Theme 3 - Business Decisions & Strategy Flashcards
Definition of sales forecasting (time series analysis)
A statistical technique which uses historical data to make predictions about the future value of sales
What are 4 main components a business wants to identify using a sales forecast
- The trend (e.g. upward)
- Seasonal fluctuations
- Cyclical fluctuations
- Random fluctuations
What can a business do with sales forecast information
• Organise production
• organise resources
• organise marketing to back up sales predictions
Name 3 factors affecting sales forecasting
• consumer trends
• economic variables
• actions of competitors
How do you calculate 3 year moving averages
- Add the first 3 months/ years of data
- Divide this by 3
- Plot in middle year row
- Move down a year and repeat
How do you center data (centring) / find 4 year centred moving average
- Find 4 year moving total (add first 4 years then move along one)
- Add the first two 4yr moving averages together to get 8 year moving total
- Divide this by 8 (this is the trend line on graph)
- Put figure in middle year of the 5 years used
How do you find the variation (sales forecasting)
Sales - trend (4 year centred moving average)
Use a + or - if below or above trend
How do you construct a sales forecasting graph
X axis = Time
Y axis = sales
Plot raw sales and the trend line (line of best fit)
What do the values of correlation co-efficient signify
+1 = absolute positive relationship between variables
0 = no relationship between variables
-1 = absolute negative relationship between variables
What is an independent variable & what axis would it be
The factor that cause the other variable to change (x axis)
What is a dependent variable & what axis would it be
The variable being influenced by the independent variable (y axis)
Name 3 limitations of sales forecasting
- past performance is no guarantee of future
- SWOT & PESTLE factors can affect future predictions
- dynamic markets change rapidly and have a short product life cycle therefore extrapolation can be misleading, time-consuming, unreliable & complex
What is a current ratio (definition)
A measure of a company’s ability to meet financial obligations (found on statement of financial position)
For every £1 or debt, the business has £n of assets
What is a current ratio (calculation)
Current ratio = current assets / current liabilities
Expressed as n:1
Ideal = 1.5:1
What does a current ratio higher than 1.5:1 mean
Too high = assets are sitting there/ money is tied up in the business & not being used efficiently/ could be better invested in the business
What is Acid Test (definition)
Tests liquidity of a business without including stock (found on statement of financial position)
What is Acid Test (calculation)
= (Current assets - inventory) / current liabilities
Expressed as n:1
Min = 1:1
What is Capital employed (definition)
The value of money in assets minus the value of any short-term borrowed finance
What is Capital employed (calculation)
(Non-current assets + current assets) - current liabilities
OR
total equity + non-current liabilities
Expressed as a figure
What is Gearing ratio (definition)
Looks at long-term finance of the business and where it comes from
What is Gearing Ratio (calculation)
= Non-current liabilities/ capital employed X100
Expressed as a %
What does the gearing ratio % show
Over 50% = a high gearing (most money is borrowed)
- very risky & deters potential investors
Less than 50% = low geared (most money comes from within)
What is Return on Capital Employed (ROCE) (definition)
A measure of profitability, demonstrates how hard the business made the money invested work
What is Return on Capital Employed (ROCE) (calculation)
= operating profit / capital employed X 100
Expressed as a %
• the higher the better
What do Porter’s 5 factors determine
The profitability & attractiveness of an industry
What is porter’s 5 forces
Threat of new entrants
Supplier power
Buyer power
Threat of substitution
Competitive rivalry (in the middle)
Name two things SWOT analysis can be used for
• to formulate a growth strategy & maximise opportunities
• to compete/ defend to minimise threats
• to improve & attack new markets
• to identify when/what to change and retreat
What does SWOT stand for
Strengths
Weaknesses
Opportunities
Threats
What is SWOT (definition)
A business analysis tool that aims to look at internal & external factors and their influence on a business
What is PESTLE (definition)
A business analysis tool that aims to look at external factors & how they may have an impact on the business
Name two ways PESTLE can be used
• aids strategic & tactical decision-making
• objective setting
• help the business reach their goals
What does PESTLE stand for
Political
Economic
Social
Technological
Legal
Ethical/ environmental
What is Ansoff’s matrix (definition)
A growth planning & analysis tool that helps a business decide on marketing strategies which products/ markets to sell in based on risk & reward
What are the 4 aspects of Ansoff’s Matrix
• Market penetration (existing market & product)
• Product development (existing market & new product)
• Market development (new market & existing product)
• Diversification (new market & new product)
What is working capital (calculation)
= current assets - current liabilities
Name 3 factors affecting the level of working capital
• seasonal changes in demand
• need to hold inventories
• production lead time
• lean production
• effectiveness of credit control function
• credit offered by suppliers
Name 2 main causes of working capital problems
• poor control of inventories
• poor control of receivables
• ineffective use of payables
• poor cash flow forecasting
• unexpected events
What is a strategy
The long-term direction that a firm will take to achieve its aims & objectives (pro active decision making in line with objectives)
What is a tactic
A short-term response to opportunities & threats in the market (day to day & more responsive/ reactive external influences)
Give an example of a Strength (SWOT) for a business
High sales volume & market share
Reputation / brand
Give an example of a Weakness (SWOT) for a business
Low sales vol & MS
Bad brand reputation
Bad leadership
Give an example of an Opportunity (SWOT) for a business
New tech/ advancements
Trends
First mover advantage of gap
Give an example of a Threat (SWOT) for a business
Legislation
Competitors
Economic situation
What is a mission statement
A formal summary of the aims & values of a company / organisation
What is a corporate objective
A focus on a desired performance & results of the business/ what it wants to achieve over time
What is a functional objective
Set to help make achievements of the corporation possible
What must objectives be
Specific
Measurable
Achievable
Realistic
Time - related
Give an advantage and disadvantage of corporate objectives
+ focuses business & involves all
+ creates an identity in comp market
- can be unrealistic / over optimistic
- constantly needs reassessing for relevance
What is a corporate strategy
The way in which the business works to achieve a vision / goal
What is corporate planning
It’s building a strategy to complete business aims & objectives
What are porters generic strategies (definition)
It identifies a sustainable strategy to gain a competitive advantage (a value that can’t be beaten by competition)
Give an advantage and disadvantage of porters generic strategies
+ establishes a clear direction
- may not be relevant in dynamic markets
- dated as it’s possible to be stuck in middle and successful (e.g. Amazon)
What do Porters generic strategies consist of
Factors in niche or mass & low cost of differentiation:
•Cost leader ship (mass & low cost)
•Differentiation (mass & diff)
•Cost focus (niche & low cost)
•Differentiation focus (niche & diff)
What is the Boston Matrix (definition)
An analysis tool which enables a business to identify where their products are in terms of market growth & market share
[Business wants balance]
What does the Boston Matrix consist of
Factors in Market share & Market growth:
Star (high MS & MG)
Question mark (high MG & low MS)
Cash cow (low MG & high MS)
Dog (low MG & MS)
Give an advantage and disadvantage of the Boston Matrix
+ helps analyse issues with product portfolio
+ helps decide future strategies and budgets
- high MS doesn’t always = high profit
- true nature of business not reflected, MS & MG not only indicators
What is a Distinctive Capability
A form of competitive advantage that is difficult for competitors to understand, let alone imitate (an ongoing competitive advantage)
What do Kay’s Distinctive Capabilities consist of
Architecture
Innovation
Reputation
What are the 5 theories that can help decide corporate strategies
- Product life cycle
- Ansoff’s Matrix
- Porter’s generic strategy
- Boston Matrix
- Kay’s distinctive capabilities
What is a business growth
The point at which a business needs to expand & seeks options to generate more profits
What are 4 objectives of growth
- EofS (internal & external)
- Increased market power
- Increased MS & brand recognition
- Increased profitability
What is economies of scale (EofS)
Where producing more output lowers the average costs of the business
What is financial EofS
Where large firms can benefit from cheaper loans & wider sources of cheap finance
What is purchasing EofS
Where big firms are able to buy in bulk & get discounts
What is technical EofS
Where large firms employ specialist labour & capital which further stimulates lower costs, productivity and quality
What is managerial EofS
Large firms have the £££ & resources to attract the best managers that make the most efficient decisions & increase efficiency overtime
What is risk-bearing EofS
Where large firms benefits from a wider product range that spreads risk & enables business to withstand changes in demand
What are 3 problems caused by growth
• diseconomies of scale (internal & external)
• overtrading (accepts more orders than can cope which = cash flow issues)
• internal communication
What is inorganic growth
Where businesses grow through joining together in a takeover or merger
What is a takeover/ acquisition
A legal deal where one larger business purchases another (at least 51% ownership)
What is a merger
A legal deal that brings together 2 businesses under 1 board of directors and operate as one (usually similar sized businesses)
What is horizontal integration
When 2 businesses merge/ takeover from the same stage in production (e.g. O2 & virgin Media)
What is vertical integration
When 2 businesses merge/ takeover from a different stage in production (e.g. Booker & Tesco)
What is the CMA (Competition & Markets Authority) and what do they do
Competition regulators that scrutinise mergers / takeovers
They make markets fair for consumers (e.g. stopped Asda & Sainsbury’s merge)
Give 3 reasons for M & As
• Quicker than organic growth
• increased MS
• gain of resources and expertise
• to exploit synergies ( better performance when 2 companies work together)
• defence against competing alone
What is organic growth
The process of business growth which comes from within the business, as apposed to mergers & acquisitions
Give 2 ways of organic growth
- New products
- New stores
- Market development (foreign markets)
(E.g. M&S into India)
Give 2 advantages of organic growth
+ maintain control of size & pace
+ less risk
+ retains company culture
Give 2 disadvantages of organic growth
- needs to be planned & measured
- can be slow
- new markets & countries can be dangerous with buying a business already operating there
Give 2 problems with too quick organic growth
• quality can drop, increased customer dissatisfaction
• staff turnover increase due to heavy workloads
• recruitment costs of new staff
What is investment appraisal
The evaluation of an investment project to determine whether it is likely to be worthwhile as the business has a finite source of money
What are the 3 investment appraisal methods
- Payback
- Average rate of return (ARR)
- Net present value (NPV)
How does simple payback work
Use the investment figure to find out how many years it would take to get it back
(To find exact months, divide how much more money you need to reach payback by the cash inflows of the year x 12)
Give an advantage and disadvantage of simple payback method
+ easy, simple
+ useful when tech changes rapidly and need money back asap
- too simplistic? Only looks at when project will pay back, not if successful
How does the ARR (average rate of return) method work?
•Add up cash flows from years more than year 0
•The minus the original project cost
•Then divide by the no. Of years the project runs for
•Take this figure & divide it by cost of project
•X100 to turn into %
Give an advantage and disadvantage of ARR method
+ clearly shows profitability if the project
+ makes it easier to identify opportunity cost of investment
- % of an investment can be misleading as a smaller % of a big investment could be greater than a bigger % of a smaller investment
What is Net Present Value (NPV)
An investment appraisal technique that takes into account that money in the future is not worth what it is today so it adds in a discount table
What is simple payback
An investment appraisal technique that looks at how long a project takes to pay back the full initial cost
What is an ARR
An investment appraisal technique that gives a probability impression of each subject
How to figure out the NPV
•First take a look at discount table
•Make profit realistic by multiplying es h cash inflow by discount, giving the present value column
•All present value are added together
•The initial cost is then taken away
Give an advantage and disadvantage of NPV method
+ good measure of profitability
+ considers other factors affecting return
- doesn’t consider sunk costs
What are decision trees
An analysis tool that looks at the probability / likelihood of success in a choice of strategies (quantitative)
How do you find the total expected value of a decision in a decision tree
•Multiply profit / loss by probability
•Add all the figures from that chance node
How do you find the Net gain/ value of a decision in a decision tree
Total expected value - investment costs
Give 2 advantages of decision trees
+ allow a business to attach probabilities & calculate potential rewards, making it easier to compare and make a decision
+ allied owner to explain complex financial decision clearly to stakeholders
Give 2 disadvantages of decision trees
- based on predicted data & estimated probabilities
- quantitative analysis means it can neglect other things (e.g. customer needs)
What is a Critical Path Analysis
A management tool which helps a business identify how long a project will take & what the critical tasks in the project are ( called network diagrams)
Give 2 uses of a CPA (critical path analysis)
• Can be used to schedule a building project
• Used to launch a new product into a market (list of factors like advertising & tech installs)
What marks the critical path in a CPA
Two lines diagonal on the lines connecting a project to another
What are the circles called in CPAs
Nodes
Give 2 advantages of CPA
+ stakeholders can see total time for project to be completed
+ very useful for businesses in the FMCG ( fast moving consumer goods) markets where speed is vital
+ parallel activities can be found and scheduled at the same time, saving time
Give 2 disadvantages of CPA
- based on estimations
- time focused doesn’t equal quality
- doesn’t take into account external impacts
What are corporate influences
A range of factors that influence the choice and the achievement of corporate objectives
What are internal and external corporate influences
Internal = factors within control of management
External = factors outside of the control of management
Give 3 examples of internal corporate influences
Business ownership
Attitude to profit
Organisational culture
Leadership
Give 3 examples of external corporate influences
Short-termism
Economic environment
Competitors
Tech changes
What are corporate time-scales
Refers to strategy & the expectation of when a return will be achieved
What is short-termism
Choosing a course of action which is best in the short-term, but may be detrimental in the long-term
What is long-termism
Choosing a course of action that prioritises long-term business ideas
What’s the difference between evidence-based and subjective decision-making
Evidence-based: based on trusted & valid info, analytical thinking
Subjective: based on personal opinions of key decision makers influences action taken
What is organisational culture
The values, attitudes, beliefs, meanings, and norms that are shared by people and groups within an organisation
(“The way we do things around here” - Charles Handy)
Give 2 things a strong corporate culture can lead to
Lots of applicants for the job
Competitive advantage ( Kay’s distinctive adv?)
What is a strong culture
One that’s deeply embedded into the ways a business does things
[Where there’s good communication, recruitment and focus on core values]
Give 2 advantages of a strong culture
+ Low staff turnover
+ motivates & productivity increases
What is a weak culture
When it becomes difficult to identify factors that form the culture or a wider range of sub-cultures exist
Who made the iceberg model of organisational culture
Edgar Schein
Give 3 factors that shape managerial behaviours
•Organisational culture
•Organisational structure, systems, policies and plans
•Leadership
•External environment
What are the 3 layers of Edgar Schein’s iceberg
Artefacts
Values
Basic assumptions
Give 3 characteristics of toxic culture
Usually autocratic leadership
Corruption
Unhealthy internal competition
Lack of transparency
Who made the 4 dimensions of organisational culture
Charles Handy
What are the 4 main cultures according to Handy
Power culture
Role culture
Task culture
Person culture
What is a stakeholder
Anyone who has an interest in the business, or who may be affected by the activities of the business
What is a shareholder
A person, business or organisation that owns at least one share of a company
What are the 9 stakeholders
Local community
Pressure groups
Bank/ creditors
Suppliers
Government
Managers / directors
Employees
Shareholders
Customers
What is stakeholder mapping
A tool that helps a business manage & communicate with stakeholders
What is Mendelow’s matrix
A tool that is used to analyse stakeholders & their level of interest a stakeholder has in a project or strategy & their power to influence this strategy
(Categorised and treated differently)
What does mendelow’s matrix consist of
• Low priority (low power & interest)
•Keep informed (low power & high interest)
•Keep satisfied (high power & low interest)
•Keep players (high power & interest)
What does power and interest mean in terms of mendelow’s matrix
Power = the ability to influence organisation & affect decision-making
Interest = notice towards the business
Give 2 uses of Mendelow’s matrix
•Enables business to consider tactics on how to engage with stakeholders
•Takes into account stakeholder views to reduce conflicts & improve chances of success and resource gain
What are the two contrasting views on stakeholders and shareholders
Friedman
Freeman/ Handy
What is Friedmans view on stakeholders
Shareholder importance
Traditional view of business in isolation and maximising profits
No social responsibility
What is Freeman / shandy’s views on stakeholders
Stakeholder importance
A modern view of ecosystems and interdependence
Costly / long-term view
Ethical & CSR
What is business ethics
The application of ethical (going above & beyond the law) values to business behaviour
What are strategic ethical decision
How a business chooses to operate in the long-term (within their corporate objectives)
[Affects tactical decisions made]
What are ethical codes of practice
They explain how employees in the business should respond in situations where ethical issues arise
(Including environment, collisions, treatment of employees & suppliers, etc.)
What is Corporate Social Responsibility (CSR)
A business taking responsibility for its effect on the environment & its impact on stakeholders by delivering economic, social, and environmental benefits for all stakeholders
What model demonstrates CSR
Carroll’s CSR pyramid
What does Carroll’s CSR pyramid consist of
Philanthropic responsibility (top)
Ethical responsibility
Legal responsibility
Economic responsibility (bottom)
Give 2 benefits of Carroll’s CSR pyramid
+ easy to understand
+ simple message
Give 2 drawbacks of Carroll’s CSR pyramid
- should ethics be at the top?
- businesses don’t always do what they claim (PR stunts, green-washing)
Give 3 advantages of CSR
+ happy customers (loyalty)
+ happy & motivated staff (corporate culture)
+ Good PR
+ encourages long-term investors to
Give 3 disadvantages of CSR
- could be a fad where customers will soon tire
- what’s the motive? Could be a publicity stunt
- there are lots of costs (including opportunity costs and trade-offs) especially if competitors are not doing csr
Give 2 factors that influence a business’ ethical stance
•Leadership
•Company culture
•Competitors
•Legislation
Give 3 reasons for a business to stay small
Owners preference
Niche market
Profit satisficing
Personal service
Control
Less administration & procedures
Traditions
What are the 2 main financial statements that all Ltds & PLCs have to publish
Statement of financial position
Statement of comprehensive income
What is the statement of comprehensive income
Shows the business profit / loss during the year
Includes: profit; other comprehensive income; revenue/income; cost of food sold; purchases, etc.
What is Gross profit (SofCI)
Revenue - cost of goods sold
Used by managers
What’s Operating profit (SofCI)
Gross profit - expenses
True measure of profit before tax
What is Profit for the year
Before tax (net profit): Operating - cost of finance (interest)
After tax: net profit before tax - tax
Bottom line, belongs to shareholders, could be used as retained profit
What are expenses
Costs to the business that have nothing to do with stock or the making of the product
E.g, selling expenses, administration, advertising, petrol, distribution
What are the contents in a statement of comprehensive income (in order)
Revenue
Cost of sales
Gross profit
Expenses
Operating profit
Net profit (before tax)
Net profit (after tax)
What is the Statement of Financial position
Shows what the business owns and owes
(Only truly accurate on the day it has been drawn up)
‘Snapshot’ of business, shows how the net assets of a business are funded
What would happen if a business didn’t keep accounting records
Can be fined £3000 by HMRC or disqualified as company director
What are assets
The resources the business owns
What are liabilities
The debts of the business which they owe to other businesses, individuals & institutions
What is capital
The money invested by the owners of the business originally when it first started & overtime as shares were sold
What is the content of the statement of financial position (in order)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Working capital
Net assets
Equity
What is working capital (SofFP)
Current assets - current liabilities
Used to gauge short-term business health
What is net assets (SofFP)
Total assets - total liabilities
(Net assets = capital employed)
It will be the same value as the shareholder’s equity (=total funding)
What is the Human Resources Department in charge of
Managing staff health & wellbeing; recruitment & selection process; contract creation; gross misconduct; pay-related; redundancies, etc.
What is absenteeism (definition)
The habitual non-presence of an employee at his or her job
What is the calculation for absenteeism
No. Of work days lost through absence /
Total possible days worked
X 100
[can be done individually or as workforce]
Give 2 possible causes of absenteeism
Job dissatisfaction
Personal insides
Medical issues
Poor working conditions
Poor management
Stress
Give 2 possible solutions to absenteeism
Job enlargement
Job rotation
Incentive schemes
What is labour productivity (definition)
The output per worker in a time period, an indicator of efficiency
What is the calculation for labour productivity
Total output / no. Of workers X100
What is labour turnover (definition)
Measures the rate at which employees leave the business in a 1 year period
(Measure of performance & important in terms of management and costs)
What is the calculation for labour turnover
No. Of employees leaving /
Average no. Of employees
X100
What is labour retention (definition)
Measures the no. Of staff staying in a business in a year compared to the total no. Of staff that work there
(Measure of how stable the workforce is)
What is the calculation for labour retention
No. Pf staff staying (over a time period)/
Average no. Of staff in job
X100
Give 3 causes of change
Changes in organisational size
Poor business performance
New ownership
Transformational leadership
The market & PESTLE external factors
Give 2 effects of change
Impact on:
Competitiveness
Productivity
Financial performance
Stakeholders
What is change management
It consists of planning & implementing change in a way that is mindful of those who will be affected by it
What are the 2 types of change
Planned change (planned by top management)
Emergent change (happens at any level in the organisation & as a result of an event or need)
Give 3 factors that influence change
Organisational culture
Size of organisation
Time/ speed of change
Continuous improvement
Give 3 reasons for failed change programs
•Employees don’t understand why change is needed
•Lack of planning & preparation
•Poor communication
•Lack of necessary resources
What are the two models used in change theory
Kotter’s 8-step change model
Lewin’s change management
What does Kotter’s 8 step change model consist of
8 steps that go from
creating a climate for change
Engage & enable the organisation
Implement & sustain
What does Lewin’s change management consist of
Unfreeze
Change
Re freeze
(Picture icecubes)
Give 2 reasons why change needs to happen
~> Dynamic markets = needs to change
~>Keeps business fresh & moving forward
~>Gives a business flexibility to adapt to internal & external changes
Give 3 ways of reducing resistance to change
•Deliver training programs
•Focus on the positive aspects
•Design flexibility into change, give time to adapt
•Involve employees into plans & their ideas
What is scenario planning
A strategic planning method designed to explore uncertainties, to protect the business from bad situations and prepare how to exploit opportunities
What is a contingency plan
A back-up plan for different situations that may not be expected
What are 3 possible situations that would need scenario planning
Natural disasters
IT system failures
Loss of key staff
What is a risk assessment
A systemic examination of a task, job or process that you can carry out at work for the purpose of identifying the significant hazards that are present
What are the 4 degrees of risk mitigation
Risk acceptance
Risk avoidance
Risk limitation (mix of 1&2)
Risk transference (eg outsourcing)
What is risk mitigation
Identifying, assessing, and prioritising risks to reduce the severity and harm of it
What are the 2 ways pf reducing the impact of a risk
Business continuity
Succession planning
