Theme Three Flashcards
1
Q
What is the hierarchy of corporate objectives?
A
Individual at the bottom, followed by team then functional, corporate and mission at the top.
2
Q
Corporate Objectives
A
Goals that relate to the business as a whole.
3
Q
Purpose of corporate objectives?
A
- provide focus
- measure performance of the firm as a whole
- inform decision making
- set the scene for more detailed functional objectives
4
Q
Name 4 examples of corporate objectives.
A
- market : market share, product range, customer satisfaction
- innovation : new products, better processes, using technology
- productivity : optimum use of resources focus on core activities
- physical and financial resource: factories, business location, finance and supplies
- profitability : level of profit, rates of return on investment
- management : management structure, promotion and development
- employees : organisational structure, employee relations
- public responsibility : compliance with laws, social and ethical behaviour
5
Q
Functional Objectives.
A
Goals in place for each key business area and designed to ensure corporate objectives are achieved.
6
Q
Name 3 internal influences on corporate businesses.
A
- business ownership and owner’s aims
- attitude towards profit (not-for-profit? etc)
- ethical stance
- organisational culture
- leadership
- strategic position and resources
- stakeholder influence
7
Q
Name 2 external influences on corporate businesses.
A
- short termism
- economic environment
- political/legal environment
- competitors
- social and technological change
8
Q
Ansoff’s Matrix
A
A marketing model that helps businesses determine their product and market strategy.
9
Q
What are the four sections of Ansoff’s matrix.
A
- market penetration = existing product + existing market
- market development = existing product + new market
- product development = new product + existing market
- diversification = new product + new market
10
Q
What is the aim of market penetration?
A
Increase market share.
11
Q
Name an approach to diversification.
A
- innovation and R&D
- acquire an existing business in the desired market
- extend existing brand
12
Q
Porter’s Five Forces
A
A framework for analysing the nature of competition and assessing profitability and attractiveness of an industry. Intensity of rivalry within the industry is determined by 4 factors:
- threat of substitutes
- bargaining power of buyers
- bargaining power of suppliers
- threat of new entrants
13
Q
Name two barriers to entry.
A
- economies of scale
- vertical integration
- brand loyalty
- high start up costs
- access to technology
- reputation and expertise
- need to obtain licenses etc
14
Q
When would suppliers be considered powerful?
A
- when there are only a few, large suppliers
- the resource they supply is scarce
- cost of switching suppliers is high
- customer is small and unimportant
- there are no or few substitute resources left
15
Q
Threat of substitutes vs threat of new entrants.
A
- threat of new entrants is the fear that other businesses may enter the market
- threat of substitutes is the possibility that another product may meet the same customer needs e.g. news channels providing the same content as news papers
16
Q
Name two determinates of intense rivalry.
A
- number of competitors
- market size and growth options
- product differentiation and brand loyalty
- power of buyers and availability of substitutes
- capacity utilisation
- cost structure of the industry
- exit barriers
17
Q
Porter’s Strategic Matrix
A
Outlines ways in which companies can gain competitive advantage depending on whether they operate in a niche/mass market and if they wish to focus on costs or differentiation:
- high differentiation + mass
market = differentiation
- high differentiation + niche
market = focused differentiation
- low cost + mass market = cost
leadership
- low cost + niche market = +
cost focus
Some businesses may be stuck in the middle while others, such as Aldi, may adopt a hybrid strategy
18
Q
SWOT Analysis
A
A business model that helps assess a business’s competitive strengths and nature of the external environment.
Strengths
Weaknesses
Opportunities
Threats
Opportunities and strengths are external and strengths and weaknesses internal.
19
Q
Name 2 indicators of strengths/weaknesses.
A
- market share
- profitability
- efficiency
- brand loyalty and recognition
- market capitalisation
- reputation for quality
20
Q
Advantages and disadvantages: SWOT analysis.
A
+ logical structure
+ focuses on strategic issues
+ encourages analysis of external environment as well as self reflection
- often lacks focus
- can easily become out of date
- may lack objectivity
21
Q
PESTLE
A
Political
Economic
Social
Technological
Legal
Ethical
22
Q
Name a political factor.
A
- competition policy
- industry regulations
- govt spending and fiscal policies
- business policy and incentives
23
Q
Name an economic factor.
A
- interest rates
- consumer spending and income
- exchange rates
- GDP
24
Q
Name a social factor.
A
- demographic change
- impact of pressure groups
- consumer tastes and fashions
- changing lifestyles
25
Name a technological factor.
- disruptive technologies
- adoption of mobile technology
- new production process
- big data and dynamic pricing
26
Name a legal factor.
- employment law
- minimum wage
- health and safety laws
- environmental legislation
27
Name an ethical factor.
- sustainability
- tax practises
- ethical sourcing
- pollution and carbon emissions
28
Name 2 objectives of business growth.
- synergies
- economies of scale
- experience
29
Name an internal economies of scale.
- bulk buying
- better interest rates
- invest in more efficient technology
- managerial
-
30
Name an external economies of scale.
- growing number of firms may encourage build up of skilled labour
- increased chance of collaboration between businesses
31
Overtrading
When a business expands too rapidly and thus does not have the financial resources to manage it.
32
Diseconomies of Scale
The rise in unit costs as a business grows.
33
Name a limitation of growth.
- diseconomies of scale
- communication problems
- less flexibility
- reduced motivation
34
Name 3 possible reasons for takeovers.
- increase market share
- spread risk through diversifying
- acquire economies of scale
- acquire new skills
- secure better distribution
- acquire intangible assets such as brands and patents
- eliminate competition
- overcome barriers to entry to a market/country
- defend itself against threat of takeover
- enter new segments of the market
35
Vertical vs horizontal vs conglomerate integration.
- vertical takeovers occur when the two businesses are at different stages at the point of integration
- horizontal takeovers are when the two businesses are at the same stage
- conglomerate integration involves two unrelated businesses conjoining
36
Name three drawbacks of takeovers.
- high costs involved
- problems of valuation
- non existent cost savings
- high rate of failure
- questionable motives
- incompatibility of management styles, structures and cultures
- upset customers and suppliers
- integration problems e.g. management issues
- resistance from employees
37
Name two reasons why takeovers often fail.
- initial price paid was too high due to overestimation of synergies
- lack of decisive management
- cultural incompatibility
- poor communication
- loss of key personnel and customers
- competitors use the opportunity to gain market share while takeover is being finalised
38
Advantages and disadvantages: vertical integration.
+ greater share of profit on each sale
+ secures important sources of supply and distribution
+ creates a barrier of entry for new entrants
+ greater insight into customer needs at different stages of the production and distribution process
- fewer economies of scale because they're at different stages of the supply chain
- high costs
- loss of focus
- reduction in flexibility
- communication and coordination issues
39
Advantages and disadvantages: horizontal integration.
+ economies of scale
+ cost synergies due to the rationalisation of the business
+ potential for revenue synergies
+ larger product portfolio
+ reduction in competition
+ can be cheaper and quicker than organic growth
- possibility of negative synergies
- reduced flexibility
- diseconomies of scale
- may attract attention of competition authorities
40
Name an example of diseconomies of scale.
- regulatory costs
- risk aversion
- office politics/industrial relations
- waste/inefficiency
41
Name two symptoms of overtrading.
- high revenue growth but low gross and operating profits
- persistent use of overdrafts
- significant increase in payables days and receivable days ratio
- significant increase in the current ratio
- very low inventory turnover ratio
- low levels of capacity utilisation
42
Name a way in which overtrading can be managed.
- reducing inventory stock levels
- scaling back the pace of revenue growth until profit margins have been improved
- leasing rather than buying equipment
- obtaining better payment terms from suppliers
- enforcing better payment terms with customers
43
Technical Economies of Scale.
Businesses can invest more heavily in automation and machinery as they grow. An example of this is businesses in the car market.
44
Managerial Economies of Scale.
The ability to afford more specialised managers as the business grows.
45
Name a reason businesses may want to stay small.
- differentiation
- flexibility in meeting customer needs
- deliver high standards of customer service
- exploit opportunities for e-commerce
46
What is investment appraisal?
The process of determining whether endeavouring on projects is worthwhile.
47
What are the three methods of investment appraisal?
- payback period (years)
- ARR (percentage)
- NPV (monetary value)
48
What is ARR and how is it calculated?
- annual percentage return on an investment
- average net profit/initial investment
49
Advantages and disadvantages: ARR.
+ simple to understand and calculate
+ focuses on profitability
+ easy to compare
- doesn't take into account external factors
- does not adjust to the time-value of money
- ignores timing of returns
- focuses on profit rather than cash flow
50
What is payback period and how is it calculated?
- The amount of time it takes a business to repay its initial investment
- calculate how many years it takes to enter positive figures and then the amount of months it would take to get from 0 to the figure in that year
51
Advantages and disadvantages: payback period.
+ simple and easy to calculate
+ focuses on cash flow
+ emphasizes speed of return which is good for dynamic markets
+ easy to compare
- ignores cash flow after payback has been reached
- may encourage short term thinking
- does not consider the time-value of money
- ignores qualitative aspects
52
What is NPV and how is it calculated?
- net present value calculates the monetary value now of the projects future cashflows
- cash flow x discount factor
- a positive nvp is a good whereas a negative nvp is bad
53
Advantages and disadvantages: NPV.
+ considers all future cash flows
+ reflects the risks that the future cash flows will not be as expected
+ different levels of risk can be accounted for by adjusting the discount factor
+ creates a straightforward decision
- discount rate may not be accurate
- results can be manipulated through the discount rate
54
Critical Path Analysis
A project analysis and planning method that allows a project to be completed in the shortest possible time
55
LFT and EST
- lates finish time (bottom): right to left and calculated by subtracting the lowest number
- earliest start time (top): calculated left to right by adding on the highest duration to the previous est
56
Advantages and disadvantages: CPA.
+ reduces risk
+ encourages careful assessment
+ helps identify which activities have float time and could therefore transfer resources
+ a decision making and planning tool
- reliant on accurate assumptions about timescales
- does not guarantee success
- tasks with excess float time may begin to slack and compromise quality and time management
- each activity may not be as straightforward as expected and need to be broken down into further mini activities
57
Decision Tree
A mathematical approach to decision making that constructs a diagram representing all the probable outcomes of a decision.
58
Net Gain Formula
EV - costs
59
Advantages and disadvantages: decision trees.
+ logical approach
+ potential options considered simultaneously
+ use of probability addresses risk factor
+ tangible results
+ easy to understand
+ costs and benefits are both considered
- estimates
- only uses quantitative data
- probabilities prone to subjectivity
60
What are the two methods of quantitative sales forecasting?
extrapolation and correlation
61
Extrapolation
Uses trends established from historical data to forecast the future.
62
Moving Averages
Used as a method of extrapolation - takes a data series and smooths out fluctuations to identify the average.
63
Factors to consider when extrapolating?
- product life cycle
- pace of technological innovation
- growth of global economy
- rise of middle class in emerging economies
- market saturation
64
Advantages and disadvantages: extrapolation.
+ simple method of forecasting
+ doesn't require much data
+ quick and cheap
- unreliable if there are significant fluctuations in data
- assumes past trends will continue
- ignores qualitative factors
65
Correlation
Looks at the strength of a relationship between two variables - the dependent and the independent.
66
Name an instance when this forecast is likely to be inaccurate.
- if the business is new
- market subject to significant disruption from technological change
- market is elastic
- product is a fashion item or in another dynamic market
- management have poorly forecasted in the past
67
Name two things that short-termism focuses on.
- revenue growth
- share price
- gross and operating profit
- unit costs and productivity
- ROCE
68
Name two things long-termism prioritises.
- brand rep
- market share
- quality
- innovation
- employee experience and skills
- social responsibility and sustainability
69
Name an indicator of short-termism.
- low R&D investment
- bonuses based on short term objectives
- high dividend payments rather than reinvesting profits
- overuse of takeovers
- frequent change in management
70
Name a factor that influences whether a business is making short term or long term decisions.
- timescales
- ethics
- corporate culture
- stakeholder perspective
71
Name 3 factors that influence an organisation's culture.
- influence of the founder
- size and development stage of the business
- leadership and management styles
- organisational structure, policies and practises
- reward structures
- market/industries in which it operates
- working environment and nature of tasks e.g. office, remote...
- external environment e.g. legal, economic...
- attitude of organisation to risk taking and innovation
72
Explain Handy's four classes of culture.
- power: little bureaucracy, power radiates from the centre and is delegated to a few individuals; typically a strong culture although there is the possibility that it'll turn toxic
- role: hierarchal bureaucracy where power derives from a person's position;;
- task: matrix organisation where power derives from expertise where possible
- person: power lies in individuals and they believe themselves to be superior to the organisation e.g. lawyers, accountants
73
What is Schein's theory of corporate culture.
Organisational culture is split into 3 levels of hierarchy:
- at the bottom is basic underlying assumptions
about the business (which are unwritten) that
employees need to come to grips with in order to
fit in
- espoused values are next and these are the
business's core (typically codified) values
- artifacts are visible signs of an organisation's
culture, such as dress code or office layout and
are at the top of the hierarchy
74
Why may a business need to change its corporate culture?
- market changes
- societal changes
- change in management (CEO/ownership)
- political/legal changes
- economic conditions
75
Ratio Analysis
A tool used to assess the performance of a business.
76
What is ROCE and its formula?
Rate on capital employed tells businesses what returns they have made on the resources available to it. Higher ROCE percentages are better although businesses need to be mindful of low quality profit which boosts ROCE.
(Operating profit/capital employed) x 100
77
Formulas for capital employed?
total equity + non current liabilities
total assets - current liabilities
note: leased equipment is not included
78
Equity
assets - liabilities
79
What is the gearing ratio and its formula?
Shows how much of the business is financed by debt. 25-50% is typical and any higher is considered too much although industry trends need to be taken into account.
[non current liabilities/(total equity + non current liabilities)] X 100
80
Why may a business want to become more highly geared?
To accumulate wealth and manage cash flow in the long term.
81
Name ways in which gearing can be increased or decreased.
+ focus on revenue growth to increase gearing rather than profits
+ convert short term debt into long term loans
+ buy back ordinary shares
+ increase dividend payments
+ issue preference shares or debentures
- focus on profit improvement (cost minimisation)
- repay long term loans
- retain profits rather than pay dividends
- issue more shares
- convert l
82
Name ways in which gearing can be increased or decreased.
+ focus on revenue growth to increase gearing rather than profits
+ convert short term debt into long term loans
+ buy back ordinary shares
+ increase dividend payments
+ issue preference shares or debentures
- focus on profit improvement (cost minimisation)
- repay long term loans
- retain profits rather than pay dividends
- issue more shares
- convert loans into equity
83
Advantages and disadvantages: ratio analysis.
+ comparisons can be made to previous years or different companies
+ help locate weaknesses
- doesn't consider qualitative info
- doesn't consider external factors
- lacks value if used in isolation
84
Labour Productivity
Output per employee.
85
Labour Turnover
Percentage of staff who leave during a given period.
86
Absenteeism
Number of staff who don't attend work.
87
Labour Turnover Formula
(no of employees leaving in a period/no of employees employed in a period) x 100
88
Name four factors that influence staff turnover.
- pay
- working conditions
- type of business (e.g. some businesses have seasonal staff turnover)
- opportunity for promotion
- competitor action
- standard of recruitment
- quality of communication in the business
- economic conditions
- quality of communication within the business
- labour mobility
- employee loyalty
89
Name a way to improve staff turnover.
- better pay and working conditions
- reward staff loyalty'
- job enrichment
- ensure those recruited are right for the role and company
90
Labour Productivity Formula
output per period in units/number of employees at work x 100
91
Name a factor that influences labour productivity.
- extent and quality of fixed assets
- skills, ability and motivation of the workforce
- methods of production organisation
- extent to which the workforce is trained
- externa factors such as the reliability of suppliers
92
Name a way to improve labour productivity.
- invest in employee training
- measure performance and set targets
- streamline production processes
- improve working conditions
- invest in equipment
- have motivational strategies in place
93
Absenteeism Formulas
(no of staff absent/no employed) x 100
or
(number of days taken off for unauthorised absence/no of days worked) x 100
94
Step change vs incremental change.
- step change is a significant change that happens rapidly and often occurs when a business has suffered a strategic drift
- incremental change involves small altercations happening over a longer period of time
95
Name a key factor that causes internal change.
- new leadership
- new ownership
- change in strategic direction and corporate objectives
- significant investment decisions
- changes to scope of business activities
- adjusting the organisational structure e.g. delayering
96
Name a key factor that causes external change.
- significant competitor actions
- political and legal changes
- significant changes in the economy
- long term societal changes
- technological change
97
What are the 4 main reasons change is met with resistance (according to Kotter and Schlesinger)?
- self interest
- different assessment of the situation
- low tolerance for change and inertia
- misinformation and misunderstand
98
What did Kotter and Schlesinger say are the six ways to overcome resistance to change?
- education and communication
- participation and involvement
- facilitation and support
- manipulation and co-option
- negotiation and bargaining
- explicit and implicit coercion (last resort)
99
Risk Management
Identifying and dealing with risks
100
Scenario Planning
Planning for unforeseen events
101
Crisis Management
Handling potentially dangerous events for a business.
