environment cannot be controlled so business strategy must be developed and adapted to ensure business success -Without PESTLE, changes in the business environment may be overlooked, so looking at all the potential barriers to the business- raise awareness of potential threats and see what may influence the success of the product launches-have the ability to thoroughly examine changes and develop a plan to minimize any/all profit increase or damage. Without it, the business could be hit by what appears to be an unexpected threat.
What are the benefits of Porter's Five Forces?
-This tool helps managers to make decisions and find the best strategy to gain competitive advantage- has a role to play in helping management to evaluate and assess their current market environment. It provides an excellent foundation for the further research and intelligence gathering needed to formulate a businesses future strategy. -Effectively used to analyse how a wider range of factors than simply competitors affects the environment in which the business operates framework for determine the nature of competition in a particular market This aimed to help businesses establish how best to achieve and keep their competitive advantage- easy to understand diagram -Determines the attractiveness of an industry and provides insight into profitability- supports entry into or exit from an industry or market segment- in such a way this allows analysis of options and with the knowledge about intensity and power of competitive forces, businesses can develop options to influence them in a way that improves their own competitive position- such as new positioning, strategic partnerships.
What are the horizontal Industry parts of Porter's forces?
-Threat of New Entrants -Rivalry among competitors -Threats of subs
What are the drawbacks of scenario planning?
-Time consuming -Expensive- funds may be unnecessary and better utilised elsewhere -Risk that the business may not devote sufficient resources to it and fail to carry out the process effectively -Some may argue that planning for events that never happen is a waste of money -Finding people in the business who have a deep enough understanding of the possible scenarios- may be necessary to invite external agents to participate- adding to cost -Only large corporations are likely to have the resources to undertake full-scale scenario planning- small businesses have much less to lose and opportunity cost of it too high
What are the key negatives of Evidence Based Decision Making?
-Time-consuming -Costly -No guarantee of the right decision
Organic Growth
A business growth strategy that involves a business growing gradually using its own resources.
What are the effects of change in ownership? (competitiveness, productivity, financial performance, stakeholders, business performance)
-Transition from private limited to public, shareholder equity. May come from internal growth or merger or acquisition as well- bringing a very sudden change to a company. -Competitiveness- this is determined by how the companies integrate and complement each other- significant EofS can be had from merging- short term may be low but long term fall in unit costs -Productivity- may eventually rise as a result, but short term it is likely that operations will be disrupted as work out how firms get along and integrate -Financial Performance- acquisitions can be very expensive, and should the venture fail it can lead to huge losses incurred by the buyer. Acquisitions are good for share prices and the announcement can increase demand for the company's stocks -Stakeholders- danger of clash between the two corporate cultures- the merger will always lead to restructuring and may also lead to redundancies
What are the 4 main components that a business wants to identify in a time series data?
-Trend -Seasonal fluctuations -Cyclical fluctuations -Random fluctuations
What is Causal Modelling?
-Tries to explain data, usually by finding a link between one set of data and another eg- the amount it spends on advertising and the sales received. The data is plotted on a scatter graph. The business can then see whether it is a positive correlation or a negative correlation between two variables.
What are the problems with extrapolation (line of best fit)?
-Unreliable if significant fluctuations in historical data -Assumes past trend will continue to the future- unlikely in many competitive business environments -Ignores qualitative factors such as tastes and fashions
What is the calculation for NPV?
-Use discount tables- how much a future value must be multiplied to calculate present value -Multiply the rate of discount with the each annual cash flow. -Add them all together and minus initial cost
Why does the airline industry make very little profit?
-Very intensive competitor rivalry - mainly on price competitiveness • Low barriers to entry - lots of new airlines who want to set up • Suppliers of aircraft & equipment are powerful - can charge high margins • Customers have lots of substitute options - e.g. rail, car • High expenses- fixed costs buying the plane - airline losses rise significantly if revenues fall only slightly, since it costs roughly the same to fly half-empty planes as full ones
What are Government objectives?
-Want businesses to grow and make a profit -Comply with legislation and not exploit vulnerable groups
Exam Tip on Structuring Change Question
-What is the cause? Internal or external? -Impact/Effect of the change? What factors? Driving forces? -What factors determine the success?- the issues covered in unit -Outcome, what steps can the business take to make sure the change is successful? Context? -What is the industry? some more adaptable than others- nature of the product? Change can bring about new opportunities but long periods of stability and consistency may help a business build efficiencies and become good at what it does.
What other considerations MUST I take into account when answering a question on predicted sales when the sales have been recently rising/falling?
-What were the sales before the recent two years? -What market does the business operate in? -Are the sales cyclical? -What is the seasonal breakdown throughout the year? -Might there be some reason why certain sales figures are so high?
What is the impact of new entrants on the business environment?
-When competition gets stronger, existing businesses have to consider their position- move more into online retailing- may otherwise find it difficult to survive in the future
What is the impact of consolidation on the business environment?
-When consolidation occurs in markets, the number of businesses in the market falls, but some of the existing businesses get bigger. These bigger organisations pose more of a threat to the others- they may be able to lower their costs and they will have a larger market share. Other businesses may organise mergers and takeovers in response, or develop their products, diversify or operate in much the same way but accept lower profit margins. -Failure to respond effectively to changes in the competitive environment could adversely affect the performance of the business- may threaten a business' survival.
Inorganic Growth
A business growth strategy that involves two (or more) businesses joining together to form one much larger one.
What is the Principle of Increased Dimensions?
-When the capital and running costs of a certain piece of machinery will not increase in relation to its larger size, the output doubles but not the cost- average cost will fall.
What should I look out for in case study questions on culture?
-Whether it is strong or weak -Surface manifestations, values or beliefs -Identify the culture by the influence of the CEO -Nationality of the business -Different dimensions and structures
What are likely to be the objectives of employees?
-Work for business profitable and growing -Higher wages -More perks- bonus? -Job security -Good working conditions- Hertzberg suggests this is expected with good pay -Responsibility -Interaction with colleagues -Be valued, personal development, fair and honest treatment, opportunities -Safety
How might a changing competitive environment affect businesses?
-Would lead to a change in strategy- there may be an increased need to innovate and invest in R&D- differentiate from competitors, develop loyalty scheme to keep customers- receiving rewards, spend more on promotional activities, either add value or potentially reduce prices Porter's Five Forces- threat of new entrants etc!
What are key barriers to entry to prevent new entrants?
-economies of scale -capital/investment requirements -access to industry distribution channels -the likelihood of retaliation from existing industry players -regulatory or legal restrictions -product differentiation
What are the key steps to scenario planning?
1) Explain and identify possible trends and risks- internal and external environment to spot what may impact a business- PESTLE 2) Build scenario possibilities- a range of possibilities that may affect their operations, using background info gathered at previous step- vary between businesses 3) Plan a response- identifying as precisely as possible the impact the scenarios will have and developing plans- lengthy, numerous, complex 4) Identify the most likely scenarios using probabilities- prioritize those 5) Capitalize on scenarios- implementing the planned responses when scenarios appear a likely reality-not all negative outcomes
What is the ideal for current ratio?
1.5-2:1
What is the ideal Acid Test Ratio?
1:1
If a question is on the external environment of a business, what should I think of?
2 P'S- PORTER'S FIVE FORCES AND PESTLE
What is a calculated number always put to in decimal places?
2 d.p
What percentage of mergers fail?
65%- 90% actually fail in the sense that they don't live up to expectations- KPMG report in 2013
According Gov Stats, what percentage of UK Businesses are classified as small?
99.4%- growth in the number of small businesses accelerated and self-employment (due to high unemployment saw self-employment as means of support) -Gov start up schemes for businesses to encourage -Economically active after retirement- self-employment -E-commerce- wide range of business opportunities have opened up- so much business activity
Mission Statement
A brief statement, written by the business, describing its purpose and objectives, designed to encapsulate its present operations. May include the ethics and reference to the market in which it operates. Reason it exists.
Corporate Social Responsibility
A business assessing and taking responsibility for its effects on the environment and its impact on social welfare. It involves the idea that businesses bear a responsibility that stretches beyond their shareholders.
Quantitative Sales Forecasting
A business measures/estimates it projected sales for the future based on the previous year's data. The use of analysed historical data- involves trend analysis and exponential smoothing.
How does the corporate strategy followed by a business compare to the mission statement in reality?
A business would form its strategy based upon the mission statement in reality, and this strategy would help the business to achieve its aspirational mission.
Network Diagram
A chart showing the order of the tasks involved in completing a project, containing information about the times taken to complete the tasks. Shows the most efficient way of completing projects for them all to be done- they may be concurrent- not all linear.
Strong Culture
A culture where the values, beliefs and ways of working are deeply embedded within the business and it's employees. It is easy to see how to behave within a business.
Scatter Graph
A graph showing the performance of one variable against another independent variable on a variety of occasions. It is used to show whether a correlation exists between the variables.
Critical Path Analysis (CPA)
A management tool which helps a business identify how long a project will take and what the critical tasks in that project are. Way of calculating the minimum time required to complete a project, identifying delays which could be critical to its completion. -Identifies those that are 'critical' and those which have 'total float' (can be delayed without making the project longer)
Shareholder Value
A measure of a company's performance that combines the size of dividends with the share price.
Correlation Coefficient
A measure of the extent of the relationship between two sets of variables. On Causal Modelling scatter graph. -A coefficient of +1 means that there is an absolute positive relationship- upward slope -A coefficient of 0= no relationship -A coefficient of -1 means there is an absolutely negative relationship- downward slope
Average Rate of Return (ARR)
A method of investment appraisal that measures the net return per annum as a percentage of the initial spending. BETTER= HIGHER
Time Series Analysis
A method that allows a business to predict future levels from past figures.
Centring
A method used in the calculation of a moving average where the average is plotted or calculated in relation to the central figure.
Porter's Five Forces
A model/tool which outlines five forces or factors which analyses the nature of competition and determines the profitability of an industry- the ultimate aim of corporate strategy is to cope with and ideally change those rules in favour of the business. -This tool helps managers to make decisions and find the best strategy to gain competitive advantage. -The collective strength of those five forces is favourable-business earn above average rates of return on capital, when unfavourable= locked into low returns or fluctuating returns. Model developed by strategy expert Michael Porter that identifies five competitive forces that influence planning strategies.
Contingency Plan
A plan devised for an outcome other than a usual expected plan- to deal with the possible crises that may affect a business. It is often used for risk management when an exceptional risk that, though unlikely, would have catastrophic consequences.
Organisational Change
A process in which a large company or organisation changes its working methods or aims, for example in order to develop and deal with new situations or markets. -Restructure and and adopt policies and processes to manage expansion
Cultural Dimensions
A set of characteristics that form the international context of business culture.
Scenario Planning
A strategic planning method designed to explore UNCERTAINTIES (unseen events eg IT failure, fire, leaving ceo), learn how to protect the business from the worst consequences (anticipating possible changes in situation of business and devising ways of dealing with them) and prepare for uncertain events that may provide a business with OPPORTUNITIES that may present themselves (population boom- businesses around the world benefit). This links to contingency planning. NOT ABOUT PREDICTING FUTURE EVENTS
Moving Average
A succession of averages derived from successive segments (typically of constant size and overlapping) of a series of values- it is used to smooth out the data and then easy to identify a trend. Adjusted relative to a period of time.
Decision Trees
A technique which shows all possible/alternative outcomes of a decision based on probabilities and estimates- branches of trees. Commonly used to illustrate how firms make decisions depending on the actions minimize risk and gain the greatest return. -QUANTITATIVE AND PICTORIAL- also based on historical data- eg they would know the probability of a successful product launch based on a previous one
What is Handy's Power Culture?
AUTOCRATIC -This involves a culture that has a central figure who makes all the decisions. This is usually a founder who has power to over-ride other people's decisions and their influence spreads out across the organisation -Few rules and regulations- are overruled -Centralised decisions by leader and quick decision making -Competitive atmosphere- gain power and achieve own objectives -Usually a strong culture, but can easily turn toxic -Employees judged on what they can achieve than how they do things and act -Tend to be relatively young small-medium sized, single owner who runs the business 'every man for himself' type of culture/entrepreneurial Alan Sugar
What is the Size of the Organisation as a factor in change?
Affect ability to manage successful change, the larger the organisation, the less adaptable and flexible it becomes (more change to manage and on a larger scale, decision making takes longer- longer chain of command and subdivisions- communication essential, longer to implement) change the way decisions are made with expansion- decentralised decision making. Large organisations it is easier to have subcultures- more difficult to manage. Being a PLC= benefit of more finance- flotation.
At what point in the diagram do two tasks take place at the same time?
After the first node, the two that split off after that most often take place at the same time. Dependent on task a being completed.
Stakeholders
All those with an interest in the activities of a business- who is affected by organisations actions, objectives and policies
What does Equity consist of?
Amount of money owed to the shareholders: -Share Capital- paid by shareholders when issues shares -Share Premium Account-difference between value of new shares issued and nominal value- the value when issued -Other Reserves- any amounts owing to -Retained Earnings-retained profit - to be used in the future
Evidence-Based Decision Making
An approach to decision making that involves gathering information (researching and analysing) and using a systematic and rational approach to reach a conclusion- based on data and analysis
Subjective Decision Making
An approach to decision making where the personal opinions of the key decision maker strongly influence the course of action chosen. -There is a sense of uncertainty generally- lack of info and consultation, more risky
What is the difference between an economic factor and a social one?
An economic factor concerns the financial impacts on a business from external influences, such as exchange rates, whereas social factors involves the impact of the population and people in a country such as an ageing population.
Living Wage
An hourly rate of pay based on the basic cost of living, set independently of government and updated annually.
What are ancillary and commercial services external economies?
Ancillary= providing necessary support to the primary activities or operation of an organization, system, etc. An established industry, particularly if it is growing, tends to attract smaller films trying to serve its needs. A wide range of commercial and support services can be offered. Specialist banking, cleaning, distribution services etc.
If a question is on the Corporate Strategy of a business, what should I think of?
Ansoff Porter's Strategic Mix
Current Liabilities
Any money owed that is expected to have been repaid by the end of the year EG- Short term loans or overdrafts, Trade and other payables- trade credit, dividends, tax liabilities- corporation, income tax etc
What category of Kay's Capabilities would culture fall into?
Architecture- relationships and networks within an organisation and those that it develops with external stakeholders. Corporate Culture is worth considering as an asset- can add value and help a business compete in a market- be a competitive advantage.
What are the internal economies of scale?
Arise from increased output within the business itself -Purchasing Economies -Marketing Economies -Technical Economies -Specialisation (Managerial) Economies -Risk-Bearing Economies -Financial Economies
What are Marketing Economies?
As firm gets larger, may choose to spread the cost of marketing over a wider range of products and sales-cutting the average marketing cost per unit-may be cost effective to acquire own fleet of vans.
What are the 3 elements of Statement of Financial Position?
Assets Liabilities Capital
Non-Current Assets
Assets owned by a business that are not expected to be sold within one year. Retain for one year or more-long term used again and again over a period of time. EG- goodwill, intangible assets (brand names copyright), property, plant, equipment- tangible assets, Investments-shares held in other companies- investments may be non-current or current.
Current Assets
Assets that companies can convert to cash or use up within one year- liquid EG- - stocks of raw materials/inventories, trade and other receivables-prepayments-debtors, cash at bank and in hand- on premises and in bank accounts.
Statement of Financial Position
BALANCE SHEET- financial document which shows the value of the business at the specific time the data was collected. Everything the business owns, and everything it owes
What is the difference between profit and profitability?
BOTH ARE A MEASURE OF FINANCIAL PERFORMANCE -Profit measures how much money a business is earning- Total revenue- total costs- appears on statement of comprehensive income -Profitability is a relative number (a percentage) and expresses the ratio between profit and revenue. Profitability = profit divided by revenue multiplied with 100. -Profit is an absolute number which is equal to revenue minus expenses. If a company has $200 in revenue and $180 expenses, its profit is $20. -Profitability is more important really than profit
Why is stock excluded from the Acid Test Ratio?
Because it may perish or be obsolete or not worth the stated value.
What does prerequisites mean?
Before
EXAM TIP- can organic and inorganic be used together?
Companies may use both strategies in order to increase the size of their business. It does not have to be a straight choice between one or the other. A supermarket chain may open brand new stores (organic) and at the same time acquire another chain (inorganic).
What is the distinction between mergers and takeovers?
Both are corporate strategies that aim to improve the performance of the business. ->Merger= two or more businesses join together and operate as one, agreement between both and generally friendly in nature with name formed out of both ->Takeover= Occurs when a business buys another- acquisition. Among Public Limited Companies, can occur because acquired 51% or more of a company's shares - on the stock market or from existing shareholders- when bought, loses its identity and becomes part of the predator company. Private limited- only taken over if invited. Share ownership may be widely spread and in this case it may take less that 515 for predator to take over company- existing shareholders are made aware of situation if above 3% -Takeovers of public limited often result in sudden increase in share price- volume of buying by the predator and speculation by investors -Sometimes competition bid if more than one firm wish to purchase the company- sharp increases in share price
Who proposed the types of culture as a theorist?
Charles Handy
What is the purpose of decision trees?
Commonly used to illustrate how firms make decisions depending on the actions minimize risk and gain the greatest return. Maps out different courses of action and possible outcomes and points where decisions have to be made. Used to determine the best likely outcome for the business, thus, the most suitable decision Used for example to choose whether to launch a new product, invest in new machinery, new marketing campaign
Business Ethics
Considerations of the moral 'rights and wrongs' of a decision at an often strategic level, in accordance with the law, and a business' code of conduct in relationship to CSR. Many business ethical decision have to be made without the help of the law.
Taxation
Corporation Tax which has to be paid to the government.
Gross Profit
Cost of Sales- Sales Revenue made before the deduction of general overheads
What is the Payback calculation?
Cumulative cash flow is calculated until the intial cost has been covered. If the amount enters another year only partially, the amount needed out of that year is divided by the total amount for the year/ divided by 12. This will give you the number of months into that year and would need to be rounded if a decimal. BETTER=LOWER
What does a result of less than 1:1 in the Acid Test mean?
Current assets do not meet their current liabilities and they could struggle to pay their bills.
What is Handy's Task Culture?
DEMOCRATIC -The focus is on the task that needs to be completed -The power comes from those who can accomplish the tasks in teams and have the expertise (instead of their role)- are adaptable, dynamic- power shifts depending on the team members and problem importance etc -If team dynamic is good- personalities and leadership can be v productive and creative -Usually a team of experts working on a project- sometimes scientific- teams dissolved and move on when finished like matrix- adaptability on daily basis -Quick decision-making Website design, software specialists
Liabilities
Debts of the business- what it owes to institutions, individuals or other businesses- sources of funds. May be short term (overdraft etc) or long term (mortgage). Current and non-current.
How is Free Float calculated?
Delayed without affecting the next task EST of next task- EST of this task- Duration
What is the type of leadership and culture of a technology firm?
Democratic Leadership, Matrix-style Task Culture- employees left to their own devices, communicated aims and objectives and employees highly skilled.
Cost of Sales
Direct costs to make the goods that have been sold- raw materials, wages, labour
What are disintegration external economies?
Disintegration occurs when production is broken up so that more specialisation can take place. When an industry is concentrated in an area, firms might specialise in the production of one component and then transport it to a main assembly plant- supporting firms.
What are the potential benefits of vertical integration?
Enables a business to capture a greater share of the profit on each sale • Secures important sources of supply or distribution • Create a barrier to entry to potential new competitors • Gain greater insights into customer needs and wants at each stage of the supply chain
What might be developed from Ethical Codes of Practice?
Ethical objectives- carefully thought out so would affect reputation if gone against
Internal Communication
Exchange of messages and the flow of information inside a business -In large businesses, the layers of management are likely to grow which leads to longer channels of communication - scope for error in the transition of messages increases -Distortions to info may occur when passed through the management hierarchy- misunderstandings and disputes- cause a drain in resources and any cost resulting will reduce productivity -May be IT systems failure causing communication to be halted -Communication poor between different departments, may have negative effects as competing for company resources- thus individual dept may be reluctant to share info- stifling development and resulting in missed opportunities and higher costs
Overtrading
Expands too quickly without having the financial resources to support such a quick expansion. Tries to fund a large volume of new business without sufficient resources to do so. -If a business grows too fast there is always the danger of this. -Most likely in young, rapidly growing businesses. As a result it runs out of cash and may even collapse. -Growth has to be managed carefully as running out of cash can threaten survival.
What should the answer of Current Ratio be shown as?
Expressed as a ratio to to 1
What are co-operation external economies?
Firms in the same industry are more likely to co-operate if they are concentrated in the same region. They might join forces to fund a R&D centre for the industry - industry journal may be published so info can be shared.
Qualitative Forecasting
Forecasting that uses the judgement and opinions of knowledgeable individuals to predict outcomes. Very useful if insufficient numerical data and where figures date quickly because market is changing rapidly.
What is the gig economy?
Freelancers and internal employees, you're your own boss such as Uber and Deliveroo.
Why do a lot of businesses today operate in highly competitive markets?
Fuelled by globalisation Changes in Technology Growth of e-commerce
What is the difference between functional objectives and corporate objectives?
Functional objectives are those that relate to the specific functions of a business (e.g. marketing, operations, HRM, finance) and which are designed to support the achievement of corporate objectives. -Functional objectives are set more day to day to keep consistency whereas the corporate objectives are the targets set by a business to allow it to achieve its aims.
Internal Stakeholders
Groups inside a business with an interest in its activities.
External Stakeholders
Groups outside a business with an interest in its activities.
What is General Inertia
Happy with what the business is now and don't want change. Become accustomed with the traditional methods of doing things- however, communication is KEY- to stress the importance of this change in preventing the failure of the business- to stay competitive. Business may stay at a level of success which makes everyone comfortable- failure may be a good thing for resilience.
EXAM TIP ON SWOT ANALYSIS
Helps make decisions so link info about any decisions made to this SWOT analysis on business' current situation.
Is ROCE better high or low?
High- will vary between industries!
Profitability or Performance Ratios
Illustration of the relative probability of a business- show how well the business is doing focusing on profit, capital employed and revenue. Profit alone is not a useful performance indicator- it is necessary to look at the value of profit in relation to value of revenue or amount of money that has been invested in the business.
BUZZ WORD- FINANCIAL REWARD INORGANIC
Immediate Increased Revenue for New Business Economies of Scale- reduced costs
What are the benefits of horizontal/vertical integration?
Horizontal: More likely to achieve economies of scale • Cost synergies (savings) from the rationalisation of the business • Potential to secure revenue synergies • Wider range of products - (i.e. diversification) • Reduces competition by removing key rivals - this increases market share and long-run pricing power • Buying a existing and well-known brand can be cheaper than organically growing a brand - this can then make the entry barriers higher for potential rivals Vertical: The potential benefits of growing through vertical integration include: • Enables a business to capture a greater share of the profit on each sale • Secures important sources of supply or distribution • Create a barrier to entry to potential new competitors • Gain greater insights into customer needs and wants at each stage of the supply chain
Earliest Start Time
How soon a task in a project can begin. It is influenced by the length of time taken by tasks which must be completed before it can begin.
Risk Mitigation Plans
Identify, assess and prioritise risks and plan responses to deal with the impact of these risks on the operation of the business. Steps to reduce adverse effects.
Succession Planning
Identifying and developing people who have the potential to occupy key roles in the leadership of the business in the future or other critical roles. -Helps the business deal with the problem of losing key staff and also develop staff needed to fill the posts as the business expands- without it , the business may end up promoting a person who is not equipped to do the job, or external recruitment which would carry a far greater risk and expense
Risk Assessment
Identifying and evaluating the potential risks that may be involved in an activity that a business proposes to undertake, ensuring compliance with health and safety legislation. -Examining the potential harm to people and precautions to take to protect this from happening -May be used within the business aswell- hazards
Ethical Marketing
In the pursuit of product differentiation but at the cost of manipulating the customers-the moral aspects of a firm's marketing strategies. eg- thinking a product is more healthy than it actually is.
What is the difference between internal and external change?
Internal causes of change are factors which are in the control of the business, such as performance, growth and leadership. Whereas, external causes are factors outside of the control and involve PESTLE factors.
What are the reasons for high labour turnover?
Internal factors: -Low pay- workers leave to get better paid jobs -Few training and promotional activities- boring and unchallenging jobs -Poor communications- low morale and motivation -Ineffective leadership and management -Poor working conditions, low job satisfaction- bullying and harassment in the workplace -Ill-suited to the job role- recruitment was flawed- poor selection procedures- higher chance of leaving quickly External factors: -Increase in vacancies for more attractive jobs -Higher paid jobs available -Type of industry- some are particularly vulnerable, flexible workforce structures often produce high turnover- can be healthy and avoids future redundancies -More interesting and better training- prospects -Boom economic growth- in recession, turnover tends to fall as people want to have a secure job and worry they won't get another one- don't want to become long-term unemployed, in a Boom- there may be labour shortages an far more vacancies so this rises so people more likely to leave their position
STRUCTURE OF INTERPRETATION OF FINANCIAL STATEMENTS 20 MARKER
Intro- definition PRO 1- Interpret the accounts PRO 2- Ratios PRO 3- External Influences- howo they affect performance Conclusion- MOPS
Forward Vertical Integration
Joining with a business in the next stage of production
Backward Vertical Integration
Joining with a business in the previous stage of production
What is Handy's Person Culture?
LAISSEZ-FAIRE -Experts have power and control but do not work together- they have similar skills, highly trained and independent -Business supports individuals but they have the power- they are unique and superior to the business- don't necessarily work together- similar background though and skills set -Collection of individuals- so they can work -Client-by-client basis rather than on a project basis Accountants and Solicitors
How do you calculate total float?
LFT-EST-DURATION -Select a task -The earliest start time would be the previous node EST -The LFT (next node bottom right) would have EST subtracted -The duration of the task should be displayed on the line and this is also subtracted to leave you with the total float value
What are Purchasing Economies?
Large firms are likely to have higher bargaining power and therefore able to gain discounts and better prices from suppliers- raw materials and components. Bulk-buying is easier if the business is large chain compared to a small independent retailer due to volume they order and business they provide for the supplier. ->The administration costs do not rise in proportion to the size of the order -Significant cost advantage for larger businesses.
What are Technical Economies?
Large scale production may use more advanced machinery with mass production- INCREASED EFFICIENCY (flow production- breaking down into large number of small operations- greater use of highly specialised machinery and processes- large improvements in labour-capital not labour intensive) which would make it more efficient through boosted productivity- this is because capital costs and running costs do not rise in proportion to their size just doubling output- principle of increased dimensions. Fixed costs are spread over higher levels of output -Also, possible to invest more in R&D -Indivisibility- making full use of particular item of equipment or machinery- so average cost of the item will fall -The firm would be able to invest more heavily in automation-improve efficiency and productivity- capital intensive- low unit costs lead to tough barriers to entry
Non-Current Liabilities
Long term debts owed by the business. EG-Loans and borrowings- bank and mortgages, retirement pension obligations- money owed to past employees, Provisions-if company is likely to incur expenditure in the future- agreements of contracts and warranties.
Corporate Aim
Long-term goal for company. (Profit Maximization, growth, increase market share)- general direction the company will take
Is Gearing better high or low?
Low- depends on the business and industry though!
What are Growth objectives/ Why do businesses want to grow?
MAIN ONES: -REDUCE POWER OF SUPPLIERS AND CUSTOMERS -INCREASED MARKET SHARE AND BRAND RECOGNITION- linked to increased profits -E OF S -INTERNAL AND EXTERNAL- lower unit costs, improve firm's competitiveness -Increase market power- exert greater bargaining power over customers and suppliers in order to gain competitive ad- SHORT-MEDIUM objective which flows into longer term profitability -Grow business and shareholder value- larger businesses generally more valuable --Increasing profitability- for private equity or stock markets- LONGER TERM
Consolidation
Markets that now have fewer businesses, resulting from takeovers or merger activity for example.
What is Speed of Change as a factor in change?
May take time and happen organically-eg if business is successfully leading the market- new products, developments technology and processes can evolve the knowledge that the business is in a safe position - forefront of innovation= Apple- continual change at a gradual pace whilst fashion is very dynamic- on a daily basis positive and negative change. Too much in a short space of time may be difficult - stress, conflict, apathy, distrust and demotivation- blame culture being developed. Crisis can lead to very fast change- economy need to change very quickly to rationalise and improve efficiency in order to survive. Some change is good for the business keeps it fresh and moving onwards and others negative such as change in tax or interest rates in recession
How is SWOT analysis often carried out?
Mind-Mapping Blue Skies thinking sessions before being documented
Sales Revenue/ Sales Turnover
Money made by the business in normal trading, only recorded when goods are delivered to customers. -Must not include VAT- does not belong to the business
What would no correlation in a scatter graph lead a business to do more of?
More research
What is Profit before Tax known as?
Net Profit/ Profit for the year Operating profit- cost of finance
What is the total value of shareholder equity equal to?
Net assets- balance sheet
What is the calculation for ARR?
Net cash flows -Original Cost (profit)/years /Capital Outlay (Initial Cost) x100
What is Profit after Tax known as? (Bottom Line)
Net profit after tax- Retained Profit to reinvest
Labour Productivity
Output per worker in a given time period. Measures the efficiency of the workforce Calculated Total output (per period of time)/ Average number of employees (per period of time)-- MAKE SURE I INCLUDE THE TIME SCALE IN MY ANSWER This is the most important measure as productivity can be directly linked to a firm's competitiveness Increases output and lowers labour costs which are a high proportin of costs
What is market development in Ansoff's Matrix?
New Market, Existing Product. Either geographically different country's market (may have different tastes and preferences) or repositioning a product for different market segment such as colouring books for adults- slight modifications are needed but isn't too risky. New distribution- online retailing, B2B or B2C. Expenditure on market research- need to meet the needs of new market, cost of new infrastructure.
Capital Employed
Non-Current Liabilities + Total Equity
What is the Gearing Ratio formula?
Non-Current Liabilities/ Capital Employed (x100) ANSWER EXPRESSED AS A PERCENTAGE IF THERE IS NO STOCK INFO THEN WON'T BE USED
How is labour turnover calculated?
Number of employees leaving during a period/ Average number of employed during period X100
How is the rate of absenteeism calculated?
Number of staff absent in one day/ Total number of staff X100
How is labour retention calculated?
Number of staff that left in period/ Total number of employees in period X100
Merger
Occurs when two (or more) businesses join together and operate as one.
What are external factor changes?
Often required to adapt and change in line with these external influences Political Economic Social- tastes of customers- increasing demand in environmentally friendly products- population size and age Technological- change= communications with customers and suppliers- pace of innovation and business processes Legal- Taxation Environmental
What is a small business?
One that is independently owned and operated for profit and is not dominant in its field- any business with fewer than 250 employees.
What is the formula for ROCE?
Operating Profit/ Capital Employed (x100) MUST BE EXPRESSED AS A PERCENTAGE HIGHER THE RATIO THE BETTER
What courses of action would a Long Termist approach be likely to use?
Opposite of Short Termism -More likely to invest in R and D and innovations to gain competitive ad -Less importance on quarterly reports -Importance on long term outlook- opportunities -Recruiting high quality staff, training them, building their loyalty and retaining them- staff development -More interested in long term contracts with suppliers and other agents in order to develop meaningful and profitable relationships -Incorporating CSR-considers ethical behaviour of the business in decision making -Investments in Tech- secure for future -Most prudent- showing care for the future
BUZZ WORD- FINANCIAL RISK INORGANIC
Original Purchase Cost Costs of Adjusting Company Redundancies of Staff
Why is profit alone not a useful performance indicator?
Profit needs to be looked at in relation to value of revenue or amount of money that has been invested in the business.
What is the social factor of PESTLE analysis?
Over time, likely to be changes in the way society operates- although social and cultural changes tend to be gradual they can still have an impact. ->The population in many countries is ageing - affecting demand patterns and creating new opportunities for some businesses- change in demographics ->Culture mix changes in the UK- different cultures- culturally specific products- supermarkets- world food isle - buy lots of different products ->Social trends that go in and out of fashion -> Numbers going to uni- increase quality of human resources ->Increasing migration- increase the size of the potential workforce, making recruitment easier- boost in demand? ->Changing tastes and preferences of customers
What are admin expenses?
Overheads/Indirect costs. Expenses are costs that are not involved in the production of goods- such as stationary supplies, accountancy fees, wages of admin staff
Why do balance sheets have equal values of liabilities and assets?
Owes=Owns because any increase in total assets must be funded by an equal increase in capital or liabilities. Eg a reduction in credit from suppliers (liability) may mean a reduction in stocks that can be bought (asset)
What is Handy's Role Culture?
PATERNALISTIC -Decisions are made through well-established rules and procedures and power to make decisions/ authority comes from the job title in hierarchy -Influence and control lies with the roles that individuals play rather than individual themselves -Often involves a tall or flat organisational structure- long chain of command and layers of management that decisions have to go through -Often painfully slow decision making -Less likely to take risks -Very bureaucratic and often involves a lot of paperwork -Highly controlled, with everyone knowing what their responsibilities are -Avoids risky decisions The Civil Service
Statement of Comprehensive Income
PROFIT AND LOSS ACCOUNT- financial document used to show the revenue, expenditure and profit made over a period of time.
What are the ethical aspects of strategical decisions?
Part of corporate strategy, usually responsibility of senior management, affect the direction of the business ->Environment-limits to the amount of pollution or environmental damage a business can do- decisions on whether to adopt even more stringent measures to protect the environment- recycle materials? -> Animal rights- pharmaceutical companies testing on animals- pressure groups would believe unethical- destroy habitats and endanger animals ->Workers in developing countries- criticized for exploiting workers- production costs are lower in emerging economies- extent of low costs to expense of workers ->Corruption- bribes to persuade customers to sign contracts- whether this is right even if competitors do eg arms deals- involvement in this unstable political areas is inethical ->New tech- some developments such as GM crops developments- other biological processes- cloning- could arouse strong ethical reactions -> Product Availability- if person cannot afford medecine for example for HIV- pharm companies charge such a high price, argue that this is an ethical issue- the choice of what research to carry out for which illness -> Trading issues- some countries have been condemned internationally for policies pursued by governments- sanctions or T embargoes- businesses have to decide whether to trade with or invest with these
What is the environmental factor of PESTLE analysis?
People are increasingly protective of the environment particularly due to threats of global warming- people also concerned about the threats to wildlife and natural habitats that businesses sometimes pose a risk to. Any environmental challenges that it may face- weather, CSR and sustainable production, Climate Change, Disappearance of wildlife. ->Intro of environmental laws ->Find new ways of production- wind turbines? Ethical Sourcing ->People inclined to buy green goods- provides opportunities for businesses to specialize in such products ->New ways of generating power using renewable energy sources rather than by burning hydrocarbons are providing new opportunities ->Recycling is gathering pace in the UK
What is Human Resources the same as?
Personnel- how well a firm is managing its most valuable resource-people.
If a question is on the Competitive Advantage of a business, what should I think of?
Porter's Strategic Mix Kay's Distinctive Capabilities
What is the difference between Porter's Strategic Mix and Porter's Five Forces?
Porter's Strategic Mix- analysis about how a business can achieve ad sustain competitive advantage by establishing a strength that cannot easily be copied eg Differentiation. Porter's Five Forces- a tool which helps to analyse the nature of competition and ultimately profitability within an industry.
Nodes
Positions in a network diagram which indicate the start and finish times of a task.
What is the purpose of Critical Path Analysis?
Preparation of a schedule and resource planning What tasks can be done at the same time to increase efficiency
Why do some M&A's fail?
Price paid for takeover was too high (over-estimate of synergies) • Lack of decisive change management in the early stages • The takeover was mishandled • Cultural incompatibility between the two businesses • Poor communication, particularly with management, employees and other stakeholders of the acquired business • Loss of key personnel & customers post acquisition • Competitors take the opportunity to gain market share whilst the takeover target is being integrated
What ratio uses both Statement of Financial Position (balance sheet) and Statement of Comprehensive Income?
ROCE
What are examples of monopolies?
Rail Travel Water Supplies Village Shops- serves whole community
Ratio Analysis
Ratio analysis involves investigating accounts and making a comparison between two related figures of financial data to gain insights into business performance
What are the External Economies of Scale?
Reductions in cost that any business in the industry can benefit from as the industry grows.- all competitors benefit. More likely to arise in an industry which is concentrated in a particular region/geographical region of the country eg- creative and media companies in London. Examples include skilled labour and local training providers, ancillary and commercial services, local suppliers, co-operation and disintegration
Assets
Resources the business owns and owes.
Market Example of Porter's Five Forces- Starbucks
Rivalry= monopolistic competition - large market share it has pressure from competitors, customers do not have cost of swapping to competitors so high rivalry intensity, does have some competitive advantage differentiating. Industry mature and growth rate been moderately low causes intense competition -Bargaining Power of Customers- different buyers in industry - offers differentiates products with a diverse customer base , relatively low volume purchases- erodes buyer power -Threat of subs- reasonable sub beverages to coffee- tea energy drinks etc- also make their own home coffee- fraction of the cost -Power of suppliers- size and scale has the power to take advantage of suppliers but it maintains a fairtrade certified coffee under equity program- fair status. Suppliers pose a low threat of competing against Starbucks by forward vertical integration- lowers their power. Starbucks is highly important part of suppliers business due to size and scope. -Barriers to entry are not high enough to discourage new competitors entering the market - industry has monopolistic competition structure- new entrants= initial investment is not significant as they lease stores etc. Starbucks benefit from economies of scale.
Net Present Value (NPV)
The present value of future income from an investment project, minus the cost- money earned in the future. AKA discounted cash flow. DOES TAKE INTO ACCOUNT INTEREST RATES BUT NOT EFFECTS OF INFLATION. BETTER= HIGHER
What culture does a hierarchical structure create?
Role Culture
Sanctions/Trade Embargoes
Sanctions are restrictions imposed on trade or investment with the aim of influencing a policy change in another country. Trade embargoes can be included in sanctions, where commercial shipments are banned in and out of a particular country, or where an embargo is placed on a particular product.
How is total equity calculated?
Share Capital+ Reserves (Retained Profit)
What is the Kubler-Ross Five Stage Model?
Shock and Denial Anger Bargaining Depression Acceptance
Growth Objective
Short to medium term objective that feeds into the long term objective of increased profitability.
EXAM TIP- REASONS FOR STAYING SMALL
Small businesses play a big role in the economy- don't simply name drop big businesses/companies but also small ones to support arguments- don't neglect the importance of them.
What statement would non-current liabilities be found on?
Statement of Financial Position
Ethical Codes of Practice
Statements about how employees in a business should behave/respond in particular circumstances where ethical issues arise. -Operate in respect of ethical business decisions- at different levels of business there may be differences in opinion May contain info about environment, dealing with customers in a fair and honest manner, competing fairly, the workforce and responding to their needs -Links to ethical trading policy- communication with staff about it, checks with the whole supply chain are adhering to it, adequate budget, corrective action to make sure problems are identified and action taken
Expected Monetary Value- how is it calculated?
THE AVERAGE. There are expected values of success and failure. Each possible outcome represents a proportion of total expected value. Calculated by multiplying the values by the probabilities and then adding up both the high and low or profit and loss branches. NOT MINUSING BUT ADDING STEPH. THIS EQUALS THE MONETARY VALUE. ONLY IF IT IS A MINUS DO YOU MINUS IT- if you add a minus it will be minus!
What culture does a matrix structure create?
Task Culture
Capital Cost
The amount of money spent when setting up a new venture.
How do you calculate the float?
The amount of time an activity can be delayed without causing the project to be delayed. When EST and LFT are same= no spare time= tasks are critical If a task does not lie on the critical path, then it may have some delay without having an impact of the project- the final LFT at the end node. Activities that lie on the critical path will have a zero float value
Payback Period
The amount of time it takes to recover the cost of an investment project.
What is the Stakeholder approach?
The business should consider all of its stakeholders in the business decisions and objectives. -Recognize their interests and take views into account -Maintain open communication and consult -Recognize interdependence that exists between stakeholders -Benefits distributed fairly for contributions -Minimize/eliminate adverse effects of business activity- compensated if cannot be avoided -Key in providing finance in order to keep business profitable
What is the Shareholder approach?
The business should focus purely on shareholders and shareholder returns in its decisions and objectives (increasing share price and dividends). -Directors/managers are employed by shareholders and should thus serve their interests of profit and growth- much money as possible provided they comply by the law -Raising dividends paid and share price
Business Continuity Plan
The capability of an organisation to continue delivery of products and services at acceptable levels following a disruptive incident- shows how a business may operate after this and how it expects to return to normal in the quickest time possible to minimize disruption. It may involve identifying alternative locations if struck by a natural disaster or back up data in the event of an IT failure.
Synergy
The combining of two or more activities or businesses creating a better outcome than the sum of the individual parts. Eg economies of scale, asset stripping potential , reduction of risk through diversification. CAN BE COST, REVENUE, FINANCIAL
External Economies of Scale
The cost reductions available to all businesses as the industry grows.
Internal Economies of Scale
The cost reductions enjoyed by a single business as it grows-arise within the firm.
What is Rivalry Among Existing Firms?
The degree of rivalry among existing firms will determine the prices and profits for any single firm. -Buy up rivals through horizontal integration -Continuously introduce new products to the market -Heavily advertise to maintain market share -Encourage engagement in- *Price Wars (competitive price reductions), *Investment in innovation and new products, • Intensive promotion (sales promotion and higher spending on advertising) -In industries where there are relatively few businesses, often they don't compete on price- allowing them to maintain high profitability. Instead they compete by bringing out new products and through advertising- creating strong brands- costs may be higher but charge higher prices - may engage in a broad range of anti-competitive practices such as these (All these activities are likely to increase costs and lower profits)
Solvency
The degree to which a business's current assets exceed its current liabilities.
What is at the top right corner of the node?
The earliest start time of task- EST
Investment Appraisal
The evaluation of an investment project to determine whether or not it is likely to be worthwhile and profitable- it is objective. Allows the business to make comparisons between different investment projects.
Asset Stripping
The practice of buying businesses and breaking them up. The profitable parts are sold for cash and the rest are closed down.
What is the economic factor of PESTLE analysis?
The general state of the economy can have a huge impact on business activity. Recessions make trading conditions extremely difficult for businesses- particularly if income elastic goods- postpone purchases until income picks up. However may be positive: ->Unemployment- increase demand for many businesses ->The business cycle- inflation ->Stable prices create more certainty-encourage investment in the future ->A strengthening exchange rate- making export more difficult but imports cheaper ->Lower exchange rates make borrowing cheaper and encourage investment
What is the legal factor of PESTLE analysis?
The government provides a legal framework in which the business has to operate. However, it also directs legislation at business to protect vulnerable groups that might otherwise be exploited. -> Calls to ban advertising of alcohol on television as well as betting- negative impact on the beverages industry ->Health and safety legislation, data protection act, equal pay act- gender equality ->Businesses in the food industry are currently under pressure to reduce the amount of sugar and salt they add to their products -The UK Gov also states that it wants to reduce the amount of red tape in business- this might benefit a wide range of businesses
Horizontal Integration
The joining of businesses that are in exactly the same line of business
Vertical Integration
The joining of two businesses at different stages of production.
Integration
The joining together of two businesses as a result of a merger or takeover
What does a Gearing Ratio show?
The long term financial position of the business and where it comes from -A result of over 50% (HIGHLY IN DEBT) means the business is highly geared so most of the money comes from loans- which is very risky for a potential investor -A result of less that 50% means the business is low geared and most of the money comes from its owners and shareholders -May show the relationship between loans on which interest is paid, and shareholders' equity on which dividends might be paid
National Minimum Wage
The minimum pay per hour all workers are entitled to by law. The lowest rate within legal limits may be seen as unethical. Government imposed regulation and effectively forces businesses to pay their workers a fair rate
What does Current Ratio above 2:1 mean for a business?
The money in the business is tied up in stocks etc and is not being used effectively.
What do brackets around a number in the exam mean?
The number is negative.
Labour Retention
The number of employees that remain in a business over a period of time. Rate at which they stay with the business. Calculated by: Number of staff staying (over a time period)/ Average number of staff in post (over a time period) X100
Rate of Absenteeism
The number of staff who are absent as a percentage of the total workforce. It can be calculated for different periods of time eg daily or annually. Calculated: (Number of staff absent in 1 day/ Total number of staff) x 100 This can be calculated for the business as a whole and compared to industry averages or national averages ENSURE I REMEMBER TO MULTIPLY BY THE NUMBER OF EMPLOYEES TO GET TOTAL NUMBER OF POSSIBLE DAYS WORKED BY ALL WORKFORCE AND NOT JUST ONE PERSON
Departmental and Functional Objectives
The objectives of a department within a business.
Minimum Efficiency Scale
The output that minimizes long-run average costs. The most efficient point of production is at the bottom of the average cost curve. Costs cannot be reduced any further through expansion. PRODUCTIVELY EFFICIENT AT THIS POINT.
Free Float
The time by which a task can be delayed without affecting the following task.
What is Organisation Culture as a factor in change?
The prevailing attitudes and values in the organisation- change needs to be embedded into the businessresistance to change may be found in the culture of the organisation- customs and practices embedded into the systems to reflect the norms, values and beliefs of the organisation- rigidity when needs to change- particularly if organisational change has come about from a merger or takeover- clash which is incompatible.
Takeover
The process of one business buying another
Management of Change
The process of organising and introducing new methods of working within a business. -These may be as a result of responding to the external environment- under pressure from competitors s, higher costs, tougher economic conditions
Return on Capital Employed (ROCE)
The profit (return) of a business as a percentage of the total amount of money used to generate it-its capital (amount of money invested). This will vary between industries, comparisons are made with the ROCE and if capital was invested elsewhere- such as a bank savings plan of 5% less risky (what interest would be gained). The ROCE must be far greater than the return that can be earned in a 'safe' investment for it to be worthwhile. Investors need to be rewarded for the risk involved. Demonstrates how hard the business made the money invested work. Calculated by... Operating Profit/ Capital Employed (x100)
Investment
The purchase of capital goods- these are goods which will be used in the production of other goods. Used repeatedly by the business over time. May also refer to the expenditure by a business that is likely to yield a return in the future.
Labour Turnover
The rate at which staff leave a business over a period of time- usually a year. Another measure of personnel effectiveness. -This varies depending on the industry, department and business
What is the technological factor of PESTLE analysis?
The rate of technological change seems to gather pace all the time. Businesses usually welcome developments- often new product opportunities to help improve efficiency. Especially in dynamic markets. -> Changes in tech can shorten product life cycles- new products are quickly developed to replace old- more efficient ->Developments mean labour can be replaced with capital- welcomed because human resources said to be most expensive and difficult to manage- automation improves productivity. ->Innovations in the industry due to R&D ->Improved communications via social media
Economies of Scale
The reductions in average costs enjoyed by a business as output increases. -E of S are a long run phenomenon- increase in scale= costs fall and with increased scale and in the long run, leads to changes in factors of production such as bigger premises and larger machinery- build another factory or purchase more machinery- average cost of production to fall. -Typically, there is a range of output over which average costs fall as output rises,over this range businesses may achieve competitive advantage over smaller businesses.
Remuneration
The reward for work in the form of pay, salary or wages, including allowances and benefits, such as company cars, health insurance, pension, bonuses and non-cash incentives.
Cyclical Variation
The rise and fall of a time series over periods LONGER than one year To make an accurate prediction of sales figures, the business will have to find the average variation over the period and take this into account. Calculated by Actual Sales- Trend SHOWS SEASONAL AND BUSINESS CYCLE
What is the ethical issue regarding pay and rewards?
The strong "bonus culture" in financial services is a good example of this. Driven by the incentive of large bonuses, do management cut corners or break the rules? -Senior management paid significantly higher bonuses than others remuneration
Critical Path
The tasks involved in a project which, if delayed, could delay the project. The activities which are 'critical' are those on the longest path.
Strategic Decisions
These set out the long-term direction that a firm will take to achieve its objectives. Based on a set of principles and guidelines set down by the CEO and board of directors-long term and relates to achieving an overall goal. -Proactive, forward thinking and future planning Eg- impact on human recruitment training redundancy , physical impact- investment in fixed assets location etc, look forward to possible sources of finance- issuing shares, allocating budgets
What is the corporate culture like at Snapchat?
They have separate isolated offices which makes it difficult to communicate easily unlike an inclusive culture in one area. This dispersed leadership makes it difficult to adequately monitor the operation of the functional areas. This leads to high capital expenditure- the offices are a very real, tangible asset that can be sold at a profit in the future- far more easily than an office block. Snap has gained a reputation for secrecy of its founders and although it uses technology to integrate communication in the offices, it is not the same as organic communication. Risk of separate cultures being created among the separate offices that do not match the larger organisation- social interaction is limited so morale may drop and productivity levels might fall- separate and isolated on more than a physical level. Lack of trust and transparency within the business- workers left out of the loop and many employees find out new projects and product launches in media headlines- many feel out of touch with the company's objectives and mission- autocratic leadership, with no relinquished control- employees are not empowered and are highly skilled but feel their expertise is not trusted- affecting the ability of employees to carry out a company's strategies. may develop a toxic culture which can spread quickly and be difficult to change
How does the strategy affect employees?
They would have to put new activities into practice in order to achieve the aims.
What is the political aspect of PESTLE analysis?
This is a factor that takes into account the political conditions of a country- whether it is politically volatile, unstable or stable, democratic. The activities of pressure groups may have an effect on influencing business activity such as- *Members joining or leaving the EU- disrupting financial markets and cause uncertainty *Issue of national security- priority for many governments- improving it could restrict movement of goods, people and capital and negatively affect business *Increasing taxes on particular items such as smoking- huge effect on business, changes in government- new gov- VAT down would increase consumer spending *Tariffs- Brexit, EU at the moment has free trade *Change in Gov and Gov intervention policies
How is cost per unit calculated?
Total production costs (£)/ Total Output (units)
Net Gain- how is it calculated?
Use the expected monetary values, and deduct the initial outlay cost. This will give you the net gain of each given decision.
EXAM TIP ON EXTERNAL INFLUENCES
When answering a Q on factors that may influence business performance, or any of its activities, it is good practice to distinguish between internal or external factors- evaluation skills.
Transformational Leadership
Where new leadership such as a new CEO brings about change with the purpose of improving business performance.
What is Current Ratio also known as?
Working Capital
How is solvency assessed?
Working Capital- Solvent= enoguh liquid assets to pay its bills
Pressure Groups
an organisation that supports a cause and aims to influence the decisions of businesses, government and individuals. EG Greenpeace -Public meetings, demonstrations, lobbying
Why is there no guarantee that unit costs will fall as the scale of a business' operations rises/ why do inefficiencies arise as the business grows larger?
• Control -problems in monitoring productivity and work quality, increasing wastage of resources • Co-operation -workers in large firms may develop a sense of alienation and loss of morale • Negative effects of internal politics, information over-load, unrealistic expectations among managers and cultural clashes between senior people with inflated ego
Why are profits so high in the soft drinks market?
• Customers and suppliers have little power - Pepsi has many millions of individual consumers, and thousands of retail distributors none of whom has much influence over the business • There is high brand awareness & loyalty = less consumer desire for substitutes • High barriers to entry - how do you enter a market dominated by Coca-Cola and Pepsi?
Some info about Expansion Questions
• Expansion will allow greater economies of scale. • Revenue can be increased only by lowering prices. • Expansion could lead to a lower average total cost (ATC). • Opportunities for export growth exist. • Burts has secured supermarket contracts and need to expand to meet demand. Potential counterbalance: • Any further expansion should be funded by share capital which will reduce the ROCE and the gearing ratio. • Funding expansion through share capital could be less risky than loan capital. • Trend towards healthier eating could reduce demand. • Statement of financial may not be truly representative of Burts position. • Financial forecasts may be required to assess ability to expand. • May depend upon the objectives of the company
Why do external economies work?
• Having many specialist suppliers close by • Access to research and development facilities • Pool of skilled labour to choose from
What are the key benefits of change?
• It may help sustain a competitive advantage (and respond to competitor changes)- NEEDED TO STAY SUCCESSFUL • Aligns business strategy with evolving nature of customer needs & wants • Business may be better able to take advantage of developing technologies • Stakeholders (employees, shareholders etc.) should gain from improved productivity and work environment • Change in organisational structure may enable a business to improve the effectiveness of its communication and decision-making • Being perceived as a business that leads change rather than follows it may bring market benefits (e.g. developing a reputation for innovation)
EXAM TIP- CORPORATE OBJECTIVES
-Analysing case study, identify the business objectives and if it achieves them then it has been successful- not all objectives are important as each other- prioritising with clear justification provides a basis for recommendation. A certain course of action will support a business achieving its objectives.
What are the limitations of Porter's Strategic Mix?
-As with any theoretical model of business behaviour, Porter's generic strategies should be seen as a simplification of complex issues facing firms. -Lacks flexibility -There are rapidly changing market places that it doesn't take into consideration -Some companies are successfully in the middle of strategies
What are the benefits and uses of Portfolio Analysis?
-Assists a business in deciding which strategy to adopt- discontinue/invest-make sure have a balanced portfolio to spread risk. Whether to invest in products such as stars which would be a good idea as they may develop into cash cows, and identify products which are not profitable and should be divested such as dogs. For stars, the business may feel the opportunity to market penetrate would be a good idea to increase sales revenue and market share whilst the product is competitive. Moreover, may decide to move the product out of a low growth market and put efforts into targeting high growth market- with good prospects. Dogs may need to be discontinued to cut costs and follow strategy of cost leadership strategy -Good starting point in reviewing existing product line- helps to balance existing product lines- must ensure the portfolio doesn't contain too many items in each category- positive cash flow from cash cows recover promotional costs required for stars- used to support the products in high growth markets such as stars and question marks. -Helps to analyse future opportunities and problems- useful tool
What are two methods of growing organically?
-Building a replicate store in a slightly new location -Building an extension to accommodate larger orders
What is the Reputation type of Distinctive Capability?
-Closely linked with the brand image of a company which is built up over time- the positive associations a business builds around issues such as quality, service, prestige and honesty. Easier to maintain than create and any negative publicity can cause deterioration of reputation. Captures new customer relationships. E.g LUSH
What are the uses of Ansoff's Matrix?
-Considers the future options for expansion -Gives thought to opportunities, associated costs, benefits and risks -Considers factors of investment, growth, level of risk and exploitation of different markets
What are the two elements associated with niche/narrow markets in Porter's Strategic Mix?
-Cost Focus and Differentiation Focus
What are the two elements associated with Mass/Broad markets in Porter's Strategic Mix?
-Cost Leadership and Differentiation Leadership
What are the uses of mission statements?
-Creates focus and direction for the business to help guide decision making- common overall understanding -Motivation- strong values- employees as they are aware that their job having a more significant purpose- shares purpose, corporate culture -Commitment to customers- promise of expectations -Identity externally as helps to establish position in the marketplace- differentiate itself from competitors -May help to attract more shareholders and finance for the business
How might SWOT analysis help to improve the performance of the business?
-Help to reveal opportunities that the business may not have seen before and thus may be a profitable method of increasing market share -Moreover the business may be able to work on its weaknesses and perhaps use resources in this area to ensure it doesn't become serious -Identifying external threats is useful as the business may choose to contingency plan and use risk mitigation to protect the business from the worst case scenario, even though it cannot be controlled
How might a business use the Boston Matrix to make strategic decisions?
-Helps to ascertain what to do with its product range to ensure profitability Stars- invest Dogs- divest Cows- milk for cash
What are the benefits of setting corporate objectives?
-Helps to clarify what needs to be achieved and creates a common focus for a company's managers and employees, helping to ensure that everyone works together. -Start of the planning process. It is impossible to produce effective business strategy and ensure the right action is taken unless objectives are clear -The existence of objectives (especially SMART objectives) makes it easier to measure and comment upon actual business performance and identify if and when strategy needs to be modified.
Stars
-High growth rate and high market share, strong compared to competitors and require high investment to sustain growth but after growth slows, become cash cows. Strategy= Build
Question Marks
-High growth rate market with low market share- they have potential but need substantial investment to grow market share. Strategy= Build to make a star, Harvest by raising price or Divest- withdraw selling it
What are some of the impacts tactical decisions make on Human, Physical and Financial aspects of the business?
-Human- having to hire staff due to one leaving and the recruitment process being a quick one due to this need- particularly if reacting to high sales and recruit temp staff. Having to make staff aware of changes when they are happening and having to train staff because a new IT system has been introduced- new staff would need more training than if they were current. -Physical- Moving a factory layout around to accomodate a new product being manufactured -Financial- Agreeing an overdraft to cover short fall in cash flow forecast, arranging a bank loan for broken materials
What are some of the impacts strategic decisions make on Human, Physical and Financial aspects of the business?
-Human- hiring new staff as part of a long term strategy to improve productivity and training staff to achieve the business objective of long term efficiency and growth. Keep staff aware of any changes that are happening in advance in the company so they are prepared for it. -Financial- Issuing shares to raise capital to achieve long term objective of growth + expansion -Physical- investment in assets and allocating budgets for R&D and projects to help business achieve long term objective of expanding product portfolio
What might be examples of financial objectives?
-Increasing profit levels -Increasing profit margins -Reducing costs -Improving cash flow and cash flow management
What might be examples of marketing objectives?
-Increasing sales volume and/or sales value -Increasing market share -Increasing brand awareness -Increasing brand loyalty
Why is a long term decision to move into a new market an example of corporate strategy?
-It involves a way in which the business aims to achieve its objectives and long term aims. If the aim was to grow and expand the business, this would be a method with which to do it.
What are the limitations of Portfolio Analysis?
-It is only a snapshot of the current position- liable to change and has little or no predictive value -High Market Share doesn't always lead to profits- little or no predictive value- not the only indicator of true profitability- the business would need to have low costs in addition to high sales that cover the costs in order to be profitable- the profit margin made is very important and the markup -Only classifies low or high but businesses can also be medium- so the true nature of the business may not be reflected- too simplistic as an approach? -Focus on market share and market growth ignores issues such as developing a sustainable competitive advantage- needs to be combined with something else
Dogs
-Low growth rate and low market share- the business may just break-even- they take up alot of time and effort. Strategy= Sold or Divested (gotten rid of) or in some cases Harvested.
Cash Cows
-Low growth rate with a high market share, generate more cash than they consume- provide return for investors and fund other investment. Strategy= Milked or Holding- spend just enough
How might the degree of rivalry in a market affect the prices and profits?
-May be price wars if rivalry is high- lower prices -If high, likely to be lower profits for business- also due to increased investment in R&D to differentiate
What are the limitations of mission statements?
-May be too vague and general- simplistic- often decisions are alot more complicated -Can be unrealistic and overoptimistic -Can lead to conflicts and inconsistencies when not properly written -Can become obsolete as the business develops and missions statement stays the same- merger or change of product -Can raise issues if not properly communicated- staff left to draw conclusions what conclusions they will- questioning of what all the fuss is about -Staff may not believe in it- may see it as just PR
What might shareholders think of organic growth?
-May consider it as too slow and not seeing profit improvements until a long time- they would want short term profit maximisation but they would only be seeing the short term costs of the growth thus may sell shares.
What are likely to be the focus of small firms for objectives?
-May have goals such as achieving efficiencies in cost, looking after customers and employees and a social purpose, some objectives may be specific.
What is the critical appraisal of mission statements?
-Mission statements are constantly assessed and altered to ensure they have continued relevance to the business- change with the nature of the business and its goals- sometimes they are not appropriate -A mission statement not only needs to be appealing to its customers, but also believed and followed by employees so customers keep faith in the business -Must include all parts of the business- otherwise not applicable however needs to be short so it is memorable- not a mission list like some businesses do -Companies should start from the top and get everyone involved in what the statement is going to be -Also needs to be disseminated across the organisation ensuring that everyone within the company understands what the business is doing etc, also communicated to customers and suppliers -All staff understand the specific focus of the business -SHOULD ALWAYS BE CHECKED FOR HIDDEN MEANINGS AND NEGATIVE IMPLICATIONS- before put out to the public domain- British Rail 'We're getting there'
What is the Innovation type of Distinctive Capability?
-Often a sustainable competitive advantage arises when a business is able to innovate by developing new products or a new process in production. This involves considerable investment in R&D, however if it is successful could lead to high sales revenue if it can fend off imitation from competitors.
What are the benefits of SWOT analysis?
-Powerful way of summarising and building upon the results of internal and external audits- positive and negative aspects of the business that management need to address- strengths should be protected and built upon and eliminate or reduce threats before competition exploit (not opps or threats as external and cannot be controlled)- seen as areas of improvement- Eg if a weakness is outdated tech, the business may look at acquiring a competitor with leading tech, or if there is a skills gap- invest in training +more effective recruitment. -Identifies opportunities for expansion into new markets for example -Widely and effectively used in business management as it is easy to understand and logical structure-SWOT analysis requires neither technical skills nor training. Instead, it can be performed by anyone with knowledge about the business in question and the industry in which it operates. Involves a brainstorming session during which the four dimensions of the SWOT analysis are discussed. As a result, individual participants' beliefs and judgements are aggregated (into a cluster) into collective judgements endorsed by the group as a whole. In this way, the knowledge of each individual becomes the knowledge of the group. --Because of low skill it is not costly and is not likely to take a long time. -May alert/bring risk and certain issues to the forefront- should be more carefully evaluated- identifies threats in the business environment so may minimise risk-encourages analysis of external environment -Useful tool when developing corporate strategy and focuses on strategic issues crucial to the business- b identifying, the SWOT may be possible to improve the performance of the business HOWEVER this would depend on the action it takes after carrying out the analysis- eg if business takes measures to eliminate weaknesses- performance would improve
What is the purpose of an aim?
-Provides a framework on which to create plans and strategies -Shows the long term intention of a business- vision of what the business is striving to achieve -Provides a shared aim for staff 'we want to grow the business into Europe'
What are the uses of Porter's Strategic Mix?
-Represents a valuable tool for analysis that is used widely by management consultants and has the potential to be used with good effect in business projects and exams -provide scope for analyzing a firm's existing and possible future strategies; and can provide a strong academic basis for making judgements about the quality of management concerned -Focuses on a few key areas which makes it simple and potentially more useful than others -Allows a business to target -Achieving a competitive advantage makes the business more likely to be more successful- makes sense
Why should objectives be SMART?
-So they are easy to understand and apply for all the stakeholders in the business to take on board and act upon -The business must be able to measure whether they have achieved or progressed with an objective- needs to be measurable
What are the limitations of corporate objectives?
-Sometimes they may be unrealistic, unclear and unspecific or otherwise flawed in some way that is daunting for those who are responsible for accomplishing it -It is essential that the goals are communicated effectively to employees otherwise they may send people off in different directions and not unanimously working towards a goal- not sure where to begin -Puts pressure and stress on employees? Some strive under pressure but others find stress affects their ability to perform so important to find goals which do not intimidate or stress them- exploit workers for goal attainment -If objectives focus on a specific area of the business, it may lack effort or attention in other important areas such as customer service and there also may be missed opportunities as a result
What are the three reasons why a business might use a SWOT analysis?
-Strategic Tool- plan whether to launch a product or how to improve them to keep up with competition -Tactical Tool-- weakness is poor cash flow, then helps business identify need for loan etc -How a business may successfully achieve objectives and improve performance by identifying needs for change and restructuring
What is Porter's overall message in his generic strategies for deciding which to adopt?
-The firm needs to decide what strategy it is attempting to adopt and make sure the market (consumers and retailers can accept that positioning) and that the firm is unwavering in its focus upon that approach- eg Iceland made a strategic change to move out of the low-cost mass market Wal-Mart now dominated and announced that it would focus on organic, GM free crops without increasing prices! This was an unrealistic switch in customer type and attitudes- with a downmarket customer profile but now trying to attract middle class customer- enthusiasts for organic foods- target audience was wrong, and another flaw, in relation to Porter, was that Iceland was aiming for a differentiated position without charging a price premium- adding to costs without adding to its prices. Iceland then returned to its roots!
What is the purpose of a mission statement?
-To communicate overall purpose of the business- its goals and values- way of communicating aims to stakeholders- why the business exists -Creating focus and direction- helps to guide decision making- unites the business in its activities -Provide a level of expectation customers can expect- defining what the business is trying to do -Should be inspiring and memorable- shows the ways it values stakeholders- fundamental core of the business- motivates employees and sets a standard
What are the limitations of SWOT analysis?
-There is no point producing a SWOT analysis unless it is actioned! SWOT analysis should be more than a list - it is an analytical technique to support strategic decisions-too often lacks focus or contains too many elements becoming an insignificant list -There are elements of ambiguity- one-dimensional model categorises S/W/O/T -as a result, each attribute appears to have only one influence on the problem being analyzed- however, one factor might be both a strength and a weakness. -Very simplistic and lacks detail about certain situations -Collection and analysis entail a subjective process that reflects the bias of the individuals who collect the data and participate in the brainstorming session. In addition, the data input to the SWOT analysis can become outdated fairly quickly. Business decisions must be based on reliable, relevant and comparable data.
What is the critical appraisal of corporate aims?
-These would be objectives relating to CSR practice, ethical practice and sustainable business growth -Businesses may need to consider the balance of the appeal of some of these objectives to their customers if the organisation is not achieving profit for shareholders
Who is the intended audience for an aim and objective?
-They are determined by balancing the requirements of the various stakeholders in the organisation. -Individuals and groups that are affected by and have an interest in how the business is run and what it achieves. For example, an objective to be the market leader, will benefit all stakeholders because customers will receive high quality products, shareholders will receive high dividends, employees will receive good wages etc.
What is the Differentiation Leadership (part B of the diagram)?
-This is applicable for businesses operating in a mass market and success here comes from the uniqueness of the product (its USP) or from the creation of an image that is distinctly different and better than that of rivals. -This may be expensive to achieve, however, Porter believes that higher costs and higher prices need be no barrier for differentiated products -Examples include Nike and Adidas, where although they get their shoes in low cost developing-world factories, they hugely invest in product design and styling and advertising which means both are high cost producers, however have strong differentiation and therefore strong market positions -This USP needs to be defensible and sustainable and then the high prices will be successful in maintaining position.
What is the Cost Leadership (part A of the diagram)?
-This is applicable to a business operating in a mass market- to become the lowest cost supplier -The lowest cost supplier means you can afford to be the lowest priced, therefore will virtually always be able to hold a significant market share. -This is because the business has the lowest costs and can be the market leader in terms of this with the highest market share- immune to price wars as it can only be undercut by firms willing to lose money- its only threat is predatory pricing which is unlawful. -The business may also choose to not lower the price, but instead keep it at the market level- thereby increasing profits due to its low cost Current examples include Ryanair, Easyjet and Aldi -This would mean the business is successful and profitable even with low prices- no frills and efficient, minimal standardised product and economies of scale, high capacity utilisation, bargaining power to negotiate (or demand) lowest prices from suppliers, lean production methods and low-cost culture, access to the widest and most important distribution channels
What is Cost Focus (part c of the diagram)?
-This is applicable to a business operating in a niche market- a more specific case of part a of the diagram (cost leadership) -The producer with the lowest costs will always succeed, however the other factors to consider: -If the segment is small, there may be few economies of scale available to the low-cost producer (low bargaining power with suppliers), therefore, low costs will come from either low wage costs per unit or from cheap materials. -This would mean that the low-cost producer is constantly struggling to avoid being undercut by new suppliers, possibly based in lower wage economies- just as pound shops come and go- hard to maintain a stable, long term business. -Focused range of products produced cheaply
What is Differentiation Focus (part d of the diagram)?
-This is applicable to a business operating in a niche market- more small, specialised firm targeting narrow range of customers -This may be exceptionally profitable- niches for well-designed products and services for example, with a strong customer image -Sensible companies within this take care to not stray from this niche- they understand customers well and deliver specific needs and wants, delivering high customer satisfaction and loyalty The strategy is to understand the customers well and delivering products and services which are specific to the customers' needs- as a result this can create high levels of customer satisfaction and loyalty, may also result in less competition and higher profit margins
What is the Architecture type of Distinctive Capability?
-This refers to the relationships and contracts a business has within and around an organisation, including suppliers, employees and relationships with partners and customers. If these are built and managed well there would be continuity and stability which would allow efficiency through easy and open transfer of knowledge and info- flexible and agile. Closely linked with the company culture and is often intangible. E.g Dyson. -These effective relationships would allow a business to add value by being efficient
Why is it difficult to have a definitive formula for the success or fail of a business through its corporate strategy?
-Too many variables and external factors, however, theoretical models help business to simplify reality in order to understand it better- the 3 main theories in the unit seem to fit together better than alone: -Ansoffs is useful to identify current position & appropriate direction to take -Porter's strategic mix is helpful in the 'how' aspect of this- how to compete in the market -Kay's helps the business to decide whether its strategy is sustainable, defensible and has longevity
What are the uses of a SWOT analysis?
-Used to make a decision about which new product to launch -Help design a new marketing strategy -Help decide whether to outsource a specific business task -Prepare for a completely new business venture -Help prepare for a restructuring of the business
What are the limitations of Ansoff's Matrix?
-Very simplistic, large plc's will need much more analysis than simple matrix and there may be thousands of sub options for strategies -Should also conduct a SWOT analysis and PESTLE analysis to get a better idea of the whole picture, to see the issues from more than one angle.
What would the critical re-assessment of mission statements and corporate aims include?
-What is the purpose of it? -Who is the intended audience? -How does the strategy followed by the business fit with its stated mission? -Are the aims and objectives realistic and achievable?
In what two criteria does Porter's Strategic Mix assess?
1) Is the business aiming at cost leadership or product leadership (through product differentiation) 2) Is the business in a mass market or a focused (niche) market segment? As the diagram shows, this leads to four possible generic strategies- 'generic' meaning they can work in every industry and market
Distinctive Capability
A form of competitive advantage that is sustainable because it cannot easily be replicated by a competitor.
Oligopoly
A market dominated by a few large businesses- can be a massive market with lots of businesses, but if 3 of those businesses share 70% of the market an oligopoly is said to exist. -A key feature is interdependence- actions of one business will affect another- if gain percentage of market- others will have lost
Monopoly
A market dominated by a single business.
What are the threats in the SWOT analysis?
The external audit should also show up what threats face the business- such as possible hazards or perils that have the potential to damage the performance of the business. ->New entrant in the market ->A rival appointing a successful CEO ->Looming recession
What is Portfolio Analysis?
A method of categorizing all the products and services of a firm to decide the right strategic plans to take for each. The products are evaluated according to competitive position and potential growth rates. Businesses would ideally prefer a range of products in all categories other than dogs to give a balanced portfolio 1) Full and detailed overview of all the products and services currently in the business portfolio 2) Look at each product in relation to current and projected sales, costs, competitor activity and future competition and any risks that may affect the performance
SWOT Analysis
A planning tool used to analyse a business's internal strengths and weaknesses and the opportunities and threats presented by it's external environment. MATCH STRENGTHS TO OPPORTUNITIES CONVERT WEAKNESSES INTO STRENGTHS
Corporate Objective
A target or an outcome for a medium to large business that allows it to achieve its aims. Should flow through the mission statement, usually set by senior management and measures the results of the business over time- maintain and improve desired performance. These should be SMART. 'we want to achieve sales of 10 million in European markets in 2004' in order to achieve the aim to 'grow the business into Europe'
SMART
Acronym for the attributes of good objective: Specific - clear and easy to understand- aspect/function of the business Measurable - evidence of whether or not the objective has been achieved-financial or quantifiable- easier to measure in this way Agreed- everyone responsible for achieving it understands what it means Realistic - can be met with the resources available and market conditions Time Specific - associated with a specific time period to have an end goal of when it should e achieved
What is the hierarchy of business objectives?
Aim Mission Statement Corporate Objectives Departmental/ Functional Objectives Business unit/individual targets
Who are mission statements aimed at?
All stakeholders- employees, customers, investors and society.
Internal Audit
An analysis of the business itself and how it operates. Identifies the strengths and weaknesses of its operations, covering areas such as the product ad its cost, finance, production, human resources, internal organisation structure. In a large business, conducted outside- give a more independently minded analysis of the business situation.
External Audit
An audit of the external environment in which the business finds itself, such as the markets within which it operates or government restrictions on it's operations- over which it has little or no control. -May address three key areas- the market, competition and PESTLE relevant to the business. ->size and growth potential of the market it operates in ->4p's! ->Characteristics of the customers in the market ->Industry practices such as whether there is a trade association or gov regulation ->Analyse the competition in the market- nature and strength of competitors- important influence on strategy development- number and size of competitors, their production capacity and marketing methods, likelihood of new entrants an those leaving, finance- such as profits of competitors
Trade Association
An organisation whose members are all involved in the same industry or trade. The organisation pursues the interests of these businesses.
What are the three types of Distinctive Capability?
Architecture, Reputation, Innovation
What is the difference between internal and external economies of scale?
Internal- e of s and lower costs which only that business benefits from- eg low cost supplier negotiations External- e of s which all businesses in a geographical region benefit from- cheap training facilities for staff, easy to recruit apprentices from colleges
What is a Distinctive Capability?
Is something which allows the business to possess a competitive advantage over rivals. EG Innovaton, Reputation and Architecture- KAY'S
Porter's Strategic Mix Definition
Identifies the sources of competitive advantage that a business might achieve in the market in order to succeed. Involves 3 key sections- Cost Leadership, Differentiation and Focus.
Give two economic factors that might affect the holiday industry?
Exchange Rates- if high- people less likely to go abroad -Lower levels of disposable income- more likely to invest and less likely to travel
What is market penetration in Ansoff's Matrix?
Existing Market, Existing Product. Small risk. -Increase sales and growth in existing markets or go deeper and sell more to the same customers eg encourage them to order more often (brand loyalty schemes), use subs less frequently. Involves the lowest level of investment as business has good understanding of product and how market may respond- expertise and experience in this. -Grow organically, increase market share, increased EOS and brand loyalty.
What is product development in Ansoff's Matrix?
Existing Market,New/modified product. Heavy investment in promo and R+D to help customers awareness however does have fairly high risk as it may not succeed. Very helpful if trends or tech are changing quickly (eg fashion) and needs innovation and continuous development is key- may be used to stay ahead of competition. Time consuming, lengthy and expensive in terms of R&D
How might interest rates affect business?
If they fall, the costs of repayment of loans for a business will fall and profits could rise. Businesses may also be encouraged to invest more. In contrast, if interest rates rise, interest charges will rise and profits will fall. Also, demand for luxury goods such as cars that are funded by borrowing would fall.
What is the key criticism of short-termism?
It does not focus a business on what it needs to do in order to build a sustainable competitive advantage- profits are unlikely to continue- it is at the detriment of long term performance.
Kay's Distinctive Capabilities
Kay argued that the source of competitive advantage is the exploitation of distinct capabilities (a form of competitive advantage not easily replicated by a competitor). "Those capabilities a firm has which other firms cannot replicate even after they realize what the benefits are that owning the capability confers."
What are two possible effects on a business of a strong new entrant into the market?
Loss of market share Decrease in prices increased innovation Loyalty customer benefits Increased promotion
What is diversification in Ansoff's Matrix?
New Market, New Product. Carries the highest risk. Move away from relying on existing markets and the business is attempting to spread risk and increase safety. May be out of the businesses expertise so performance poor compared to experiences operators. May be barriers to new industry. However, can be the most rewarding! Needs extensive R+D and analysis, works better with well-established brand.
What is the difference between organic and inorganic growth?
Organic- where a business expands its activities internally- eg adds an extension for added space Inorganic- via merger or takeover-external expansion business activities and practices
How might internal communication be affected if a business grows too quickly?
Organisational structure may be confusing and decisions that are communicated may be distorted on their way down. Employees may be unaware of changes- demotivation.
Diseconomies of Scale
Rising long-run average costs as a business expands beyond it's minimum efficiency scale.
Ansoff's Matrix
Strategic tool to help a business achieve growth- considers factors that determine corporate strategy. Looks at existing and new markets and products. Compare between product development, market development, diversification, market penetration.
Tactical Decisions
Tactical decisions are regular and short-term responses to an opportunity or threat in the market- present day decision making which responds to current business conditions that help to achieve strategy. Eg buying large amount of stock as the opportunity arises to buy it bulk cheaply. -Normally handled by managerial or supervisory level although should respond to corporate strategy. Organising an overdraft. -Usually made in isolation of the bigger picture and are more responsive in nature- may backfire if poorly made- impact brand reputation -Reactive
Give two political factors which may affect the food industry?
Taxes- sugar tax and VAT Legislation and Laws- banning of certain foods or advertisement for specific food- unhealthy eg
What are the opportunities in the SWOT analysis?
The external audit should show up the opportunities that are available to the business- eg the options or openings that the business might be able to exploit- resulting in improvements, such as higher revenues or lower costs. EG- -> New overseas market opening following a political change -> A fall in the cost of an essential raw material
What are the weaknesses in the SWOT analysis?
The negative aspects of a business that may be identified from the internal audit. Weaknesses are what the business lacks or does poorly in relation to its competitors. They are characteristics which undermine the performance of the business- perhaps even preventing it from growing. They are also areas of improvement-- -> poorly motivated workforce with high staff turnover -> too many layers in organisational structure- management -> product range that is getting out of date etc
Corporate Strategy
The plans and policies developed to meet company objectives. Concerned with the range of activities the business needs to undertake in order to achieve its goals. Successful= form an advantage in competitive market place+ fulfil stakeholder expectations.
What are the strengths in the SWOT analysis?
The positive aspects of the business that may be identified from an internal audit- what the business is good at and help to make the business a success- such as a USP product, loyal customers, innovative market department. -A characteristic giving a business an important capability
Short-termism
The tendency for managers to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives. It has negative implications for the likelihood of ethical lapses as well as company performance in the longer run. -Low investment in R&D -Many of the perks, benefits and financial rewards in business go to meeting short term financial goals- like a daily sales target -Under pressure to produce high dividends instead of reinvesting -Overuse of takeovers instead of internal growth
What is the purpose of Departmental/Functional Objectives?
They are more specific objectives set more day to day to keep consistency and help focus on a particular area of business activity- goals of specific departments such as finance, marketing, operations and human resources to ensure business achieves it's hierarchical objectives- directly support. If they are to be effective, functional objectives should support the achievement of overall corporate objectives and, therefore, be in harmony with, rather than contradict, each other.
PESTLE Analysis
This is a business analysis tool that aims to look at external factors and how they may have an impact on a business. Analysis of the external political, economic, social, technological, legal and environmental factors affecting a business. Can be both positive and negative factors. This aids strategic and tactical decision making, objective setting and helps a business to reach its goals. Cannot control external factors but need to monitor it to react to any changes that occur- anticipate change and then react to it is the best way.
What things would management be likely to focus on if using a short-termism approach?
• Share price and market capitalisation • Revenue growth • Gross & operating profit • Unit costs & productivity • Return on capital employed
