Theme 3: Business decisions and strategy Flashcards
what are corporative objectives?
specific targets set for the whole firm to reach in a given time period to achieve the corporate aims, they are SMART
corporate to functional to team to individual objectives
what are corporate aims?
a generalised statement of where a business is heading, it is a long term plan from which business objectives are derived.
what is the purpose of setting aims? (3 points)
- a sense of purpose and drive to everyday business
- the basis for setting objectives
- measure success
what are 3 typical business objectives explained
profit maximisation
- common for those looking to grow, when subject to takeover bid
- do this to ensure share price is high
survival
- to fulfil most would have to break even, priority for startups
- for those who have over expanded or been negatively affected by competitors
cost efficiency
- common target to make profit as quick as possible
- finding the most cost-effective way of delivering goods and services
what is the difference between strategic objectives and tactical objectives
strategic- long term plans, difficult to reverse
tactical- short term plans, require few resources, easily reversed
what are 3 internal and 3 external factors that influence business objectives
internal
- age of the business
- ownership
- views of owners and managers
external
- market conditions
- state of the economy
- competitors
what is a mission statement?
it is a qualitative statement of the business’ aims and is the underpinning purpose behind the existence of a business. it also says its vision for the future.
why is a mission statement important?
- provides a focus for employees, motivation, guides employees
- it gives staff a genuine sense of purpose
- unites staff and customers behind the business, motivates
- differentiates business from competitors
what are the 4 influences on a business’ mission?
purpose
- likely to be rooted in the founder’s beliefs
values
- the values of the business are are a key part of its culture, what they believe in doing
standards and behaviours
- behaviours of managers are likely to have a very strong influence over the behaviours exhibited by their staff
strategy
- what the business aims to achieve, their goals
what are 6 limitations of mission statements/aims?
- they change a lot over time
- they may be a substitute for the real thing, provide a sense of purpose in a business that has none, treated with derision by the staff
- if their MS is too ambitious it can harm its employees’ ability to meet stated goals, negatively affect employees’ morale, diminishes credibility
- can create confusion if they lack specificity and provide no direction for employees to follow, those that are too broad will not define a company’s ethos
- often too vague and general
- not always supported by the actions of the business
what do SMART objectives mean?
Specific- should state exactly what is to be achieved
Measurable- capable of measurement
Achievable- be realistic given the circumstances
Relevant- relevant to the people deposable for achieving them
Timebound- should be set within a time frame, deadlines to be realistic
what is the process from mission statement to objective (they are all linked)
mission statement
corporate aims
corporate objectives
functional, team and individual objectives
what is the difference between a mission and a mission statement?
a mission is the underpinning purpose behind the existence of a business
a mission statement is a qualitative statement of the business’ aims and is the underpinning purpose behind the existence of a business. It also says its vision for the future
whats SWOT analysis?
a SWOT analysis identifies a business’ internal strengths and weaknesses along with the opportunities and threats it faces by its external environment
strengths and weaknesses = internal
opportunities and threats = external
what are the 4 factors that affect the external environment (explained)
- Demography
- refers to population change
- not only is our pop growing but the age distribution is changing, more elderly people, gives opportunities for businesses - New laws and regulations
- provides both opportunities and threats
- the increased laws and regulations with COVID meant many stores fell into administration, no inflows
- the law for 2006 for children car seats led to a huge boost in business - Economic factors
- changes in unemployment rates, inflation and exchange rates will affect firms for sure
- they can drastically change their economic position - technological factors
- rise in technological competition has created many threats for firms in the sector, the rise in subscription providers (Netflix) creates many threats
- the rise of the use of social media created many opportunities for entrepreneurs of facebook
- threat of digital cameras due to improvements in mobile phone cameras
what are the positives and negatives of SWOT analysis
positives:
- helps focus on strategic issues, better direction in decision making, sufficient insight into into the current and potential position
- understand your business better, to have full credibility when discussing issues
- help deciding on a new corporate strategy, make plans for the future
negatives:
- they may be outdated, needs to be constantly reviewed
- doesnt prioritise issues, only one stage of business planning
- a lack of hierarchy leads to problems
give 5 examples of internal strengths and weaknesses
- market share
- brand recognition and loyalty
- human resources (staff turnover)
- capacity utilisation
- productivity
what is PESTLE analysis
it is a framework or tool used by marketers to analyse and monitor the macro-environmental (external marketing environment) factors that have have an impact on the organisation. this helps to form the SWOT analysis
political economic social technological legal ethical/environemtnal
what is an external influence?
it is factor beyond a firm’s control that can affect its performance. this includes changes in consumer tastes, laws and regulation and economic factors
explain the PESTLE factors
Political
- all about government decision making and policy, to what degree a gov intervenes in the economy
this includes:
- competition policy (preventing certain mergers if giving one huge advantage)
- government spending and tax policies (changing taxation policies on industries)
- business policy and incentives (they may be given incentives to certain industries)
- need to be able to respond to anticipated future legislation, adjust marketing policy accordingly
Economic
- interest rates (set by Bank of England, affects loans)
- exchange rates (SPICED)
- business cycle, GDP (recession, boom, react in different ways )
- consumer spending and incomes
Social
- demographic change (people living older)
- consumers tastes and fashions (always changing, market research)
- changing lifestyles (veganism, environmental conservation/sustainability)
technological
- new production process (use of robots)
- disruptive technologies (very dynamic, declining industries (cameras))
- adoption of mobile ethnology (m-commerce, convenience)
- new ways of distributing, communicating with target markets
Legal
- decisions made by gov in which all need to adhere to:
eg:
- employment law
- minimum/living wage (reviewed every year)
- health and safety laws (protect employees and customers)
- hard for global companies as each country has its own set of rules and regulations
Ethical and environmental
- sustainability (increased pressure in the media)
- ethical sourcing along supply chain (pressure groups, bad PR)
- pollution and carbon emissions (especially in certain industries, transportation)
- increased demeaned over last decade with resources scarcity and climate change
what are the 4 objectives of growth?
- to achieve economies of scale (internal and external)
- increased market power over customers and suppliers
- increased market share and brand recognition
- increased profitability
explain the objectives of growth of achieving economies of scale and increasing market power over customer sand suppliers
to achieve economies of scale (internal and external)
- by growing the scale of output a business can achieve lower unit costs which can thereby improve a firm’s competitiveness
- if growth enables the business to become market leader with huge EOS it could become virtually impossible for any competitor to hit back
- increased sales leads to increased output required to meet demand which leads to EOS which lowers unit costs making price cuts possible leading to increased sales and so on…
increased market power over customers and suppliers
- larger firms may be able to exert greater bargaining power over suppliers and/or customers in order to gain a competitive advantage
- having a large product portfolio leads to market dominance and great negotiating power with distributors being able to charge higher prices
explain the objectives of growth of increased market share and brand recognition and increased profitability
increased market share and brand recognition
- strong link between growing market share and brand recognition with higher profits
- increasing MS done by working harder on innovation perhaps by increasing budget for R+D or by investing heavily in branding and marketing to try and differentiate
increased profitability
- a key objective for many firms, particularly those who shares are quoted on stock markets or who are owned by private equity
- if growth achieve EOS then average costs will fall in real terms which will lead to rising margins
what are the 6 different internal economies of scale?
purchasing- when you buy in bulk, unit costs drop the more you buy
managerial- a form of division of labour, large scale manufacturing employ specialists to supervise production systems, manage marketing systems and oversee human resources, co-ordiante operations
financial- urger firms are usually rated by the financial markets to be more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing, smaller firms often have access to higher rates of interest
marketing- a large firm can spread it advertising and marketing budget over a large output and can purchase its input at bulk at a discounted price, e.g Coca Cola dont need to do separate advertisements, for all stores around the world
technical- large scale businesses can afford to invest in expensive and specialist capitalist machinery, e.g. Tesco investing in technology that improves stock control, not possible for smaller businesses
risk-bearing economies- the ability of large firms to spread risks over a larger number of investors, diversification of location
what are external economies of scale and what are the different types?
- these are when a firm benefits from lower unit cost as a result of the whole industry growing in size, e.g. Silicon Valley
this can occur through:
1) growth of industry- training and education focused on that industry, e.g. ICT
2) better transport infrastructure and communications systems
3) the government might lower taxes for the business (this is outside their control)
4) introduction of new technology to lower costs
it can be generated when a group of producers develop and expand in a relatively small geographical area
what are the 3 problems arising from growth?
- diseconomies of scale
- internal communication
- overtrading
what are the three diseconomies of scale?
1) co-ordination/control- problems in monitoring productivity and work quality, increasing wastage of resources, difficulty in MNCs
2) motivation- workers in larger firms may develop a sense of alienation and loss of morale, change in organisational structure, feel disconnected
3) communication- workers in large businesses may have less opportunities to communicate, different languages, lots of branches so long chain of command
what happens to motivation, communication and coordination and control when a business grows and how can we prevent these problems?
motivation
- less time for recognition and reward
- workers can feel alienated
- lack of personal contact can have an adverse effect on staff
communication
- spans of control get wider and face to face meetings are less regular
- poor or little feedback given
- increase in layers of hierarchy
coordination/control
- hard to keep on track of who does what and which branch is doing well
- internal competition within departments can create a lack of coordinated objectives
- hard to ensure accountability in line management
how to prevent:
- centralise
- more management members
- non-financial incentives
what is overtrading and when is it most likely to happen?
when a business faces liquidity problems as a result of expanding too quickly without sufficient cash reserves
- when growth is achieved by making significant capital investment in production or operations capacity before revenues are generated
- sales are made on credit and customers take too long to settle amounts owed
what are 4 ways of managing the risk of overtrading
- reducing inventory levels
- leasing rather than buying capital equipment
- obtaining better payment terms from suppliers
- scaling back the pace of growth until profit margins and cash reserves have improved
what is refrenchment?
when a business reduces the scale of a specific business area or element within the business operations.
it can allow a business to re-focus on growing a core activity within its operation.
what are synergies?
when two or more businesses combine and are worth greater than the individual sum of each.
what is quantitative sales forecasting and what are the three methods to provide one?
it involves estimating possible future sale figures on the basis of available primary or secondary quantitative data
- moving averages
- extrapolation
- correlation
why do firms forecast sales?
it forms the basis for other business planning:
1) human resource plan: how many people we need linked with expected output
2) production/capacity plans
- whether they will have to adapt production in order to accord to increasing or decreasing sales forecasts
3) cash flow forecasts
- how will they have to adapt their outflows (costs) to the number of inflows coming in
4) profit forecasts and budgets
- seeing the number of sales estimated will lead to them estimating the amount of profit if costs stay the same
what are moving averages?
it is a quantitative method used to find underlying trends in a set of raw data, a succession of averages derived from successive segments
this looks at several periods at a time and averages out the data
- it is helpful when there are strong seasonal influences on sales or when sales are erratic for no obvious reason
what is times series analysis?
- it is a series of figures covering an extended period of time
refers to the use of past data and trends to forecast and predict future trends. it allows businesses to use moving average calculations to forecast future sales based on historical data.
how do you calculate the moving average of the data?
- the first step is to calculate a moving total, the amount over the period you are assessing, for three month total it would be January-march, February-April, march-may
- calculate the moving average by dividing it by the number of months you assessed (3 month moving average = divide by 3)
how do you calculate variation in a moving average?
sales in a specific time period - the moving average sales
what is the difference between three period moving average and four-quarter moving average?
three period moving averages allows a business to use three sets of data to calculate an average and reduces the impact of a singly anomaly on future predictions
four quarter moving averages (three month periods) are used if the key factor affecting sales is seasonal, this eliminates seasonal variations
what are correlations
they can be used by marketing departments to examine the relationship between two variables. scatter graphs can be used to show correlation and allow businesses to extrapolate data. often researchers will compare sales volume with advertising expenditure
- positive correlation is when an increase in one variable results in an increase in the other variable
- negative correlation is when an increase in one variable results in a decrease in the other variable
what is extrapolation?
a method used by businesses to predict future levels such as sales, through analysing trends in past data
what are three negatives of quantitative techniques?
- changes in the external environment (new competitors, bad PR, legal changes) can impact the business’ future performance
- changes in the internal environment (culture, leadership and degree of promotion) can impact the business’ performance
- quantitative sales forecasting can be time-consuming and complex
when are moving averages useful?
it is useful when there are strong seasonal influences on sales or when sales are erratic for no obvious reasons, wild ups and downs may make it hard to see the underlying situation.
explain the use of extrapolation in forecasting sales
- the simplest way of predicting the future is often to assume that it will just be like the past, this can realistic in the short term, if the sales have been increasing over the past few months it is fair to assume it’ll continue
- despite the use of extrapolation is the most used for predicting sales, there is a need for judgement, you must base it around the longer-term trends
what are 3 pros and cons of the use of extrapolation
pros
- a simple method of forecasting
- not much data required
- quick and cheap
cons
- unreliable if there are significant fluctuations in historical data
- assumes past trends will continue into the future- unlikely in many competitive business environments
- ignores qualitative factors (e.g. changes in trends and fashions)
what would make quantitative techniques more effective in forecasting sales?
business is mature- lots of past data to identify trends
industry is mature- rapid change is less likely, external forces likely to have less of an impact
stable external environment- the economy, technology, competition and legislation less likely to change
what is the definition of investment and the two different types
investment- spending now with the expectation of a return in the future
capital investment- machinery and equipment that has a long-term benefit, e.g. buildings, projectors
revenue investment- spending on stock, wages, that has a short-term benefit
what is investment appraisal?
it is a series of techniques designed to assist businesses in judging the financial desirability of an investment decision
this is done by:
- payback
- ARR
- NPV
what is payback?
the length of time that it takes to recover the cost of an investment through the net returns provided by that particular investment
what is the formula for payback?
no. of full years + what you need / what you get x 12
what are the 3 pros and cons of payback
pros
- easy to calculate
- takes into account the cost of the investment
- focuses on short term cash flow as a priority
cons
- ignores the overall return on a project
- ignores the time value of money, ignores profitability
- encourages a short-term approach , makes it very hard for managers to plan effectively for the long term future of the business
what is ARR?
a method investment appraisal which looks at the total return on a project and finds the annual average as a percentage of the initial investment cost
how do you calculate an ARR?
1) calculate the total profit over lifetime - INVESTMENT OUTLAY (total net cash flow - the investment outlay)
2) divide by the number of the years of the investment project to give the average annual payment
3) find ARR
average profit = total profit or returns / no. of years
ARR = average profit / initial cost x 100
what are the advantages and disadvantages of ARR?
pros:
- measures profitability
- easy to compare returns against other investments
- considers total profit made
cons:
- ignores the timings of cash flows, solely focused on profits
- ignores the time value of money
- ignores the risk that projections of future sales may be more inaccurate the further into the future they are
