Business unit 3 benefits and drawbacks Flashcards
revise advantages and disadvantages of each topic
mission statements advantages
-communicate goals/vision to stakeholders (employees, cutsomers, investors, ect)
-clarify business purpose- this helps to define strategic direction
mission statement disadvantages
-Can appear vague and insincere-demotivating
-may not be reflected by the actions of the business-tarnish brand image, customers lose faith in the business
-wasteful of resources as it is time consuming-opportunity costs
-can be too optimnistic/unrealistic
falls in exchange rates advantages
increase price competitiveness abroad as it is cheaper for other countries to import
increased sales
disadvantages of a fall in exchange rates
importing more costly- results in lower profit
reduced purchasing power abroad- may need to seek domestic suppliers
higher costs
Advantages of cost leadership (porter’s matrix)
increased market share (take advantage of price elastic demand)
businesses can create a barrier to entry by using competitive pricing
in order to achieve cost leadership business have to streamline their operations, leading to increased efficiency and less waste
disadvantages of cost leadership (porter’s matrix)
limited profit per item R&D so limited innovation
quality concerns
vulnerable to market change e.g. a larger competitor who can take advantage of economies of scale
advantages of differentiation (porter’s)
premium pricing due to reduced price sensitivity
brand loyalty by meeting customer needs
increased profitablity
disadvantages of differentiation (porter’s matrix)
vulnerable to changes in consumer preferences
risk of imitation by new entrants
costly due to investment in R&D
Advantages of cost focus
strong position in the market due to niche market dominance (customer loyalty)
reduced competition
disadvantages of cost focus
risk of lager competitors
limited growth potential due to small market size and limited funds for R&D
advantages of differentiation focus
-premium pricing
-brand loyalty
disadvantages of differentiation focus
-limted sales potential due to small market
-risk of larger competitors
advantages of portfolio analysis
-effective resource allocation- prioritize investments in products based on Market share and growth potential
-tool for performance evaluation
-balanced product mix
disadvantages of portfolio analysis
limited predictive value
ignores external factors/oversimplified- strategies may not suit the market environment
advantages of SWOT analysis
helps allocate time and resources more effectively by focusing on strengths and solving weaknesses
helps develop strategies to improve market positioning (prioritise strengths and identify threats)- inc competitiveness
identify opportunities
disadvantages of SWOT analysis
risk of subjective interpretation
usefulness dependent on how data is used by managers
risk of subjective interpretation (qualitative)
porter’s five forces advantages
identify potential threats in the competitive environment
understand how to maximise competitive advanatges
improve market position and power to improve profitability
Organic growth advantages
avoid potential diseconomies-controlled growth
avoid culture clashes
less capital needed than inorganic
disadvantages of organic growth
slower than inorganic growth
limited potential grwoth due to market size
advantages of inorganic growth
exploit synergies
enter new markets
faster than organic
expand assets-stronger financial position
disadvantages of inorganic growth
risk of culture clashes
resource intensive
alienates existing customers
advantages of growth in companies
economies of scale
inc. market share
higher revenue
disadvantages of growth in companies
investment and marketing costs
loss of flexibility
communication issues-inefficiency, leading to diseconomies
advantages of sales forecasting
stock management-prevent overstocking or stockouts, reducing associated costs and improving reliability leading to an improved customer experience
gaining finance- reliable forecasts=more attractive to potential investors, banks more willing to provide loans
budgeting- improve cash flow management and therefore financial stability, increasing satisfaction of shareholders
Advantages of qualitative forecasting
useful for new products when there is little accurate or predictable historical data available
useful for markets subject to wide fluctuations in demand
useful for dynamic markets
disadvantages of qualitative forecasting
subject to bias means predictions can be skewed/inaccurate
lack of precision in comparison to quantitative methods- does not provide specific numerical estimates which may reduce the condfidence of stakeholders
may be difficult to reach a consensus due to combining multiple opinions
Advantages of the simple payback method
simple to calculate and understand
useful when technology changes rapidly so the cost of the investment can be recovered before new model is designed
cash flow management-focuses on recovering the inital investment as fast as possible so it can contribute positively to cash flow sooner
disadvantages of ARR
time value ignored so it does not consider the opportunity cost of the investment
does not focus on recovering the initial investment, unlike simple payback
ignores cash flows (only focuses on profitability) so could create a misleading image of a business’ financial position
advantages of decision trees
may reveal options that hadn’t previously been considered-take advantage of market opportunites
forces managers to consider risks associated with their choices, increasing chances of success
quantitative approach, meaing it requires deep research to be carried out. decisions should be well informed.
advantages of critical path analysis
identifies the shortest time possible to complete a project, reducing the delay of bringing a project to the market- seize market opportunites in dynamic markets
improve resource allocation- identifies floats so resources can be rediretced where needed most, improving capacity utilisation
inventory management-resources can be ordered when needed, reducing costs
contingency management-identify the implication of delays on the rest of the project
advantages of contribution analysis
contribution costing can be used to evaluate costs of production and thus choose more profitable ones (contribution-fixed costs)
contribution pricing can be used to set prices which exceed variable costs, ensuring a profit is made
disadvantages of contribution analysis
contribution costing could encourage short termism
contribution pricing ignores fixed costs so should be used by a business with low fixed costs or that knows through experience that they will be covered
How to calculate simple payback
Step 1 - Divide the initial outlay by the additional expected net cash flow
e.g. 20,000/30,000=6.67 years
Step 2 - Convert the outcome to years and months
12 month*0.67 =8 months
Payback period = 6 years and 8 month
How to calculate average rate of return
average anual return (profit per year)/initial outlay x100
How to calculate net present value
Step 1 - Calculate the discounted cash flow for each year by multiplying the net cash flow by the discount factor
Step 2 - Add together the discounted cash flow values for each year, including Year 0
Advantages of a strong corporate culture (6)
1.provides a sense of identity for employees-they feel part of the business- flexible when the company is having difficulties
2.improved teamwork-workers identify with other employees
3.increased commitment of employees to the company-reduced labour turnover
4.motivation-increased productivity
5.employees understand what is going on around them-prevents misunderstandings
6.control
evaluation of strong corporate culture
does not guarantee success e.g. rigid cultures may make it difficult to respond to changes in the market
Disadvantages of a weak corporate culture
higher costs as the business needs to implement a range of systems to create worker alignment
poor quality of customer service, which may reflect badly on the business
inconsisent and poor performance
advantages of role culture
employees understand exactly what is expected of them
well defined processes and procedures to follow
employees have security and predictability
allows a business to maintain its current position
disadvantages of role culture
difficulty to adapt in a changing environment could lead to failure
advantage of power culture
quick and responsive to change
disadvantages of power culture
competitive atmosphere among employees
employees dissatisfied
advantages of task culture
able to adapt to change
power lies with those with expertise-motivation
employees are compliant
disadvantages of task culture
reliant on team work and communication
employees must be able to work independently
advantages of person culture
employees are self-motivated so need little guidance
high level of expertise
flexible
disadvantages of person culture
employees may be difficult to control as they may believe themselves to be superior to the business
disadvantages of sales forecatsing
based on past data which may not reflect future results because of the range of external influences that can affect future inflows
requires skill-it can be challenging and time consuming to select the most appropriate data, especially for smaller businesses lacking experience
interpretation may be biased due to experience bias and competing priorities of stakeholders
disadvantages of the simple payback method
does not consider the profitability of investments like ARR
does not consider time value of investments
does not consider future cash inflows
may encourage a short-termism approach as potentially lucrative investments may be dismissed because they take longer to pay back than others
Advantages of discounted cash flow
Helps investors make decisions-considers all expected future cash inflows, providing a comprehensive assessment of a company’s value.
flexibility and scenario analysis. helps with contingency planning as discount rates can be adjusted depending on financial market changes
considers time value=more accurate than other methods
disadvantages of discounted cash flow
complicated to interpret and calculate-may not be suitable for new less experienced businesses
does not account for uncertainty/events that ay impact future values
highly sensitive-selecting the wrong discount rate can significantly impact future values
Advantages of average rate of return (ARR)
focus on profitability means it is useful for increasing shareholder’s faith in the business
helps with strategic decision making-easy to compare percentage returns with other investments
considers all the net cash flows generated by an investment over time so useful for seeing the long-term picture
disadvanatges of decision trees
time-consuming. the delay in implementing the decision may affect the reliability of expected values
based on estimates therefore could be biased
does not consider impact on human resources of a decision or other qualitative elements and this may impact the probability of success
estimates may not take full account of external factors
they cannot include all possible eventualities
disadvantages of critical path analysis
resources may not prove to be as flexible as hoped when managers identify float periods
relies on accurate estimates and forecasts
can be difficult to use as it requires project managers to be skilled and have experience working with complicated plans
(stakeholder objectives) What are shareholder’s objectives + consequence of these objectives not being met
-maximise shareholder value (a measure of company performance that takes into account the size of dividends and the share price).
-consequence: investors may sell their shares. this may result in a fall in the share price and make the company at risk of a takeover.
(stakeholder objectives) What are employees’ objectives + consequence of these objectives not being met
- according to Herzberg, they want the business to be growing and profitable so their financial rewards increase and they feel secure in their jobs (this contributes to hygiene factors)
-however, employees also need motivation factors e.g. promotion, personal development.
-employees may become demotivated and turnover may increase if not met
(stakeholder objectives) What are managers’ objectives and the consequence of these not being met?
-they to meet the companies goals and objectives as their remuneration is linked to business performance
-They want to maximise profits and minimise costs while ensuring that the company operates efficiently
-failure to meet these objectives may reduce shareholder’s confidence in the business and mean they lose out on performance related pay.
(stakeholder objectives) What are customers’ objectives and the consequence of them not being met?
-receive high-quality products or services at a fair price
-Customers also want good customer service
-If these needs are not met, customers will spend their money elsewhere. In competitive markets only those businesses that meet customer needs are likely to survive.
(stakeholder objectives) What are suppliers’ objectives and the consequence of them not being met?
-they want the business to pay what it owes promptly and in full
-Suppliers often want to be able to establish long-term arrangements with customers to improve business stability
-if their needs are not met business relationships may deteriorate so the business could lose out on exclusive deals/preferential treatment
(stakeholder objectives) What is the government’s objectives?
-they want the business to grow and make a profit (economic benefits e.g. more jobs)
-pay taxes
-comply with legislation to ensure public/consumer safety
(stakeholder objectives) What are environmental groups’ objectives and the consequence of them not being met?
-they want the business to demonstrate environmentally friendly behaviour
-if their needs are not met the business may be seen as unethical. this could damage its reputation.
(stakeholder objectives) What are the local community’s objectives and the consequence of them not being met
-they want businesses to contribute to the success of the community and be good corporate citizens e.g. by creating employment or supporting local organisations
-not meeting these could cause damage to the company’s local reputation and a loss of local support.
why should a business follow a stakeholder model (2)
-reduce pressure from stakeholders, the media and the wider public to be more socially responsible
-they can portray themselves as following this model to fulfil shareholder needs by increasing sales, revenue and profit
why should a business follow a shareholder model?
-increased focus on growth and profit when making business decisions due to the influence of shareholder’s objectives
-satisfy shareholder’s objectives so they don’t sell their shares
disadvantage of using a stakeholder model
-This is likely to decrease profits as competing stakeholder needs may require solutions that involve increased costs
trade-off definition
The balance between two desirable outcomes, where both are not achievable.
2 disadvantages of acting ethically (trade-offs between ethics and profit)
- higher costs
- reduced revenues
CSR definition
Corporate social responsibility (CSR) is when companies integrate social and environmental concerns into their business operations.
4 Benefits of CSR for businesses
- Contracting/HR benefits – e.g. helps recruit, motivate and retain employees
- Customer-related motivation: attract customers; brand positioning
- Lower production costs (packaging, energy usage)
Risk management – address potential legal or regulatory action - Improved access to capital – for example, the rise in ethical investment funds looking to make equity investments in companies with strong CSR reputations
Reasons for stakeholder interest in the statement of comprehensive income
- Shareholders/management-assess the growth and performance of the business through profit and revenue. Shareholder satisfaction
- Employees-Interested in profits earned and potential for wage increases and job stability
- Suppliers-Interested in the continued success of the company they are supplying. determine the level of trade credit offered to businesses
- the government- Used to determine how much tax is payable
- Local community- Interested in the stability of the business and what this may mean for jobs in the community
Reasons for shareholder interest in the balance sheet
-Used to identify the asset structure of the business and how their investment has been put to use
-Used to calculate the working capital of the business and determine its solvency
-Used to determine the rough value of a business, which helps a judgement on whether their investment is growing
Reasons for Managers & Directors interest in the balance sheet
-identify financial position of the business to ensure it does not overspend
-Provides information on the capital structure of the business, which helps guide decisions on whether to raise further funds through borrowing or via other means (e.g. share issue)
Reasons for Suppliers & Creditors interest in the balance sheet
-Used to judge the solvency of the business (through working capital) to determine the risk when offering firms trade credit/the terms they will offer trade credit on
employee interest in the balance sheet
-determine job stability
Interpreting the gross profit margin
-higher=better because more gross profit is being made per £1 of sales
-the quicker the turnover of inventory, the lower the gross profit margin that is needed (e.g. retailers)
-if gross margins are below the industry average, a business can reduce production costs/improve production efficiency or raise prices
Interpreting the gearing ratio
-shows how reliant a business is upon borrowed money
-highly geared=over 50%
-ways to reduce gearing: Issuing more ordinary shares to create further share capital, Retaining more profits to avoid further borrowing, Repaying loans to lower interest costs for the business
Impact on a business of having a high gearing ratio
Substantial levels of interest will need to be paid on this high level of borrowing which means:
-The level of profit available to pay as dividends to shareholders is reduced
-Profit available to retain within the business is limited
-The business is likely to be considered a risk for further investment
-It is also likely to face difficulties in raising further loan capital
impact on a business of having low gearing
-The business may be missing out on the opportunity to access finance without the need to dilute existing shareholders’ control
-Lenders such as banks are more likely to approve loan applications from low-geared businesses
-An unwillingness to access loan capital may indicate a risk-averse business which may deter investors
Interpreting ROCE
-measures how well a business generates profit from the funds invested in the business
-higher ratios are better (at least 20%)
-will vary between industries so should be compared with rivals to assess performance
Ways to increase ROCE
-increase the level of profit generated without introducing new capital into the business
-maintain the level of profit generated whilst reducing the amount of capital in the business
How can a business use ROCE?
RoCE can be used to support strategic decisions (e.g. investment or divestment decisions) to determine the most profitable option given the level of capital employed
Interpreting the current ratio
-a low current ratio shows the business does not have enough working capital (over-borrowing/overtrading)
-businesses with fast inventory turnover such as retailers can operate comfortably with a low current ratio because they rely on frequent sales and so do not need hold large amounts of cash or receivables
-too high=too much money being held up unproductively
Interpreting the acid test ratio
-gives a view of short-term financial stability and how reliant a business is on inventory
-a high acid test ratio reduces risk because it means the business can easily cover its short-term obligations without selling inventory
Strategies to increase labour productivity and retention and reduce turnover and absenteeism
-Application of Herzberg two-factor theory
-employee share ownership
-financial rewards
-empowerment strategies (delegation training)
-consultation
How can businesses manage resistance to change?
-Clearly communicating the reasons behind the change and the benefits that the change will bring
-Involving stakeholders in the change process to build buy-in and support for the change as they are more likely to embrace the change and feel a sense of ownership over it
-Providing training and support will help employees adapt to the new changes
-Identifying and addressing stakeholder concerns is vital
What is the purpose of risk assessment?
-Used in the first stage of contingency planning to identify the possible crises a business might face in the future, the probability of them occurring and its impact on the business/staff
Examples of risk mitigation strategies
-take out insurance policies (business interruption cover)
-set up in a location unlikely to experience natural disasters
-secure data storage
what are the two types of risk mitigation plans?
continuity planning and succession planning
Impact of IT systems failures on businesses
-loss of valuable data and system downtime could lead to a loss in revenue
-data breaches could impact brand image and customer’s trust in the business
impact of natural disasters on businesses
-supply chain disruptions
impact of loss of key staff on businesses
-Loss of experience and knowledge can impact a business competitive edge
-Losing a figurehead or influencer can affect the morale of remaining employees as well as the culture and direction of the business
-Business contacts and relationships with customers and suppliers may be lost
Advantages of succession planning for businesses
-preserving the company’s values and culture, thereby maintaining the identity and integrity of the business.
-contributes to the stability of the business which can help alleviate uncertainty among stakeholders and enhance their confidence in the business
-avoid disruption to operations, preventing damage to reputation and financial losses
