Theme 3 Flashcards
What is a corporate objective?
The objectives of a medium to large-sized business as a whole.
What is a mission statement?
A brief statement describing the business’s purpose and objectives, designed to encapsulate it’s current operations.
Reasons to create a mission statement
- To form a promise to it’s customers on what they can expect the business to strive for.
- To bring a company’s workforce together.
What is Ansoff’s Matrix?
A strategic tool to help a business achieve growth by selecting the appropriate marketing strategy.
Ansoff’s Matrix strategies
- Market penetration
- Market development
- Product development
- Diversification
What is Porter’s Strategic Matrix?
A tool that helps identify the sources of competitive advantage that a business might achieve in a market.
Porter’s strategies
- Cost leadership
- Differentiation
- Focus
Cost leadership
Striving to be the lowest cost provider in the market.
Pros and cons of cost leadership
+Increase profits
+Increase market share
-Requires high level of market share
Differentiation
Striving to achieve a high level of product differentiation.
- Quality
- Design
- Brand identity
- Customer service
Pros and cons of Differentiation
+May be adopted by any business
+Premium price
- Development costs
- Marketing costs
- Easy to copy
Focus
Targeting a narrow range of customers by either
- Cost focus
- Differentiation focus
Pros and cons of Focus
+Customer satisfaction
+Loyalty
+Less competition
+Higher profit margins
-Low bargaining power with suppliers
What is portfolio analysis?
A method of cathegorising all the products and services of a firm to decide which fits within the strategic plans.
Aims of portfolio analysis
To find out: •Projected sales •Projected costs •Future competition •Risks that may affect performance
What is competitive advantage?
An advantage that enables a business to perform better than it’s competitors in the market.
What is a distinctive capability?
A form of competitive advantage that is sustainable because it cannot be easily replicated by a competitor.
Ways of achieving competitive advantage through distinctive capabilities
- Architecture: Relationships with employees, partners, suppliers and customers.
- Reputation: Quality, reliability, service, prestige and honesty
- Innovation: Products, production.
What is SWOT analysis?
An analysis of internal strengths and weaknesses and external opportunities and threats involving a business.
Strengths
What a business is good at:
- Leadership
- Motivation
- USP
- Production
- Loyalty
- Marketing
Weaknesses
Undermine the performance of a business:
- Motivation
- Organisational structure
- Product range
- Poor cash flow
Opportunities
- New markets
- Cost reduction
- Low interest rates
- Low exchange rates
- Low regulations
Threats
- New competitors
- New legislation
- Social pressures
What is PESTLE analysis?
Analysis of the external political, economic, social, technological, legal and environmental factors affecting a business.
Political factors
- Members leaving the EU
- National security issues
- Pressure groups
- Government changes
Economic factors
- Unemployment
- Price stability
- Exchange rates
- Interest rates
Social factors
- Literacy rate
* Migration
Technological factors
- Development
- Capital over labour
- Communications
Legal factors
- Taxes
- Bans
- Health regulations
Environmental factors
- Bio products
- Renewable energy
- Recycling
What are Porter’s five forces?
Five factors that determine the profitability of an industry:
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of new entrants
- Substitutes
- Rivalry
What are the 4 objectives of growth?
- Economies of scale
- Market power
- Market share
- Profitability
Pros of economies of scale
- Fall in production costs per unit
* More efficiency
Pros of market power
- Higher prices
- Less competition
- Less development costs
Pros of market share
- Higher prices
- Product differentiation
- Customer loyalty
- Product recognition
- Brand developing
What 3 problems can arise from growth?
- Diseconomies of scale
- Bad internal communication
- Overtrading
Diseconomies of scale
Rise of average costs as output rises.
Economies of scale
The reduction of average costs as output increases.
What is a merger?
Occurs when two or more businesses join together to operate as one.
What is a takeover?
The process of one business buying another.
Reasons for mergers and takeovers
- Exploit synergies
- Quick expansion
- Cheaper than internal growth
- Defensive reasons
- Entering new markets
- Economies of scale
Disctinction between mergers and takeovers
Mergers:
•Agreement on both sides
•New combined brand
Takeovers:
•Through buying of shares
•Bought brand disappears
•51% of shares are necessary
Horizontal integration
The joining of businesses that are exactly in the same line of business.
Vertical integration
The joining of two businesses at different stages of production.
Reasons for horizontal integration
- Common knowledge of the market
- Less risk of failure
- Similar skills
Finacial risks for mergers
- Regulatory intervention
- Resistance from employees
- Integration costs
- Bidding wars
Finsncial rewards for mergers
- Fast growth
- High remuneration for senior staff
- Rewards to previous owners
- Increased profitability
Problems of rapid growth
- Drain of resources
- Coping with change
- Alienation of customers
- Loss of control
- Shortage of resources
What is organic growth?
A business growth strategy that involves a business growing gradually using its own resources.
What is inorganic growth?
A business growing strategy that involves two or more businesses joining together to form a much larger one.
Methods of growing organically
- New customers
- New products
- New markets
- New business model
- Franchising
Advantages of organic growth
- Less risk
- Cheaper
- More control
- Less likely to encounter diseconomies of scale
Disadvantages of organic growth
- Too slow for some stakeholders
- Slow adaptation
- Slow economies of scale
What are reasons for a business wanting to stay small?
- Personal service
- Owner’s preference
- Flexibility and efficiency
- Lower costs
- Low barriers to entry in markets
- Small firms can be monopolists
How does Product differentiation allow a small business to survive in a competitive market?
- Hand-crafted products
- Personalized service
- Larger product choice
How does flexibility allow a small business to survive in a competitive market?
- Less complex organisational structures
- Changes to customer’s orders
- Faster response to shifts in vustomer needs, exchange rates and legislation
How does customer service allow a small business to survive in a competitive market?
- Easier to offer
- Convenience for customers
- Easier to communicate
- Fast customer feedback
How does e-commerce allow a small business to survive in a competitive market?
- Online shops/ easier competition
- Social media consultants
- Information and advice sites
- Tutoring, training or mentoring
What is quantitative sales forecasting?
The prediction of future sales based on past numeric figures.
What are 2 methods of quantitative sales forecasting?
- Predicting the line of best fit
- Variations from the trend
- Seasonal variations
What is moving average?
A succession of averages derived from successive segments of series of values.
What is a scatter graph?
A graph showing the performance of one variable against another independent variable on a variety of occasions. It is used to show whether a correlation exists between the variables.
What is investment appraisal?
The evaluation of an investment project to determine whether or not it is likely to be worthwhile.
What are the 3 methods of investment appraisal?
- Simple payback method
- Average Rate of Return
- Discounted cash flow
Simple payback period
The amount of time it takes for a project to recover or pay back the initial outlay.
Pros and cons of simple payback period
+Useful for fast recover or costs
+Simple to use
+Useful for cash flow problems
- Cash earned after payback is ignored
- Profitability is overlooked
Average Rate of Return
ARR(%)= (Net return per annum/Capital cost) x 100
Pros and cons of ARR
+Clearly shows the profitability of an investment project.
-The effects of time on the money value are ignored.
Discounted cash flow
A method of investment appraisal that takes interest rates into account by calculating the present value of future incomes.
Pros and cons of discounted cash flow
+Correctly accounts for the value of future earnings by calculating present values
+Flexible
- Complex calculation
- Rate of discount is critical.
What is a decision tree?
A technique which shows all possible outcomes of a decision.
Structure of a decision tree
- Decision points
- Outcomes
- Probability
- Expected monetary values
Expected monetary value
EMV= (probability of success x expected profit) + (probability of failure x expected profit)
Pros and cons of decision trees
+Shows all possible action courses
+Use numerical values
+Shows all the risks
- Based on estimations
- Time-consuming
- Dynamic markets
What is critical path analysis?
A method of calculating the minimum time required to complete a project, identifying delays which could be critical to it’s competition.
Critical path analysis diagram structure
- Nodes
- Time taken for each activity
- EST
- LFT
Earliest Start Time
How soon a task in a project can begin.
Latest Finish Time
The latest time that a project can begin
Pros and cons of critical path analysis
+Efficiency
+Faster decision making
+Working capital control
- Inaccurate
- Unexpected changes
- Large projects can be complicated.
What are the 2 corporate timescales?
- Short-termism
* Long-termism
Short termism
Taking decisions which will only impact the next five years of a business.
Long-termism
Taking decisions that will impact the vision, mission and objectives of a business.
Pros and cons of short-termism
+Reduced costs
+Increased profits
- Overlooking of long-term opportunities
- Costs can be larger in the short term
Pros and cons of long-termism
+More long-term and international opportunities
+More innovative
+High staff quality
+Better relationships with suppliers
What are the 2 types of decision making?
- Evidence-based
* Subjective
What is evidence-based decision making?
An approach to decision making that involves gathering information and using a rational approach to reach a conclusion.
What is subjective decision making?
An approach to decision making where personal opinions affect the course of action chosen
Structure of evidence-based decision making
- Identifying objectives
- Collecting information and ideas
- Analysing information and ideas
- Making a decision
- Communication
- Outcome
- Evaluate the results
What is corporate culture?
The values, attitudes, beliefs, meanings and norms that are shared by people and groups within an organisation.
Features of a strong corporate culture
- Sense of identity
- Teamwork
- Commitment
- Motivation
4 types of company cultures
- Power culture
- Role culture
- Task culture
- Person culture
Power culture
- Centralised
- Few rules
- Competitive atmosphere
Role culture
- Power is associated with a role
* Tall structures
Task culture
- Power is given to those who can accomplish tasks
- Teamworking
- Adaptability and dynamism
Person culture
- Small number of expert individuals
* Accountants, lawyers, doctors, architects
Factors that help create a corporate culture.
- Leader
- Environment
- Nationality
- Policies
- Beliefs
- History
- Structure
- Values
Difficulties in changing an established structure
- Identifying the factors
* Change people’s attitudes and beliefs
Who are internal stakeholders?
Groups inside a business with an interest in it’s activities.
- Staff
- Managers
Who are external stakeholders?
Groups outside the business with an interest in its activities.
- Shareholders
- Suppliers
- Customers
- Governments
- Local residents
Common stakeholder objectives
- Growth
- Rising profit
- Product quality
- Innovation
Stakeholder influence on businesses
- Listened views and interests
* Open communication channels
Stakeholders influence on businesses
- Prioritise short term needs of shareholders
- Boost immediate cash flow and profitability
- Good relationships with suppliers
Potential conflicts between shareholders and stakeholders
- Shareholders-employees: Higher welfare means higher costs
- Shareholders-customers: Higher prices mean less sales
- Shareholders-directors: Higher dividends means less retained profit
- Shareholders-environment: Higher profit means less environmental care.
- Shareholders-government: Higher proftis mean neglecting taxes.
What is business ethics?
The moral rights and wrongs of a decision, focusing more on a strategic level.
What are trade-offs?
Situations where the selection of one choice results in the loss of another.
Common trade-offs
Acting ethically can mean •Raised costs •Reduced revenue •Better reputation •Better marketing
What is Corporate Social Responsibility?
A business taking responsibility for its effects on the environment and its impact on social welfare.
What is remuneration?
The reward for work in the form of pay, salary or wages.
Ethical codes of practice
- Environmental responsibility
- Dealing with customers and suppliers in a fair and honest way
- Competing fairly
- Responding fairly to staff needs
What are the 2 form of financial statements?
- Statement of financial position
* Statement of comprehensive income
What is a statement of comprehensive income?
A document that shows the income and expenditure of a business for a period of time.
Key information in statement of comprehensive income
- Revenue
- Cost of sales
- Gross profit
- Selling expenses
- Administrative expenses
- Operating profit
- Finance costs
- Net profit
Which stakeholders might be interested in the statement of comprehensive income?
- Shareholders
- Managers
- Employees
- Suppliers
- The government
What is a statement of financial position?
A document that shows a summary of a firm’s assets, liabilities and capital.
Key information in a statement of financial position
- Current assets
- Non-current assets
- Current liabilities
- Non-current liabilities
- Net capital
Non-current assets
- Goodwill
- Names
- Copyrights
- Trademarks
- Patents
- Property
- Equipment
- Investments
Current assets
- Inventories
- Trade
- Cash
Current liabilities
- Borrowings
- Trade
- Dividends
- Tax
Non-current liabilities
- Loans
* Provisions
Net assets
- Share capital
- Share premium account
- Retired earnings
Which stakeholders might be interested in the statement of financial position?
- Shareholders
- Managers
- Suppliers
- Creditors
What 2 ratios are used for ratio analysis?
- Gearing ratio
* Return on capital employed
ROCE formula
ROCE=(Operating profit/Capital employed) x 100%
What is ROCE?
The profit of a business as a percentage of the total amount of money used to generate it.
What is gearing ratio?
Comparison of the proportion of capital raised by debt and equity.
Gearing ratio formula
Gearing ratio=(Non-current liabilities/Capital employed) x 100%
Limitations of ratio analysis
- The basis for comparison
- The quality of final accounts
- Limitations of the balance sheets
- Qualitative information is ignored
- Window dressing
What is labour productivity?
Output per worker in a given time period.
Labour productivity formula
Labour productivity=Total output/Average number of employees
What is labour turnover?
The rate at which staff leaves a business
Labour turnover formula
Labour turnover=(Number of staff leaving over time period/Average number of staff in during time period) x 100%
What is labour retention?
The number of employees that remain in a business over a period of time.
Labour retention formula
Labour retention=(Number of staff staying/Average number of staff in post) x 100%
What is absenteeism?
The number of staff who are absent of the total workforce.
Absenteeism formula
Rate of absenteeism= (Number of staff absent on a day/Total number of staff) x 100%
What are the 4 strategies to increase productivity?
- Financial rewards
- Enployee share ownership
- Consultation strategies
- Empowerment strategies
Pros and cons of financial rewards
+Fair pay
+Less staff turnover
+Reduce absenteeism
-Should not penalise for entitled breaks
Pros and cons of employee share ownership
+Motivation
+Loyalty
-Depends on the share value at that time
Pros and cons of consultation strategies
+Motivation
+Productivity
+Feel valued
+Less resistance
- Time taking
- Could be ignored
Pros and cons of empowerment strategies
+Motivation
+Productivity
+Less absenteeism
- Costs
- Time taking
What are the 5 causes of change in a business?
- Changes in organisational size
- Poor business performance
- Market change
- Ownership change
- Transformational leadership
Effects of changes in organisational size
- Competitiveness
- Productivity
- Financial performance
- Stakeholders
Effects of change on business performance
- Competitiveness
- Productivity
- Financial performance
- Stakeholders
Efects of market change
- Competitiveness
- Productivity
- Financial performance
- Stakeholders
Effects of change in ownership
- Competitiveness
- Productivity
- Financial performance
- Stakeholders
What are the 4 key factors which change can impact?
- Organisational structure
- Size of the business
- Speed of change
- Managing resistance to change
What is scenario planning?
A planning method design to explore uncertainties, prepare against risks and exploit opportunities
What is risk assesment?
Identifying and evaluating the potential risks in an activity that a business is about to undertake.
What is a business continuity plan?
A document that shows how a business will operate after a serious incident and how it expects to return to normal
What is succession planning?
Identifying and developing people who have potential to occupy key roles in a business in the future.
