Theme 3: Business decisions and strategy Flashcards
1
Q
what are corporative objectives?
A
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
2
Q
what are corporate aims?
A
a generalised statement of where a business is heading, it is a long term plan from which business objectives are derived.
3
Q
what is the purpose of setting aims? (3 points)
A
- a sense of purpose and drive to everyday business
- the basis for setting objectives
- measure success
4
Q
what are 3 typical business objectives explained
A
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
5
Q
what is the difference between strategic objectives and tactical objectives
A
strategic- long term plans, difficult to reverse
tactical- short term plans, require few resources, easily reversed
6
Q
what are 3 internal and 3 external factors that influence business objectives
A
internal
- age of the business
- ownership
- views of owners and managers
external
- market conditions
- state of the economy
- competitors
7
Q
what is a mission statement?
A
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.
8
Q
why is a mission statement important?
A
- 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
9
Q
what are the 4 influences on a business’ mission?
A
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
10
Q
what are 6 limitations of mission statements/aims?
A
- 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
11
Q
what do SMART objectives mean?
A
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
12
Q
what is the process from mission statement to objective (they are all linked)
A
mission statement
corporate aims
corporate objectives
functional, team and individual objectives
13
Q
what is the difference between a mission and a mission statement?
A
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
14
Q
whats SWOT analysis?
A
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
15
Q
what are the 4 factors that affect the external environment (explained)
A
- 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
16
Q
what are the positives and negatives of SWOT analysis
A
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
17
Q
give 5 examples of internal strengths and weaknesses
A
- market share
- brand recognition and loyalty
- human resources (staff turnover)
- capacity utilisation
- productivity
18
Q
what is PESTLE analysis
A
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
19
Q
what is an external influence?
A
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
20
Q
explain the PESTLE factors
A
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
21
Q
what are the 4 objectives of growth?
A
- to achieve economies of scale (internal and external)
- increased market power over customers and suppliers
- increased market share and brand recognition
- increased profitability
22
Q
explain the objectives of growth of achieving economies of scale and increasing market power over customer sand suppliers
A
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
23
Q
explain the objectives of growth of increased market share and brand recognition and increased profitability
A
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
24
Q
what are the 6 different internal economies of scale?
A
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
25
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
26
what are the 3 problems arising from growth?
- diseconomies of scale
- internal communication
- overtrading
27
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
28
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
29
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
30
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
31
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.
32
what are synergies?
when two or more businesses combine and are worth greater than the individual sum of each.
33
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
34
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
35
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
36
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.
37
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)
38
how do you calculate variation in a moving average?
sales in a specific time period - the moving average sales
39
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
40
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
41
what is extrapolation?
a method used by businesses to predict future levels such as sales, through analysing trends in past data
42
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
43
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.
44
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
45
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)
46
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
47
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
48
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
49
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
50
what is the formula for payback?
no. of full years + what you need / what you get x 12
51
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
52
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
53
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
54
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
55
what must you do if the ARR is better in one but the payback is better in the other?
consider:
- how long the investment continues to pay fir
- volatility/dynamic nature of the market
- attitudes/objectives of shareholders
56
what is NPV (net present value)?
a method of finding the present value of future income, by applying a discount factor to decrease the present value of future income
it takes into account time and value of money, changes due to inflation rates, interest rates and opportunity costs
57
what is a discount factor?
it is given to reduce the present value of a future income- the discount factor takes into account the interest, or return the investment could have had if it has been put in the bank or spent on something else
the discount factor can be based on the current rate of interest, or the rate expected over the coming years
58
what are the three steps of NPV
1) multiply net cash flow x discount factor
2) add up all the present values
3) subtract the initial outlay
59
what are the pros and cons for NPV
pros:
- use of discounting reduces the impact of long-term, less likely cash flows
- has a decision-making mechanism, reject projects with negative NPV
cons:
- cannot automatically compare projects with different initial investment costs
- more complex to calculate
- choosing the most appropriate discount rate
60
what are other factors affecting investment decisions?
1) company finances- if a large amount of the investment money is to be borrowed then this may be concerning, if by looking at their balance sheet they are highly geared they may be reluctant to invest
2) confidence in the data- see who made the forecasts and how they made them, what was the evidence behind it, should not be subject to bias
3) social responsibilities- even if investment in energy-saving schemes generate very low ARR, the firm may still wish to proceed for public relations reasons, boost staff morale
61
what are decision trees?
they are mathematical models (or techniques) that set out all the options available for managers when making a decision, plus the possible outcomes of those decisions
62
what is the definition of probability, expected value and net gain?
probability- the chance of an outcome happening
expected value- the financial value of an outcome calculated through adjusting the estimated financial effect by the probability of its occurrence
net gain (expected monetary reward)- the value to be gained from taking a decision. it is calculated by adding together the expected value of each outcome and deducting the costs associated with the decision
63
what are the pros and cons of decision trees?
positives:
- choices clearly presented in a logical approach, can also generate new ideas and approaches
- probability highlight the risk vs rewards of each choice and allow for uncertainty, decisions are more carefully considered
- considers alternative outcomes as well as success, shows the implications of success and failure
negatives:
- probabilities are just estimates and are prone to error especially for new or one-off decisions
- only uses quantitative data, no qualitative data considered
- assignment of expected values and probabilities can involve bias
64
how is a decision tree structured?
- the decisions to be made are shown by a square
| - chance events or alternatives beyond the decision makers control are shown by a circle/node
65
how do you calculate the possible outcome of the decisions
probability x results and then add them up
66
how do you calculate expected value?
work from right to left
estimated financial effect x probability and add the resins
then you can carry working right to left and the decision maker decides at each square which branches to cut off leaving the best alternative option
67
what is critical path/network analysis?
the process of planning the sequence of activities in a project in order to identify the most efficient way of completing an integrated task or project. the aim is to complete the project in the shortest time possible.
68
what is the critical path?
the longest sequence of events on which any delay will cause a delay to the whole project, they have no float time
activities that have LFTs identical to ESTs and represent the longest path between the nodes is the critical path
69
what information is needed for a critical path analysis and what does it show?
info needed:
- activities to complete a project
- duration of each activity
- dependencies/pre-requisites
what does it show:
- the order in which each task must be undertaken
- how long each stage should take
- the earliest date at which the later stages can start
70
what are the two main components of a critical path analysis and what are the rules for constructing them?
1) an 'activity' is part of a project that requires time and/or resources. activities are shown as arrows running from left to right. the length has no significance.
2) a 'node' is the start or finish of an activity and is represented by a circle. all network diagrams start and end on a single node. these nodes are split into three with the left half showing the stage in the path, top right showing earliest start time (EST) and bottom right showing latest finish time (LFT)
1) the network must start and end on a single node
2) identify activities with no prerequisites and draw lines from left to right
3) label the activity line and place duration
4) go to first activity with prerequisite and for two or more link to one node
5) repeat this until all nodes are drawn
6) add the EST and LFT and identify the critical path
- there should only be one node at the beginning and one at the end
71
what are prerequisites and what is the float
prerequisites are activities that must be completed before the next activity can begin
the float is the duration an activity can be extended or postponed so that the project still finishes within the minimum time
float = LFT - activity duration - EST
72
how do you calculate LFTs and EST
LFTs
- give the last node of the project an LFT = to the EST
- work backwards from right to left
- subtract the duration of the activity from the LFT
ESTs
- they are calculated from left to right
- the first node will always have an EST of zero
- add the duration of an activity to the EST of a previous node
- if more than one activity leads to a node then the highest figure becomes the new EST
73
what are the positives and negatives of critical path analysis?
positives:
- helps businesses meet deadlines, especially for time sensitive projects
- some projects are expensive and complex and so CPA minimises risk of missing deadlines and overspending
- allows businesses to plan resources and build in contingencies, JIT/ Lean
negatives:
- unforeseen incidents can cause delays despite completing a CPA
- time consuming to complete
- less necessary if the company is experienced in delivering similar projects, or one big project is just a series of small projects
74
what is corporate culture?
it sums up the attitudes, behaviours and the ethos of an organisation. it is embodied in the people who work there via traditions that have built up over time.
75
give 4 factors how corporate culture is formed and how it is shown
- influence of the founder
- leadership and management style
- size and development stage of the business (MNCs often take a longer-term view)
- organisational structure, policies and practises
- rituals
- mottos
- symbols
76
what is the definition of a strong culture and what are 4 features of one?
values and beliefs that are widely shared and significantly influences people's behaviour
- they have good internal communication with their employees, use of top-down memos
- culture often based around the history, tradition and founders of the firm
- engaged and loyal staff
- clear core values, mission and goals
77
what is the definition of a weak culture and what are 4 features of one?
values and beliefs that either don't exist or are now widely shared so do not significantly influence people's behaviour
- often leads to business failure
- exhibit a demotivated workforce
- little alignment with values
- very bureaucratic and lacks flexibility to respond to dynamic markets
78
what is handy's classification of company cultures
he divides culture into power, role, task and person culture
79
what is a power and role culture?
power culture
- where power is concentrated at the centre, one or a small group of power holders, authoritarian
- likely to be few rules and little bureaucracy, most communication by personal contact
- autocratic leadership
- decision making is not limited by any code of conduct
role culture
- employees have clearly defined roles within a formal structure and high control
- power depends on the position an individual holds in a business
- culture is bureaucratic, cautious and focused on the avoidance of mistakes, all expected to conform to rules and procedures
- autocratic/paternalistic, traditional organisation
80
what is task and person culture
task culture
- paternalistic/democratic
- they have no single power source, senior managers allocate projects to teams of employees made up of representatives from different functional departments
- matrix organisation where teams are formed to solve problems/work on projects
- dynamic culture, organisation structure changes depending on the project, good for dealing with rapidly changing competitive environments because it is flexible (in markets with short PLCs)
- power comes from expertise within a project team
person cultue
- democratic style
- individuals employees believe themselves to be superior to the business
- when individuals with similar training and backgrounds are encouraged to form groups to enhance their expertise and share knowledge
- found in large complex organisations, or among professions such as accountants or lawyers
- employees are highly skilled with professional qualifications
81
what are 4 barriers to cultural change
- preference for the existing arrangements
- employee resistance
- cost to make changes
- the unknown
82
what are 4 strategies to manage cultural change?
1) start with the vision- ensure it is clear and consistent
2) must be communicated at every layer of hierarchy (especially middle managers)
3) get staff buy in by involving them in the change, they need to support it
4) requires a clear business strategy
83
what are three reasons why cultural change is hard?
- major culture overhauls are hard to do and often fail
- its a long race, culture evolves slowly
- momentum is hard to sustain
84
what is a stakeholder and shareholder?
stakeholder- any individual or organisation who had a vested interest in the activities and decision making of a business
shareholder- someone who owns a proportion of a company's share capital and therefore has voting rights at the annual general meeting
85
what is the definition of an internal and external stakeholder and give examples
internal stakeholder- groups or individuals within an organisation who have an interest in the business
- shareholders or business owners
- managers and employees
external stakeholder- groups or individuals outside of an organisation who have an interest in the business
- competitors
- local community
- suppliers
86
explain the shareholder and stakeholder approach
shareholder approach- a short term approach that looks at profitability through spending as little as possible on employees, they are seen as a cost, look for greater returns and growth
stakeholder approach- a long term approach which looks at profitability through investing in employees to improve productivity, they focus on meeting the needs of all stakeholder groups such as employee welfare and environmental performance
87
what are the priorities of stakeholders:
- shareholders
- local community
- employees
- customers
- suppliers
shareholders
- high dividends, rising share price, success and growth of the business
local community
- low levels of noise and traffic, jobs for the local community
employees
- higher wages, improved working conditions, growth, job security
customers
- quality of product and service, innovative new products, convenience
suppliers
- repeat orders, growth, products in a way that enhances brand image
88
what is the influence of stakeholders?
'united by the objective of growth'
- they want the business to consider all of its stakeholders in its business decisions/objectives
- the public relations benefits that come from a positive corporate image based on respect for stakeholders
- focused on long-term investment, e.g. on staff training
89
what is the influence of shareholders?
'profit-focused'
- they believe the business should focus purely on shareholder returns (increasing share price and dividends) in its business decisions/objectives
- cost-cutting is favoured because its bound to boost short-term profit
- growth and greater returns
90
why is there potential for conflict between shareholder and stakeholder objectives
- often different stakeholders seem unable to stop themselves taking advantage of any weakness in others
- some aim to benefit their shareholders at the cost of others, underpaying the government
- conflicts with increased production benefitting employees and managers through growth but at the detriment to environmental groups concerned about increased resource use
- switching demand from shops to e-commerce benefits customers but not employees due to potential loss in jobs
- shareholders tend to want a return on investment in short term through basing on profit performance but stakeholder groups such as employees would want wage increases and better work conditions, all of which come at a cost
91
what is business ethics and which areas are ethics tested?
business ethics are the morals and principles that underpin business behaviour
- protecting the environment through the use of sustainable resources
- whistleblowing on unethical practises within the business
- dealing honestly and fairly with customers and with suppliers
- pay and rewards (bonuses)
92
what are the 4 approaches to ethics?
ethical- ethical practise is at the core of the business, e.g. patagonia (resources)
responsive- accepts that being ethical can pay off, e.g. M&S (ethical consumption, packaging)
legalistic- will obey the law bur nothing more than that, e.g. shell (resources)
immoral- seek to win at all costs, anything acceptable, e.g. amazon (tax avoidance)
93
explain the trade-off between profits and ethics
- profit needs to be enough to provide a satisfactory return for the risks involved in investing in a business
- there are many instances of career ambition overtaking moral considerations, especially in big corporatiosn
- there should be a constant tension between ethics and profits
- often in order to be ethical profits will have to be sacrificed which is often a hard decision for a business to make
- avoiding the use of renewable energy sources or relying materials in order to maximise profits
- offshoring to low-cost countries with little or no workplace legislation in order to cut costs
94
explain the problems of unethical behaviour associated with pay and rewards
- the ways in which management and employees are rewarded differently can create significant issues
- the strong 'bonus culture' in financial services is a good example of this
- many high-earners are driven by the incentive of bonuses, this can lead to unethical practises
- paying senior management at disproportionately higher levels than frontline workers
95
what is peer review?
it is used when helping to decide the salaries of CEOs, they look to other companies of a similar size to see what they are paid, this means they will ask for a higher salary than rivals and therefore lead to collusion where they continue comparing and salaries continue to rise
96
what influences the extent to which a business is ethical?
- relationship with customers
- priorities of the entrepreneur, culture and leadership
- CBA of being ethical
- how competitive the market is
97
what is corporate social responsibility?
the desire to run a business in a morally correct way, attempting to balance the needs of all stakeholder groups, they exceed legal minimum requirements
CSR leads to ethical decision making
- businesses adopt CSR to be morally superior, market leader, an intangible NCA
98
what is sustainable accountancy?
it involves tracking carbon emissions, not just financial accounting, publishing their carbon pollution
- use stock more sustainably, waste reduction
99
what are the arguments for an against CSR?
pros:
- gain a USP, marketing advantages
- staff recruitment and retention- help recruit, motivate and retain staff
- improve access to capital- ethical investment funds
cons:
- role of governments and not businesses to decide what is best for society
- any extra costs that are incurred in CSR will be passed on to consumers, so will make products less price competitive
- may not be possible when external environment is challenging (recession)
100
what is a statement of comprehensive income (profit and loss account)?
this measures the business’ performance through showing a business’ revenue for a period of time along with the costs associated with generating that revenue
101
how is a statement of comprehensive income structured and what are the formulas
Revenue
cost of sales
gross profits = revenue - COS
fixed overheads
operating profit = gross profit - fixed overheads
net financing cost
profit before tax = operating profit - net financing cost
corporation tax
profit for the year (net profit) = profit before tax - corporation tax
102
what are cost of sales?
they are the direct costs of generating revenues. it includes the cost of raw materials and the direct labour costs of production. this is affected if the cost of raw materials were to go up.
103
what are overheads?
they are the expenses made by a business such as rent, transport of goods and administrative expenses. this would be affected by the type of recruitment strategy or if they were to expand/change location.
104
what is a statement of financial position (balance sheet)?
it is a snapshot of a business' assets and its liabilities on a particular day
- it tells you the way a business has raised its capital and the uses to which capital has been put, not to do with profit
105
explain how a statement of financial position/balance sheet is formed?
Non-current assets
current assets
current liabilities
net-current assets = current assets - current liabilities
non-current liabilities
net assets = total assets - total liabilities
financed by:
share capital
retained profit
total equity
106
give examples of 3 NCAs, CAs, NCLs and CLs
NCA- land + buildings, machinery
CA- cash balances, inventories (stock) , trade debtors (receivables)
NCL- long-term borrowings (loans)
CL- trade creditors (payables), short term borrowings (overdrafts)
107
what are debtors and creditors?
they are customers that owe you money and are an asset, creditors are suppliers who have lent you money and are a liability
108
explain stakeholders' interest in balance sheets: shareholders, managers, suppliers
shareholders- non-current assets and net current assets to determine how the funds in the business have been used, to review the liquidity position of the business
managers- net current assets, capital structure, net assets,
to review the liquidity position of the business, determine the best way of funding future finance through analysing the current capital structure, to enable further analysis of a business' financial position through ratio analysis
suppliers- net current assets, current assets and current liabilities
to analyse the payables figure to determine how much the business owes, look at their liquidity position, help with decision making helping them come to an informed judgement regarding offering trade credit
109
explain stakeholders interest in profit and loss statement
employees- net profit
indication of job security, potential of a future pay rise, bonus?
shareholders- revenue, operating profit, net profit
compare perfomance of revenue and operating profit to previous years to see if shares are still a good investment, see the dividends for the year
suppliers- revenue, gross profit, operating profit
likelihood of repeat orders, ability of firm to pay on time, indicates financial stability fo the firm if reviewed over time
110
what is a cash flow statement?
a summary of cash inflows and outflows over a period of time. shows how the business has generated and disposed of cash and liquid funds during a specific period
111
what type of ratio would you use for measuring profitability, liquidity, debt structure and investment performance
profitability- gpm/npm
liquidity- current ratio/acid test ratio
debt structure- gearing
investment performance- ROCE
112
what is gearing?
it measures the proportion of a business' capital (finance) provided by debt
- it measures the firm's level of debt
- a business is highly geared if it has used debt to fund all of its capital investment
113
why is gearing useful?
- measures the financial health of a business
- focuses on the level of debt in the financial structure of a business
- high gearing can mean high business risk
114
what is the formula for gearing and how do you evaluate the figures
non current liabilities / capital employed (total equity + non current liabilities) x 100
- gearing ratio of 50% or more is normally said to be high
- gearing of less than 20% is normally said to be low
- the level of acceptable gearing depends on the business and industry
115
what are the benefits of high and low gearing?
benefits of high gearing:
- less capital required to be invested by the shareholders
- debt can be a relatively cheap source of finance compared with dividends
- easy to pay interest if profits and cash flows are strong
benefits of low gearing:
- less risk of defaulting on debts
- less exposed to interest rate changes
- shareholders rather than debt providers have influence over the business
- business has the capacity to add debt if required, more flexible
116
what is return on capital employed (ROCE)?
a ratio that measures the efficiency of a business’ investments by measuring the return generated by the investments or capital employed by a business
- it measures the efficiency with which the business generates profit from the funds invested into the business, it is a diagnostic tool
- helps to evaluate the profitability of investments
- provide a target return for future individual projects (help with investment appraisal)
- benchmark performance with competitors or make comparisons over time
117
what is the formula for ROCE and what must you remember when evaluating the figure and how can you alter the figure?
operating profit / capital employed (total equity + NCL) x 100
- the higher the value the better, higher ones suggest resources are being used more efficiently, 20% would be regarded as very satisfactory
- it will vary between industries
- can be compared with the return offered by interest-bearing accounts at banks and see if they would get a greater return there
- comparisons over time and with key competitors are most useful
alter:
- increasing the level of profit generated by the same level of capital invested or
- maintaining the level of profits generated but decreasing the amount of capital it takes to do so
118
how do you calculate current ratio and how do you evaluate the figures and alter the ratio?
current assets / current liabilities
ideal = 1.5:1
- any higher than this and they have too many resources tied up in unproductive assets
- a lower one means they may not be able to pay back their debts
altering if too low:
- selling under-used fixed assets
- raising more share capital
- postponing planned investments
119
how do you calculate acid test ratio and how do you evaluate the ratio?
current assets - stock / current liabilities
- stock is misused as when times are tough it can be very difficult to sell stock
ideal = 1:1
- lower implies they won't be able to pay off their debts
120
what are the three main ways of financing a decision?
- use working capital, such as cash from customers, however this would worsen your liquidity ratios
- borrow the capital, loans, this would increase the gearing ratios making it very risky
- fund the expansion by asset sales, this would work well from ratio viewpoint but leave the firm with few assets to fall back on if times get tough
121
what are the pros and weaknesses of ratio analysis?
pros
- identifies areas that need to be addressed to satisfy key stakeholders, liquidity issues?
- make more informed decisions based on actual data
weaknesses
- they are not fact, they are more like averages
- how is one to create an accurate figure for the value of stock, the value can change rapidly especially in those subject to changes in consumer tastes
- ratio analysis can only be used for comparison with firms of the same size and type
- ratio analysis doesn't take into account external factors such as a worldwide recession
- only using past data is not always a good indicator for future decisions
122
what is ratio analysis?
it is an examination of accounting data by relating one figure to another, this approach allows more meaningful interpretation of the data and the identification of trends.
- it helps with financial planning and decision making
- it is a powerful tool in the interpretation of financial accounts
123
what are 6 areas in a HR department deal with?
- redundancy and dismissal
- recruitment
- HR planning
- retention
- training
- motivation
124
what are the three areas of HR that help make business decisions
- labour productivty
- labour turnover and retention
- absenteeism
125
explain labour productivity and the formula for calculating it
it compares the number of workers with the output they are generating.
output per period / average number of employees per period
- any increase in the productivity figure suggests an improvement in efficiency, the importance of productivity impacts labour costs per uni
126
explain labour turnover and the formula for calculating it
the percentage of staff who leave during a period
number of employees leaving during a period / average number of employees during the period x 100
127
what are 3 problems of high staff turnover?
1) higher costs (increased recruitment and training costs)
2) Increased pressure on remaining staff
3) disruption to production/productivity
128
what are 4 reasons for why people leave a workforce?
- working conditions
- poor management
- financial and non-financial rewards
- type of business (temporary/seasonal)
129
what are 4 factors that affect staff turnover?
internal reasons:
- a poor recruitment and selection procedure, appointing the wrong person to the wrong post
- ineffective motivation or leadership, workers lack commitment to firm
- wage levels lower than competitors
external reasons:
- more local vacancies arising
130
what are 4 ways of improving staff turnover
1) effective recruitment and training
- recruit the right staff
- do all you can to keep the best staff (training and other motivation tools)
- monitor performance of managers
2) provide competitive pay and incentives
- competitive pay levels and non-financial benefits, benchmarking (looking at other companies)
3) job enrichment
4) reward staff loyalty
- service awards, extra holiday etc.
131
what is employee retention and what is the formula for labour retention?
the ability of a business to convince its employees to remain within the business
number of staff staying (per time period) / average number of employees (per time period)
132
what is the definition of absenteeism and how is it calculated?
percentage of staff who are absent from work
number of staff absent during time period/average number of staff during time period x 100
133
what are 3 positives of staff turnover?
- new workers can bring new ideas and enthusiasm to the firm
- workers with specific skills can be employed rather than training up existing workers
- new ways of solving problems through different perspective
134
what are the different parts of Ansoff's matrix?
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market penetration (lowest risk)
- existing products in existing markets
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new product development
- new products in existing markets
market development
- existing products in new markets
diversification (highest risk)
- new products in new market
135
what are two pros and cons of portfolio analysis (Boston matrix)
pros
- explore new product development opportunities
- see which products no longer contribute, divest
cons
- markets are subject to change
- some products can be reinvigorated
136
what are two ways of achieving a competitive advantage through distinctive capabilities
1) innovate- new products and/or processes
| 2) architecture- build relationships within and with suppliers and customers
137
difference between short termism and long termism
short-termism
- where businesses are focused on quick financial reward such as profit figures often at the expense of investment in key areas such as R&D
long-termism
- a more holistic approach to business strategy, incorporating key elements such as sustainability and CSR
