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
Limitation of investment appraisal technique
- each Technique relies upon forecasted future cash flow which may lack accuracy
Manager complying cash flow forecast may lack experience or may be biased towards a particular investment
Also inaccurate due to changes in consumer taste, uncertainties due to economic growth and recession
What is a decision tree
- quantitative method of tracing and he outcomes of a decision so that the most profitable decision can be identified
Use probabilities
Calculating expected monetary value
Expected value of success x probability + expected value for failure x probability
If there’s a cost minus it after
Benefits
- make managers account for risk associated with their choice
- clarifies possible choices of action . Reveals option that haven’t perfectly been considered
Drawbacks
- does not consider qualitative information
- the time lag between construction of a decision tree diagram and the implementation of the decision likely to futher affect reliability of exact value
So don’t take into account dynamic nature
What are critical paths
- involves using a network diagram to manage various tasks required to compete a project
Allows managers to work out the most efficient ways of completing a project = the shortest time possible
Limitations of critical paths
Network analysis often relies on estimates and forecast
Very lengthy or complex projects involve a very large number of activities
Corporate influences
Short termism vs long termism
Long term decision affect long term term mission and vision of the business over a tortious of anything up to 10 years
Short term decisions more likely to impact on objectives and tactics
Short term perspective business more likely to:
Maximise short term profit
Invest in less r and d and training
Pursue rapid external growth than organic
Return profit to shareholders
Long term perspective
-invest in r and d and training , innovation
Establishing lasting relationship with suppliers
Profit quality = focus more on employee engaging investment
Evidence based vs subjective based decision making
( good for evaluation)
Evidence based decision making involves taking a factual based approach when determining objective, strategy and tactics
Advantage
Helps reduce risk in decision making and identify likely outcome
Disadvantage
Data can be hard or expensive to collect especially for small business
Subjective decision making- using personal opinion and experience of key decision makers
Disadvantage
Often more risky than evidence based approach
Appropriate when
Quick decisions needs to be made
Where the nature of the industry means that subjective decisions is normal
For example fashion industries relies on instinct, personal lifestyle choices of buyers
Also when there is a lack of data to support evidence of lack up to date
Advantages
Intuition may come from experienced managers= useful when making qualitative decisions
Corporate decision making
- ethics- business with strong ethical stance likely to make different decisions from those who don’t have strong principle strong corporate social responsibility
- times scale- short term goals of profitability don’t always align with long term strategy
Strong culture and weak culture
A strong culture exist where factor such as attitude and values and beliefs are easily recognized and embedded into the way business operates
Benefits of strong culture:
Sense of identity
People understand their purpose within the organization = motivation
Weak culture= signs may be difficult to identify
High level of staff turnover and low commit Samar staff may exist
How corporate culture formed
Leadership style
Rewards-. Ceremonies
Training culture such as induction
Decision making approaches
Repeated stories about their values and histories
- the market which it operates, type of products
Classification of company culture
Power culture - decision making is carried out by 1 or a small number of powerful individuals usually at top of the business hierarchy
- common in small business
- the culture is determined by a few individuals
Role culture- key decision are made by those with specific job role. There’s usually a very clear hierarchical structure
- employees are expected to adhere to rules and understand their place in industries
- culture may differ across function
- may find it difficult to adapt to rapid changing market conditions
Task culture
Teams are formed to solve particular problems
Power derived from expertise
No single power source
There’s emphasis on adaptivikity
And team working
Person culture
People believe themselves to be superior to the business
Business full of people with similar expertise
Common in firms of professional like lawyers
Power lies in each group of individuals to determine their own decision making procedure
Difficulties unchanging an established culture
Business may change till its culture to improve productivity or improve innovation and creativity
BUT
- require employee to buy in = require communication in order for commitment to change to be achieved
- also a long process= may require significant training of a workforce
-culture is deep set= not easy to change
Exam tip for culture
- look for signs of strong and weak culture
(. Uniform, branding , guiding principles )
Also strong culture= competitive advantage for business. As it lead to creative innovative and highly motivated organizations = desirable but difficult to change op
What are stakeholders
- are individuals or a group that affect or are affected by the actions of the business
- business need to take into account the needs and interests of of its stakeholders to operate successfully= ensure long term success
Internal stakeholder = individual or a group inside the business such as employees, managers and business owner
External stakeholder- individual or group outside of a business such as customer ,suppliers , shareholders and the local community, government
Objectives for stakeholder
owners
Want all or a higher share of profit
Want business to succeed
To provide and income
Employees
Good income
Job security
Opportunity for promotion
Share
Return on investment
Growth of the company
Managers
Need company goals and objectives
Want to maximise profit and reduce
Cost
Customers
Receive high quality products or service
Clear and fair pricing
Suppliers
Paid on time
Fair price
Shareholders
Maximise their returns on investment
Company to be profitable
Government
Tax revenue
Promote public good
Want companies to operate within the law and contribute to the economy
Local community = individual and organization operate in the area where a business operates
- no pollution = environmentally responsible
Employment= provide jobs
Investment in local areas
Stakeholder approach
Focus on the interdependence between stakeholder groups and take steps to ensure that the benefits and drawbacks of its operation are shared equally
Likely to decrease profit as solution may invoke increase cost such as meeting employees needs by paying higher wages= increase salary cost
Advantages
- communicate effectively with stakeholder group
- understand impact stakeholders group have on its operation
Shareholder approach
- often used by large organizations
Focus on meeting the needs of shareholders , by maximizing profits in order to increase dividends and improve share price
Influence on stakeholders
- profit objective.= more aligned with shareholder = if business profitable= shareholder benefits from increase dividends
- growth objective = more aligned with empoyees
-local community- pollution or job creation
The potential conflict between stakeholder and shareholder
Shareholder and employees
- share holders aim to maximise their return on their investment= usually require business to make much profit
Employee aim for higher wage and better conditions = likely to increase cost which reduces profit
Shareholder and customers
Customer aim for fair price as well as good customer service
As shareholders demand high profit to achieve maximum dividend = pressure on a business to raise prices
Shareholder and government
- gov want business to create good jobs, able to comply with laws and tax
Shareholder are less interested in job creation and more interested in profit maximisation
Business ethics
-ethics are moral principle that guide the behavior of individuals and business.
When making decisions, Business must consider the impact they have on all stakeholders
Behave responsibly with regards to the environment so ensure they are sustainable such as using recycle material in packaging
- fair working practices = ensure there’s good working conditions- fair pay
Takes steps to eliminate corruption such as bribing, tax avoidance
- avoid negative impact on animals such as animals testing
Ethical sourcing
Caring for community
Trade offs between profit and ethics
Business will embed their ethical code of practice = lead to prioritize procedures
- induction and training programs
- reward system
✅ adopting ethical principles usually attract long term loyal customers
✅ competitive advantage
However will lower profit and there will be and increase in cost
Ethics in pay and reward
Rewarding and motivating existing staff
- attract new employees
- maximise productivity levels
But the principle of who gets paid not always fair
In some business senior leaders are paid extreme high bonus whereas some workers paid minimum
Also any industries where pay gap between men and woment is significant
What are pressure groups
- are organisation that try to make business change their behavior or operation
Focus on issue lie worker right, environment
Can cause negative publicity to a business that acts unethical
What are corporate social reps
- involves conducting business activity in an ethical way and balancing interest of shareholders with those of the wider community
Such as sustainable sourcing of raw material and components
Responsive marketing
Protecting the environment
-also CSR in practice for stakeholder
Benefits
Can enhance the business image and reputation
May improve employee motivation and productivity
Disadvantage
- increase business cost
Can face high level of media scrutiny= likely to receive damaging criticism if they fall short
The ethical principle likely to be dismissed in favour making as much profit as possible
What is organic growth
Occurs when business grows naturally and is driven by internal expansion using reinvested profit or loans
Usually generated by :
Opening new store
Investing in new tech
Product diversification
Advantages and disadvantages of organic growth
Advantages
Less risky than inorganic as growth is financed by profit and there’s expertise in the industry
Diseconomies of scale minimized as growth is gradual
Management knows and understand every part of the business
Cheaper
Disadvantage
- slow pace- frustrating for some stakeholder = want rapid return on their investment
External experise- it don’t take advantage of the resource, skills and knowledge that might exist through potential takeover or merger
Competition- business growing organically might be left behind by others that use external growth to dominate market
-ansoff matrix- helps identify potential organic growth
Reason for staying small
Cost- small firm may have lower cost= however unlikely to benefit from EOS
Personal service- find it easier to provide good customer service= due to workers being able to build relationship with small number of customer
Leads to high level of satisfaction
= can add further value to its USP through customer specialists advice
They provide a product in a niche market.= can be very profitable by charging higher price = stills church profit max objective
- through commerce- small operation am an reach targeted customers
Interpreting financial statement
• A business will produce a range of financial info to support its stakeholders in decision making
• The state of comprehensive income shows the income and expenditure of a business over a period of time- usually a year- and calculates the amount of profit made
How to find gross profit
Gross profit- revenue- cost of sales
How to find operating profit
Operating profit- gross profit- expenses
How to find profit of the year
Profit of the year- operating prof- interest and exceptional expenses
What we can find out from a statement of comprehensive income:
• Changes in sales revenue
• The profitability of the business
Stakeholder interest in the statement of comprehensive income
• Shareholders- interested in the profit of the year as this may indicate potential returns for shareholders
• Employees- interested in profits earned and potential for wage increase and job stability
• Managers- use revenue, gross profit and operating profit to measure performance and set targets
• Government- to identify the level of taxation the business needs to pay
The statement of financial position(balanced sheet)
contains the financial info required to draw conclusions on the liquidity of the business
It identifies business assets and liabilities and specifies the capital used to fund the business
Non current assets- are items that are owned by a business for a long term e.g. machinery and buildings
Current assets- items that are converted to cash quickly e.g inventory, bank
Current liabilities is money a business owes and is due to settle soon. Include short term borrowing e.g. overdraft
Non current liabilities is money a business owes and that does not need to be paid back for at least 12 months e.g. bank loans and mortgages
Net assets= assets – liabilities
Total equity or capital employed is the total funding. Net asset= equity
Stakeholder interest in the statement of financial position
• Shareholders- may analyze the asset structure of the business to see how their investment has been spent
• Managers- use the current financial position to analyze liquidity and the level of risk associated with debt
• Suppliers- will be interested to see whether the business will be able to pay its debt
• Employees-is the business financially stable or jobs at risk?
Ratio analysis
• Ratio analysis involves extracting info from the financial account to assess financial performance and the financial structure of the business
• provides measurable data that can be used to support judgements and compare performance
types of ratios
The gearing ratio— analyses how a business has raised its long term finance. The ratio represents the proportion of a firms equity that is borrowed
Non current liabilities/ capital employed x 100
• Capital employed can be calculated by subtracting current liabilities from total assets
Return on capital employed (ROCE) r
it compares the operating profit made by a business to the amount of capital employed in the business
Operating profit / capital employed x 100
Interpreting ratio to make business decisions
• The gearing ratio shows how reliant a business is upon borrowed money
• A highly geared business has more than 50% of its capital in the form of loans. A highly geared business = vulnerable to increase in interest rates. Also means the business likely to be considered a risk for further investment
• Steps to reducing the gearing—retaining more profit to avoid further borrowing
• A low gearing business has less than 50% of its capital employed as long term loans. Lenders such as banks are more likely give funds/loans to a low geared business= expansion
• Business will also secure cash flow
• RoCE measures how well a business generates profit from the funds invested in the business
With ROCE, the higher the rate= the better as it indicates that the business is profitable and using its capital efficiently. Impacts:attract investors
To increase ROCE: increase level of profit generated without introducing new capital.
Evaluation on ratio analysis
Strength – allows the business to calculate and compare trends over time- however this info not always available
Can be used to assess the performance of different functional areas of the business- operation and Human Resources
Limitations- mainly deals with numbers- doesn’t take into account qualitative issues e.g. customer service, product quality, brand image
Ratio also doesn’t take into account economic conditions or the performance of other businesses.
Human Resources
• About managing employees and their performance
• Understanding human resource performance can help managers make decisions on employee numbers, rewards and remuneration and human resource policies
• It’s important as staff cost can make up a large proportion of a business cost so monitoring of employee performance is a key element of effective financial and operational control
Labour productivity
• Labor productivity is a measure of output per employee
• It is calculated by the formula: total output per time period divided by number of employees at work
• It’s a key measure of employee performance
Interpreting labour productivity
• The higher the labor productivity the better the business is performing= improved competitiveness . HOWEVER:
• Doesn’t take into account wage rates- a key factor in employee performance
• Doesn’t take into account technology used in the production process
Interpreting labour productivity
• The higher the labor productivity the better the business is performing= improved competitiveness . HOWEVER:
• Doesn’t take into account wage rates- a key factor in employee performance
• Doesn’t take into account technology used in the production process
Turnover rates
• Measure the proportion of employees leaving a business during a special time period
• Industries like holiday companies may expect high rates of labour turnover as contracts are seasonal
• Calculated by: number of staff leaving during period divided by average number employed during period x 100
• A rising rate of labor turnover =signals internal Human Resource management problem such as :
• Poor management = workers loosing commitment and motivation
• High turnover or low retention can indicate employees are not happy with their jobs or less rewards(promotion)
External factors can also increase labor turnover:
• Improved transport links- provide opportunity for workers to seek work across a wider geographical area
Problems of high turnover:
• Increased recruitment and training cost
• Negative reputation
Do lower turnover rates…
• New ideas and creativity introduced to the business
Labour retention
• Measures the proportion of employees remaining with a business during a specific time period
• High level of labor retention means few staff are leaving the business during a given time period- they are happy and motivated
Number of staff remaining/ average number of staff x 100
Absenteeism
• Is the measure of the proportion of staff were absent from work during a specific period of time
(With just absenteeism take don’t include the %)
• High level of absenteeism=problems for business including: productivity falls,
• —absence due to sickness require to sick pay to be paid
• —hiring temporary staff to cover for the absent=increase cost
• — other staff may become demotivated if they constantly cover for absent workers
Number of staff absent / number of staff employed x 100
Methods to increase labor productivity, improve employee retention and reduce absenteeism
• Offering financial reward
— such as increase pay rates= increase commitment =higher output and productivity,
— attendance bonuses-e.g £500 bonus linked to 100% attendance over a 6th month period=increase motivation.
— Performance related pay(rewards link to output), — loyalty bonus— rewards linked to length of time employees have been in the company
• Offering employees shares in the company
• — rewarding shares may increase their commitment to achieving objectives as it will lead to them having a higher return,
—they may work harder and take less time off as they have a financial stake in the success of the business.
Consultation— asking for and considering employees’ views when making decisions
-employees feel more involved and connected to their company to their company as they feel they have an influence on the way the business is run.= resolve any negative issues
Empowerment— involve providing employees with autonomy and responsibility to make their own decisions and work on their own behalf
Strategies:
• Extra training
• Delegate authority— allow employees to make decisions on how they work
— Employees are using their knowledge and experience to develop their own solutions
Scenario planning
• Scenario planning involves the process of a business analyzing the current and future environment and anticipating potential risk
• AIM is to plan how the business can resume normal operation after the crisis
• Risk assessments— where business identifies, evaluate and prioritize risk and the precautions that may be taken to protect against them
• Crisis management- handling potentially dangerous events for a business
What is a risk
• Risk is the likelihood of a negative event occurring multiplied by the impact of that negative event
• Business then adjust their plans in order to minimize this risk or put in place a plan to deal with the negative outcome
Examples of scenarios a business might plan for:
1natural disasters
e.g. flooding and earthquakes can destroy businesses.
They are unpredictable ( in essay include the steps to the scenario e.g identify the type of natural disaster that could be expected to occur in a particular area) businesses should implement measures to reduce risk like evacuation plans
2.IT systems can fail through viruses and many large businesses are also targeted by cyberattacks where hackers will attempt to steal or wipe business data. Some employees may not be adequately trained on cybersecurity
3— Key employees can be lost through resignation, illness and death
= loss of experience and knowledge= can impact business competitive edge.
Also business relationships with customers/ suppliers may be lost.Business have to plan to function without key personnel.
Risk mitigation
Risk mitigation— identify and assess risk and then prioritize and plan responses
Business might put in pace measures to mitigate against risk
• Back up IT infrastructure and install effective security software
• Monitor political and economic trends
• Train staff in disaster recovery
• Identify multiple suppliers of raw materials and components
• Ensure all regulations and legislation are met
• Ensure emergency plans are in place are in place for all eventualities
• Fully test new system on a small scale
Business continuity (.planning for risk mitigation
Business continuity plan— sets out how a business will operate following an incident or disaster
- Impact analysis—is the assessment of the potential impact of these events on the business. E.g. financial and operational impacts
- Put together a recovery strategy e.g implementing backup systems, developing communication plans
- Testing and training- ensure that the plan is effective and all stakeholders understand their roles and responsibilities. This can be done by training employees or conducting drills
Succession planning ( planning for risk mitigation
Succession planning- involves identifying and developing current employees who have the potential to move intro key roles in the future
Elements of succession planning
• Identify potential successors- may involve assessing their skills, experience and commitment to the business and comparing these to desired characteristics
• Put in place a recruitment plan
• Train and mentor- need to be prepared and have the skills and knowledge ready to take over the business— may involve providing education, coaching and on the job training
• Successful business succession planning can help provide a peace of mind to key leaders or employees as they plan for their departure
Benefits of scenario planning
- Helps to clarify some of the future uncertainties in business and prepare= unlikely the business will be damaged
What is change management
Involves the process that ensures a business responds to the environment in which it operates
Internal cause to change
Changes in organizational size
= business will go though a process of change as it grows= may create or expand funtionsl areas, open new premises or introduce level of supervision
- may also come from when firms merged or takeover = workforce and capital will need to be integrated
Business may also become smaller flows a result of divestment= redundancy or sale of asset may be required
Poor business performance
-such as loss of profit= changes in product design or leadership team= help avoid loss of customer= reputations damage
New ownerships
Significant changes to the overall aim and objective of the business . Also new customer likely to bring new policies = attempt to make changes in business culture
Transformational leadership
External causes of change
- change in the market- new competitors may enter or existing competition may change their strategy
- social change - change to consumption habits as a result of social change
Political change - new policies
Economic change- impact the demand for g/ s and can be difficult to predict also increase in tax or interest rate
technological change - create significant opportunities or reaches larger number of customer
The effects of change
Competitiveness- change through process of growth can lead to economies of scale= improve competitiveness also arrival of a new leader. Change has an overall positive effect on a business competitiveness when bringing management and engaged employees together
• Productivity- change through adoption of new technology od increased training- increase productivity and efficiency. HOWEVER in short term, as change is being implemented or during periods of external change= business may endure period of unstable levels of productivity as 1) getting used to new processes 2)take time to find strategies
• Financial performance- in short term, the implementation of change= very expensive e.g product development/market research require investment, wage cost for new leaders, promotional activity as a result
How stakeholder may spend to change
• Shareholders may withdraw their investment if they fear the change will not be successful and might on lead to return on their investment
• Employees may fear for their job security and status within the organization
• Customers may react negatively to new products or processes. Or if they a sudden change externally and there a demand for a product that not available= customers will be upset
Key factors in change
- organizational culture
-size of organization
-time and speed of change
- managing resistance to change
