Business 3 Flashcards
What are the development of corporate objectives from mission statement/ corporate aims
— aims- what the business is looking to onschieve in the long term
- an overall vision
— mission statement is an expression of a business overall aim as ell as its core value and context
- informs the development of corporate and functional objective
-expressed in inspirational terms to provide direction and common purpose for stakeholders
— corporate objective- specific performance goals set by senior management for the business to achieve overtime
- is to provide a specific and measurable step that a business should take
- has to be realistic, agreed, time- bound
Functional objective
- the day to day goals of functions or departments within business.
Focus on corporate objectives
— sustainability
— growth
— achieving specific level market share
— new products/ market development
— profitability
— social responsibility
— innovation
Passing
Factors affecting corporate objective
- internal- poor performance, new leadership, business culture
- external- economic conditions, social change , technology change , action of competitors
The critical appraisal of mission statement and corporate aims
The mission statement and corporate objectives must be reviewed regularly so that they fit with the direction of the business and its stakeholders. When reviewing its mission and objectives a business might consider:
• What is the purpose of the mission statement?
• Who is the intended audience?
• Does the strategy fit with the mission statement?
• Are the aims and objectives realistic and achievable?
Short-termism is the pressure of achieving short-term gains over long-term success.
Sometimes short-termism and the pressure for instant success can influence corporate objectives and decision-making as much as any other internal or external factor.
What are corporate strategy
- helps to provide a competitive advantage
-requires careful consideration of internal and external factors - 2 strategic model used to develop corporate strategy are Ansoff matrix and porter generic strategic matrix
Ansoff matrix
- a tool for business with a growth objective. Use to identify an appropriate corporate starry and identify level of risk associated with that strategy
-market penetration
Least risky to achieve growth
- growth strategy where business focus on selling existing products to existing customers by encouraging :
More regular use
Brand loyalty of customer
✅Less investment in new market research = as they already have good info on competitors and on customer need
✅ maintain or increase market share of current products= can be achieved by combination of competitive pricing strategy, advertising, sale promotion= build brand
❌ limited growth potential
❌less innovative = business becomes vulnerable
Market development
- involves finding and exploiting new market opportunities with existing products
Can be done by:
Entering new geographical market= can use penetration pricing, exporting product to a new country
- repositioning product by selling to a different customer profile( or B2B)
- new distribution channels- moving from selling retail to selling using e commerce
❌ more risky than market penetration as targeting new market
❌ heavy promotion targeting new customer= loyalty
✅ potential for considerable growth
✅ no need for expensive product development
Product development
Involves selling new and improved products to existing customers by
- developing new versions or upgrades of existing successful products
- redesigning packaging , features
✅ diver funds into r and d and PD= innovation
✅ Particularly suitable for a business where a product needs to be differentiated in order to remain competitive
✅ meeting their needs
❌ costly
❌ risk of product cannibalisation- when new product displaces existing ones= loss of sale revenue
Diversification
‘Most risky growth strategy = involved targeting new customers with entirely new products redeveloped
- such as tesco launching range of financial products like credit cards
- can be achieved through Merger or takeover
- needs to assess risk
✅- spread the risk by engaging in different market
✅- gain of new customers
✅ — focus on regular innovation, quality= can attract customers= able to compete
❌- risk-can lead to wastage and increase cost- may not meet to customers expectations
❌requires significant market research and development cost= expensive
Porter generic strategic mix
- identify strategies and business might adopt considering its source of competitive advantage ( cost or differentiation) and the scope of the market which it cooperates ( mass and niche)- helps successfully, strategically position themselves in market
Cost leadership
With this strategy = the objective is to become alter lowest cost producer in the industry = typically involve production on a large scale= enables the business to exploit EOS( one way to achieve CL)
- or technology = efficiency ( another way)
- cost leadership important- if selling price are broadly similar= lowest cost producer will enjoy the highest profit
Suitable in market where there little product differentiation
Suitable in a mass market
Attributes of cost leader;
✅ productivity , high capacity utilization, lean production method (JIT)
Benefits
- help to achieve high profit margin as cost per unit is kept low
- maintain market price and gain higher profit margin
❌- multiple business cannot directly compete on cost
- need to have control over your supplies
Cost focus
- here a business seeks to be lowest cost competitor in a small market
- product may be similar to higher priced = but acceptable to sufficient customer
Differentiation focus
- is the classic niche marketing strategy= a business aims to differentiate within a small number number of a target market segment
- clear identifiable customer needs and wants
Possible approaches: highest quality, specialist expertise, exclusiveness
Differentiation leadership
- the business target larger market and aim to achieve competitive advantage through quality, innovation, customer service, brand identity across whole of an industry
✅- usually associated with charging premium price for product= due to being unique =reflect higher production cost=adds value
✅ help business stand out
- Beeltter meets customers n/w= helps reduce PED of product = more inelastic
❌ requires substantial marketing investment- innovation, customization, spend more on r and d, quality control , customer service
❌ excludes some buyers
Way to achieve differentiated leadership
- superior product quality, branding= brand loyalty, consistent promotional support often dominated by advertising, sponsorship
- strategically positioned yourself is important= if not= risk of failure
What is the aim of portfolio analysis
- is to categories a company products with specific characteristics in order to make strategic decisions about them
What is the Boston matrix
A portfolio tool that considers the relative market share of a firms product and the rate of growth within market
Star- high growth with high market share
Require some ongoing investment to maintain their market position.
If managed well= they are likely to become cash cows in the future
- market penetration strategy likely to be appropriate
Cash cows- low growth, high market share
- generate more cash flow than they need to maintain their market positon
- they are successful products with little need for investment
- need to be managed for continued profit
Question mark- products with high growth , low market share
- require significant investment if they are to improve their level of market share
Dogs— low market share in low growth market
have little potential for future growth, should be divested so that they can invest in other products
❌ may oversimplify what can be very complex
Achieving competitive advantage through distinctive capabilities
Definition- when business has particular strengths that very difficult for competitors to copy
1- innovation- ability of a business to create new and unique processes and product, ability to change
- more investment in r and d= successful innovation
- Architecture-involves relationship between business ,its employees, suppliers
- effective relationship= adds value to the business= being more efficient through easy transfer of knowledge and info
- means low cost strategy possible = from lose trading relationships
Reputation - linked to brand image, take time for a business to build
- business may develop this through quality
Differentiation strategy likely suitable
Any negative publicity of brand= lasting impact on reputation
Factors to consider when choosing strategy
- expected cost- product development , diversification likely more expensive than others
- stakeholder- impact of its strategy on stakeholders
- external environment
- risk aversion- willingness to take risk
What is a strategy
- is a long term plan or approach that a business will take to achieve its objectives
Will have an impact on human, financial , and production resources
Human- need hiring, relocation
Financial, marketing budget, investment in overseas distribution channels
Production- increase output = require more capital investment in machinery
What is a tactical decision
Are made to support the overall strategy, usually short term
- they are day to day decipher taken by manager
What is a SWOT analysis
- analytical tool used by business to identify:
- internal strengths and weakness
- external opportunities and threats
Strengths should be harnessed , weakness should be eliminated
examples of factors considered in SWOT analysis
Strengths- (internal)
what a business is good at
- USP
- location
- effective leadership
- experience, knowledge skills
- loyal customer base
- marketing
Weakness (internal)
- reputation
- finance- profit declining
- too much reliance on high street/ poor online presence
- lack of USP
- resource or capital limitation
- morale/ leadership
- reliability of data
Opportunity (external
- option a business may exploit for further successes
- new USP- help lift sales, revenue
- market development
- technology development and innovation
- niche target market
- potential for positive media coverage
Threats- hazards that have potential to damage business performance
- cost of material
- new or emerging competitors are gaining market share
- political or legal effect negatively impact on business decision
- seasonality
- loss of key staff
- cost of materials
- negative press
Evaluation of SWOT analysis
✅ assist strategic thinking in a structural way
- low cost , simple approach
❌- subjective- depends on options of manager
- does not offer clear solution
pESTLE analysis
Dentition- exams the external factors that likely to impact the activities and outcome of a business
- can support effective decision making
Political- the extent to which local and national governments is expected to influence business including :
Fiscal policy- corporation tax- if low = more profit= invest, or retrain staff
competition policy,
tax regulation- might put price caps- only able to increase price by certain amounts
government intervention such as protectionism
Political decision can have direct impact on international trade
Economic - the extent to which economic indicator can directly impact business performance
Such as inflation,
exchange rate,
interest rate( its forceast that interest rate are going down, cost of living,
unemployment level- high unemployment = wide supply of workers maybe skilled worker= cut cost
,the business cycle,
GDP growth
Increase price level= low level of disunion
-Recession = trading more difficult = business may look to reduce capacity in order to cut cost and maintain capacity utilization
Social-. The extent to which personal attitudes and value, culture and demographic change rate expected to affect business including :
Social mobility( progress from 1 class to higher class)
Education, Religion ,Migration- we got a lot
Population growth
Demographic change- in UK high aging population
Health
Pressure groups
Changes in consumer Fashion,taste
So more people graduating from uni= increase quality of workers available to UK business
Technological
The extent to technological change and innovation are expected to impact business such as
- r and d
-adoption of mobile tech and e- commerce: growing
- business looking to reduce cost
- flexible :working from home movement
- production and distribution process
- disruptive business
- automation- use of robotics
- creates opportunities of new p/s= help improve efficiency
- rapid development in tech can reduce length of product life cycle =as new products are quickly developed to replace older tech
Legal- the gov provides legal framework in which business operates
- changed in law and regulations re expected to impact the business
- such as taxation , employment law , health and safety, consumer legislation, competition. Policy
- minimum wage
Environmental - extent to which change in attitude and gov policy towards environmental as well as impact of global warming could impact the business
Such as pollution/ carbon emissions, sustainability, ethical sourcing,
fair trade- changing supply chain= increase cost but increase in demand= consumers satisfied
Gov try to ensure business pay risk cost of production , including external cost like pollution, carbon emissions tax
Society increasingly concerned about the environment and the effect on if from industry business
- benefit good reputation however add extra cost
Reasons for changes in the structure of markets over time
- new business may enter the market and citing may leave
- two business may merge together= increase EOS and larger market share, making combining business more competitive
- the legislation may change = fewer barriers to entry For new business
-the growth of the internet= increase the number of competitors a business face in majority of market= increase competitive rivalry
Customer rate and presence changes rapidly = leading to short product life cycle= require innovation
Globalization = increase competition with rivals
- a business may develop a new and innovative product= puts pressure on existing business in that market
Porter 5 force model
- identify key pressure on an industry that impact the ability of a business to compete with rivals
Rivalry within the market
This is the level of competition between business within the market
- when there’s many competitors selling similar products= business have little power = as customer have lots of choice and = low market share= Lowe price= less profit
When business offers products in an industry with little to no competition = more powers = premium pricing
Options to consider:
- lower cost of production and prices
- differentiation
- takeover, merger= increase market share
- porter generic strategy ( other one is CL)
Threat of new entrants
Definition: refers to how easy new business can enter market
• If new competitors can enter an industry quickly and without investing a lot of money, then the barriers to entry is low and the threat of new entrants is high
• The market is likely to contain a large number of rival businesses
• Individual businesses are likely to have little power
—can erode the business competitive advantage = lower market share, profit and prices
Options to consider to increase barriers to entry
- innovation
- build strong relationship with buyers= difficult for new entrant= build brand loyalty
— use EOS= increase output= reduce COP= reduce price = can engage in price war= new market struggle to enter
—- exclusive rights to distribution channel= make deals= or forward or backward integration
The bargaining power of buyers
This is the power buyers have to negotiate terms and prices
- might change as consumers gain greater access to info, greater choice between rival business
Buyer power high: if products are price sensitive
• When a business sells to a small number of customers those customers have significant power to negotiate lower prices
AS business has few options when it comes to customer
Where a business has high number of customer = those customers have less power
— many sellers with similar product and fewer buyers= more choice = may need to compete on prices= reduce revenue and profit
Options to consider
- increase quality= differentiate = but lower profit
- take over/ merger= leads to fewer seller
- find new customers/ segment
- promotion or price wars= less sellers= improve leverage towards buyers
Supplier power- this is the power supplier have to negotiate terms and prices
- may change if the supply of a commodity fluctuates
Supplier power high if:
- few suppliers= business has little choice over source of its supplier = reduce competitive advantage= up your cost= lower profit
- suppliers product essential for production
-offer specialized components
Strategies to overcome this:
- longer contracts with suppliers
- maximise EOS= push down average cost per unit
- switch from JIT to JIC
- merge— supplier may become forward integration partner= guarantee point is sales
Threats of substitutes
- substitute is an alternative product that may deliver the same benefits to the customer
- threats of substitute high if:
- alternative product exist= Lowers demand= fall in price
- alternative price falls
-customer cancels switch to substitute ( elastic)
Key problems- buyer have high bargaining power
Competition exist outside of the market
Option to consider:
Develop a USP
Lower price to attract and keep customers- ( engage in cost leadership= helps reduce price)
-promote benefits= increase brand loyalty
-have significant market power however from that may be less inclined to innovate
- meet customer needs= avoid switching
Importance to manager using this model:
Existing business- help define strategy- help reach goal
Potential business- helps see profitability within that industry, is it worth entering?
Definition of growth sand the objective of growth
Growth is
Objective of growth
- larger firms often have easier access to finance
- increase market power over customer and suppliers
- increase market share and brand recognition
- increase profitability
- benefit from EOS- as business grows it can increase its scale of output generating efficiency that lower its AC of production
= increase productive efficiency
Types of internal and external economies
Internal economies of scale occur as a result of the growth in the scale of production within the business
• The firm can benefit from lower average costs (AC) generated by factors from inside the business
Financial economies
• Large firms often receive lower interest rates on loans than smaller firms as they are perceived as less risky
• A cheaper loan lowers the cost per unit (average cost)
Managerial economics
Occurs when large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost (AC)
• Managers in small firms often have to fulfil multiple roles and are less specialised
Marketing economies
Large firms spread the cost of advertising over a large number of sales and this reduces the AC
• They can also reuse marketing materials in different geographic regions which further lowens the AC
Purchasing economies- but raw material in greater volumes = revive bulk purchase discount= lowers AC
Technical economies
Occur as a firm can use its machinery at a higher level of capacity due to the increased output thereby spreading the cost of the machinery over more units & lowering the AC
Risk bearing economies
Occur when a firm can spread the risk of failure by increasing its numbers of products i.e greater product diversification - less failure lowers AC
External economies of scale
occur when there is an increase in the size of the industry in which the firm operates
Labour - increase unskilled labour can lower cost of skilled labour = lower ac
Transport links
Improved transport links develop around growing industries to help get people to work & to improve the transport logistics
• This lowers the AC
Favorable legislation
- often generates significant reduction in AC as gov support certain industries to achieve their wider objectives
Problems arising from growth
Rapid business growth may create challenges that can negatively impact a company’s operations and financial performance
- Diseconomies of scale
Occurs when a company grows too large, making it difficult to manage and control its operations.
E.g It may face challenges in coordinating its various departments. managing its workforce, or maintaining quality control. The cost per unit ends up increasing as a result of these inefficiencies - Internal communication
Rapid growth may strain communication channels or result in miscommunication, conflicting priorities and lack of coordination. This may result in delays, errors, missed opportunities and impact
on employee morale.
Motivation- feel less significant - Overtrading
Occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity). This may cause cash flow problems or decreased customer satisfaction. E.g A company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers
- strain on cash flow= merger/ takeover require investment in new staff to support growth= cause financial strain if revenue growth not kept up with expenses
Strategies to deal witth growing too large
- redundancies
- discontinuing product line
- delayering
- pulling out of international markets
What are mergers and takeovers
- a type of integration
Takeover occurs when 1 company acquire another company, along with its assets often against their will
Marker when 2 more more companies combine to form a new company for mutual benefits
Reasons companies choose to pursues mergers and takeovers
- gain eos due to growth= allows company to reduce cost= efficient
- create synergies- are benefits that results from the combination of 2 or more companies like increase revenue. Such as one extremely innovative while the other have financial powe= support investment in r and d
- quick way to expand business
- elimination of competition = increase market share
- business lack knowledge and resource to develop organically
Risk and reward of m and t
Risk
Diseconomies of scale
Debt- acquiring company may take on debt to finance the merger= financial risk= reduce flexibility
Cultural differences- merger can result in clashes of company culture = decrease productivity = loss of valuable employees
Rewards
Increase market share =increase sales revenue and profitability
Speedy growth- quicker than organic growth
Access timee market= acquiring company with strong presence in new market = higher customer base= sale revenue
Types of integration
- inorganic growth- usually takes place when firm merge in one of 2 ways:
Vertical integration ( forward or backward)
Horizontal integration - forward vertical integration = acquiring a business further up the supply chain such as manufacturer buys a distributer or merges with ice cream manufacturer
- backward vertical integration = acquiring a business operating earlier in the supply chain such as retailer buys a whole saler
Advantages
- forward integration can increase brand visibility
The quality of raw materials can be controlled= reduce risk
Lower cost= comer competitive
Disadvantage
Culture clash
Possible little expertise in the new firm= efficiencies
Long process like contracts for it to take place
Horizontal integration- acquiring a business at the same stage of supply chain such as manufacturer buys a competitor
Advantages
- rapid increase in market share
- reduce competition
Exuding knowledge of the industry = the merger more likely to be successful
Why do business sale forecast
- provides an estimation of future sales figures using last data and considerable predictable external factors
- use prominently trends in product sales = can be compared with the market as a whole
Help set budget
What are moving averages
A series of averages calculated from successive segment of a. Series of data = trend may be more reality identified
Extrapolation
Uses trend established from historical data to forecast the future
Can be done simply by extending a line to best fit
- help predict outcomes on a product life cycle of the business
Advantages
- simple method of forecasting
- quick and cheap
Disadvantage
- unreliable if there’s significant fluctuations in historical data
- ignores qualitative factors like change in taste and fashion
A assumes what happens in part will happen in the future
What are correlation
- looks at the strength of a relationship between 2. Variables
Positive correlation means that there’s a positive relationship where IV increases so does the DV
Negative correlation
No correlation = no connection between 2 variables so no line of best fit
❌ correlation does not always indicate causation between 2 set of variables.= business needs to conduct research to establish whether relationship exist as well as the strength of it
What are time series
Can help a business work out if there’s an upward trend, downward trend
Seasonal variation also takes into account
- moving averages ( three period / four quarter)
Limitation of quantitative sale forecasting
Effective in short term but in long term= uncertainties especially in external environment = make extrapolation of past data unreliable
Less value volatile market
- not detailed
How to improve sale forecasting
Conducting detailed market research
Employing expert with excellent market knowledge
Forecasting for the short I medium term
External factors that may influence on accuracy
Publicity ( positive/ negative)
Seasonality
changes in legislation
Entrance of new rivals
What are investment appraisals
A numerical technique that analyse the predicted financial outcomes of potential investments involves
comparing expected future cash flow on investment with the initial outlay of that investment investment
Main method of investment appraisal
Simple payback period
8: the calculation of the amount of time it’s is expected an investment will take to pay for itself
Initial outlay/ net cash flow per period= years/months
To find months times 0.__ (after the decimal point) x 12 after finding the years
Therefore payback period = _ years and _ months
Benefits
- simple and easy to calculate = easy to understand the result
Focus on cash flow=useful for business where cash flow management is useful
Drawbacks
Ignores qualitative aspect on a decision
May encourage short term thinking not long term
Average rate of return
Compared the average profit per year generated by an investment with the value of the initial outlay
Net return( profit) per annum/ capital cost ( initial outlay)x 100
Advantages
Consider all of the net cash flow generated by an investment over time
East to understand
Disadvantage
- depends on an average cash flow= ignores the timing of this cash flows
NPV- net present value
Calculate the monetary value of a project future cash flow
Cash flow x discount factor.= present value
Then add together all the present value of future cash flow
Passive npv = accept project
Negative npv=. Reject the project= not financially worthwhile
Discounting is a method used to reduce the future value of cash flows to reflect the risk that may not happen
Advantages
Creates straight forward decision= positive npv suggest project should go ahead
Consider all future cash low
So it considers the opportunity cost of money
Disadvantages
Challenge in accurately forecasting future cash flow based on predictions
Npv method only considers the financial cost and benefits of a project, does not account for non financial benefit or cost such as environmental damage
