Revision Cards Flashcards
RISKS AND RISK MANAGEMENT
- Financial Risk, Business Risk, Technological Risk, Regulatory Risk, Reputational Risk, Opportunity cost of losing revenue or partnerships, Getting caught in contracts, Increased costs (no economies of scale?)
Risk Management - TARA
- Transfer
- Accept
- Reduce
- Avoid
With risk ALWAYS mention that we should consider our risk appetite
RESPONSIBILITY CENTRES
- Investment Centres - responsible for revenue and costs plus investment decisions (assets)
- Profit Centres - responsible for revenue and costs (currently how Happy Playz manages stores)
- Cost Centres - responsible for costs
- Revenue Centres - responsible for revenue
NB. Always mention controllable costs if asked about managing performance
Example: Profit Centre
- Advantages
1. Consistency
2. Motivation
- Disadvantages
1. Difficult to apportion head office costs if the venture is different to current ways of working
2. Demoralisation of other departments if the profit centre is given full credit for all the work
LOANS VS EQUITY
Loans
- Advantages
1. Interest is tax-deductible
- Disadvantages
1. Increase in gearing - possible breach of loan covenants
2. Committed to repay
Equity
- Advantages
1. Potential to increase share price
2. Dividends at discretion of managers - however we paid a large dividend this year (£70m)
- Disadvantages
1. Possible dilution of shares - not as relevant to HP as listed / quoted
2. Takes longer to raise
RETURN ON INVESTMENT VS RESIDUAL INCOME
ROI - calculated as profits before financing divided by capital employed
- Advantage
1. Widely used and accepted, easy to compare (%)
2. Easily understood by managers
- Disadvantage
1. May lead to dysfunctional decision making ie. decision making that only tries to improve ROI eg. buying assets towards year end may reduce ROI as the asset hasn’t had time to impact on profits yet.
RI - calculated by taking the divisions controllable profit and subtracting an imputed interest charge (the investment of the division multiplied by the cost of capital)
- Advantage
1. More flexible as different cost of capitals can be used (useful for new ventures or divisions with different models)
2. Less likely to encourage dysfunctional behaviour
- Disadvantage
1. Not easy to compare as it doesn’t take into account the relate size of income for a division
PRICING STRATEGIES
Considerations
1. Customers needs
2. Costs
3. Competition
Strategies
1. Market Penetration - initially low price
2. Market Skimming - initially high price
3. Psychological Pricing - Setting the price just below a price point so it appears cheaper
4. Cost-plus pricing
5. Price differentiation - same type of product to different customers at different prices
TOTAL QUALITY MANAGEMENT
General name for highest quality, continuous improvement, right first time
The four costs of quality
* Conformance costs - Prevention and Appraisal costs (worth spending money on these to avoid NC costs)
* Non-Conformance costs - Internal and External failure costs
Continuous Improvement - ability to keep improving
Will require everyone in the organisation to embrace the concepts of TQM
THE 5 FEATURES
- Partners - key external stakeholder groups like delivery companies
- Resources - ensuring we have access to resources. Employees (eg. in store)
- Processes - The steps taken to meet objectives (eg. buying and purchasing departments)
- Activities - Activities that follow a process to create value (eg. inventory management system)
- Outputs - products or experiences created from activities and processes (eg. experience in store of buying the toy)
DATA ANALYTICS
Demand forecasting - predictive analytics
Buffer inventory - ensuring accurate buffer levels of stock. Not too much to waste space but enough to satisfy demand
Real time inventory reporting - real time to ensure toys are in the right stores at the right time
Clubcard’s - monitor customers buying habits
Issues with data gathering
1. Privacy - may be considered an invasion of privacy by customers
2. Compliance with data protection legislation
3. Security - appropriate measure need to be taken to protect data
NEGOTIATION
Considerations when preparing to negotiate
1. Culture
2. Language
3. Location
4. Currency
5. Guarantees
6. Testing
7. Price
8. Establishing a good relationship
Process
1. Investigate reasons for objections
2. Address reasons for objections
3. Seek alternative suppliers/employees carefully
4. Consider attractive secondment/remuneration/contract for involved parties
INTEGRATED REPORTING
- Human Capital - competencies, capabilities and experiences of its employees
- Manufactured Capital - encompasses all manufactured physical objects (warehouse)
- Financial Capital - pool of funds available. HP has cash funds through operations and long term finance
- Intellectual Capital- Inventory management system and licences to toys
- Social and Relationship Capital - external relationships between and within communities (ecosystem)
- Natural Capital - environmental resources and processes (selling bikes)
EMPLOYEE EMPOWERMENT
What?
- Greater freedom for workers
- Individuals more responsibility for targets
Promoting empowerment
- Employee led schemes
- Employee led targets
Goes hand in hand with engagement and alignment
- Engagement - getting employees involved in the performance management process
- Alignment - vertical and horizontal, linking goals of individuals with the goals of the organisation
CLUBCARD
Impact on Customers
- Reduces their power, HP is better able to target deals and build loyalty
- Data information can be sold (with the customers permission)
- Ways to communicate with customers can change
Impact on Suppliers
- Reduces supplier power as HP knows what they want to buy
- Purchase may become more narrow and focussed
- HP can collaborate with suppliers to help them create the next ‘it’ toy
Benefits
- Drill down on which stores are more popular and why
- Predictive modelling and buying behaviour
- Promotional activity
- Store vs online debate
If LOYALTY POINTS awarded, use IFRS 15 - Revenue from contracts with customers
- Revenue recognised when performance obligation satisfied
- 5 steps for revenue recognition
- Additional goods for loyalty points is a separate performance obligation
- Revenue relating to loyalty points is deferred and recognised at redemption or expiry
OUTSOURCING VS IN-HOUSE
Outsourcing considerations
- Would need to find a supplier
- Consider the cost
- Obtain references
- Establish the required service
- Commercial sensitivity
- Performance measures
In-house considerations
- Design, installation and maintenance costs (running costs of team / possible new equipment)
- Need for management input (significant senior management time may be needed to understand the needs)
- Disruption to current systems and ways of working
- Need for change management, which could lead to conflicts with directors over who’s responsible for the new work
- Specialist skills
- Data security
- Data Overload
BREACHING TOY SAFETY
Practical measures if a toy fails standards
- Launch an internal investigation
- Contact manufacturer
- Legal counsel
- Withdraw the product
- Offer refunds
- Communicate with customers
IRON TRIANGLE (TIME, COST AND QUALITY)
- Define the three constraints and their relationship with each other
- Then explore how the constraints impact the question and which ones are under pressure / important to the question:
Time
- Short term projects would have an important time constraint
Cost
- Will usually be important given our need to control costs tightly
Quality
- More important if long term, also a key part of our USP is the quality
