Unit 3 Business Flashcards
Business objectives and strategy
Business objectives are what a business hopes to achieve, and business strategy is what a business does to achieve these objectives.
mission statement
is a formal summary of the aims and values of a company, organisation, or individual.
corporate objectives
short term targets which are set to help achieve overall goals. In order to be helpful they need to be SMART….
Benefits of a Mission Statement
- Can create and help to support a shared vision for employees (Employees will be more motivated as they understand the aims of the business )
2.stakeholders will form a better impression/image of the business as the result of reading it (attracting investors)
3.Customers may agree with the business values and choose them over other competitors (results as differentiation from the business’s competitors)
Critical appraisal of mission statement
a mission statement of the aims of a business designed to give stakeholders a sense of direction common purpose ( used to create and help to support a shred vision for employees)
MOPS
M= market
O= objective
P= product
S= situations
SMART Objectives
S= specific (The objective should state exactly what is to be achieved)
M=measurable (An objective should be capable of measurement – so that it is possible to determine whether (or how far) it has been achieved)
A=achievable (The objective should be realistic given the circumstances in which it is set and the resources available to the business)
R=relevant (Objectives should be relevant to the people responsible for achieving them)
T=time bond (Objectives should be set with a time-frame in mind. These deadlines also need to be realistic)
Ansoff Matrix
Ansoff Matrix is a decision making model that can be used to help business analyse it’s strategic options opportunities for growth, It is a clear graphical representation of a corporate strategy….
Usefulness of Ansoff’s Matrix
- it is clear, graphical help, shows and assess risk, of a strategy
- asses the degree of risk
3.identifies, opportunity in sales growth
Drawbacks Of Ansoff’s
1.it is one decision making model, others may be used and could give different readings of the situation
- formal market research in each market may give better indication of the needs of each new market (more research is needed to understand market conditions and consumer preferences)
3.it is a theoretical and simplistic tool that takes no account of changing economic and market conditions ( like not considering any figures, just risk. doesn’t take into account actions of competitors and is subject of external factors that can’t be planned for)
Porter’s Strategic Matrix
A method that can be used in the development of a corporate strategy, helps to identify the sources of competitive advantage that business might achieve in a market (see table)
Market penetration
Safest option: Same product – same market
-Increase brand loyalty
-Encourage customers to use the product more often
-Encourage customers to use more of the product
-Lowering the price
-Useful if the brand is already well known and has loyal customers.
-Useful if the market is still growing
Market development
Same product – new market
(e.g. entering an overseas market)
-Changes may have to be made to adapt to new market such as brand name
Product development
-Same market – new product-
- Suitable for short product life cycle or dynamic markets
(E.g. Apple iPhone, iPad, Apple Watch…)
Diversification
-Highest risk: new product – new market
(E.g. Virgin Airlines, Internet services, cosmetics … )
-Well known brands can take more risks, so is suitable for these types of businesses
Cost leadership
-Striving to be the lowest-cost provider in the (mass) market
1.Keep prices the same but gain higher profit margins
2.Lowering prices to gain market share
-Firms need a large market share in order to achieve cost leadership
1.Economies of scale
2.Negotiating with suppliers
E.g. Tesco
Cost focus/differentiation focus
-Targeting a narrow range of customers (similar to niche)
-Used by small or very specific firms
- Cost focus: cost minimisation within a focussed/niche market (Aldi)
- Differentiation focus: differentiation within a focussed/niche market (Ferrari)
Differentiation
-Operating in a mass market with a unique position
-A firm needs to offer a level of differentiation from the competitors
1.Quality
2.Design
3.Brand
4.Customer service
E.g. Apple, RedBull
Benefit for Cost Leadership
-Can increase demand if price is competitive
Drawback for Cost Leadership
-Could result in lower brand image if prices are lowered
Benefit for Differentiation
-Can charge premium prices
Drawback for Differentiation
-Can be expensive to build up differentiation – market research, R&D and marketing needs to take place
-Others may copy the point of differentiation
Benefit for Focus
-As they focus on a narrow segment of the market they are able to gain an advantage of understanding its customers very well
-Can help to create a high level of customers satisfaction & loyalty
Limitations of Porter´s Strategic Matrix
-ignores other external factors
-It is only one tool! A business could use Ansoff or portfolio analysis (Boston Matrix)
-Markets are dynamic and different This matrix is quite generic and rigid.
-Ignores profit margins, profitability
Theory Corporate strategies
Boston Matrix
Products evaluated according to competitive position in the market and potential growth rates
Drawbacks of Boston Matrix
Benefits Boston Matrix
Benefits of Portfolio Analysis
-visual representation of situation, associated problems or opportunities.
- Can be more helpful than just relying on figures (especially for some shareholders)
-It´s an analysis! So better than nothing and contributes to planning.
-Products that have potential for future are identified = help planning
-Products with little/no more potential in marketplace are indicated = plans made for milking, re-launch or withdrawal
Portfolio Analysis
A method of categorising all of the products of a firm (portfolio) in order to see where each one fits within the strategic plans
Limitations of portfolio analysis
-The Boston Matrix may be too simplistic, compared to rigorous monetary (money/financial) analysis
-The positioning of products into the Boston Matrix, and interpretation of positions, needs skill and experience which may mean mistakes are made if person completing the analysis is not skilled enough.
1.Conclusions drawn from the Boston matrix could cause the firm to lose money trying to sustain an old product that has been out-dated by changes in trends
-Market share and market growth is just one way of measuring the performance of a product, other factors - brand strength, competitive advantage or customer loyalty may be more important for some products
1.Consideration of an overall business may be more important than analysis of individual products
Strategic
Strategy is more long term and relates to achieving an overall goal
Strategies:
Mission statements
Core values
Organisational culture
Growth
Tactical
Tactics are shorter-term actions that help to achieve the strategy
Tactics:
Location decisions
Marketing mix
Improved technology
Recruitment and selection
Customer service
Motivating staff
Human
-Impact on the workforce
-Recruitment
-Training
-Redundancy
Physical
-Impact on land, machines, tools, equipment, vehicles, shops, computers, factories, and raw materials.
-investment in fixed assets
-location
Financial
-Impact on financial resources such as raising funds externally or internally
-Sources of finance
SWOT analysis
-Allows the business to gather information to then help make decisions regarding strategy:
-Internal considerations:
strengths and weaknesses
-External considerations:
opportunities and threats
Usefulness of a SWOT analysis
-By identifying its strengths a business will know which areas to further develop
-Areas of weakness can be identified therefore addressed and improved
-Potential opportunities can be explored and developed
Possible threats can be identified and planned for
Limitations of a SWOT analysis
-Time consuming
-Has to be actioned to be of use
-Doesn´t prioritise actions or actually make a decision
-Can generate LOTS of ideas/information – hard to decipher
Impact of external influences - PESTLE -
-A framework used for assessing key features of the external environment facing a business.
-It can enable the business to identify external factors that will impact positively or negatively
P= political
E= economic
S= social
T= technology
L= legal
E= environment
PESTLE
P= Competition policy
-Tax policies
E= Unemployment levels
-Rate of inflation
-Stage in business cycle
-Interest rates
S= Demographic change
-Consumer tastes & fashions
-Changing lifestyles
T= E-commerce
-Mobile technology / apps
L= Employment Law
-Minimum / Living Wage
-Health & Safety Laws
-Environmental legislation
E= CO2 emissions / Net-zero emissions
-Recycling / Recue wasted
Porter´s Five Forces
The model is a framework for analysing the nature of competition within an industry. And can be used to identify the potential profitability of a particular strategic decision.
The 5 factors of Porter’s Five Forces
1.Threat of new entrants to a market
2.Bargaining power of suppliers
3.Bargaining power of customers “buyers”
4.Threat of substitute
5.Degree of competitive rivalry
Usefulness of Porters 5 force
- it is only a management tool and relies on the skills of the person being able to analyse the competitive environment
1.Depends on the skills and knowledge of the person carrying out the analysis (put this in a conclusion)
-Some businesses may not have access to market data or be able to apply the model to such a unique product
-Some businesses may faces little competition on the market so they do not need to use this model to analyse the rivalry amongst existing competitors
-Porter’s five force model is a management and decision-making tool which must be used in conjunction with other decision-making tools such as PESTLE or a SWOT analysis to increase its effectiveness
Business growth
Objectives of growth
-economies of scale (internal and external)
-increased market power over customers and suppliers (link to porter’s 5 forces)
-increased market share and brand recognition
-increased profitability.
economies of scale (internal and external)
-internal economies of scale occur as the firm increases its output or its physical size
-external economies of scale occur due to external factors brought on by the expanding industry or market. They occur outside a company but within the same industry.
Internal economies of scale
-Financial
1.Can be offered better deals on loans e.g. lower interest
2.Wider variety of sources to choose from. E.g. a sole trader can’t sell shares
-Technical
1.Can purchase better (more expensive) machinery = higher output which means lower average cost
- Specialisation and managerial
1.Can afford to employ specialised staff
(Doesn’t necessarily employ more managers so fewer high salaries)
-Purchasing
1.Buying in bulk
2.Admin costs do not rise if bigger orders and placed or more lines are sold
-Risk bearing
1.Greater ability to diversify - if one product/market fails can still operate and make money
2.Able to carry out R&D
External economies of scale
-better transport network
-research and development facilities
-clustering of businesses in a distinct geographical area
-relocation of component suppliers
Increased market power
Customers
A larger/dominant business can charge higher prices if competition is limited. (helps to increase profit margins)
Suppliers
Large business may be able to force down costs of materials if ordering in bulk (helps to increase profit margins)
Suppliers may rely upon large businesses for their custom
Increased market share and brand recognition
Charge higher prices
Product/service distinct from competitors
Create customer loyalty
Greater recognition
Develop an “image”
Launch new products more easily
Increased profitability
profit= profit, gross, operating net
Revenue, cost
profitability=%, margins
Organic Growth
Expansion from within the business itself (1) based on its own resources/rather than expanding through takeover or merger (1)
Ways of growing organically
-New product launches
-Opening new stores/branches
-Expanding into foreign markets
-Expansion of the workforce
Benefits of Organic growth
-Less expense in the short term
-Less risky due to an increased level of control of the variables
-Maintaining existing management and culture
-The ability to plan for and effectively control growth
Drawbacks of Organic growth
-Often slow and can limit a business’s ability to react to the growth of competitors
-The amount of growth achieved is dependent on the growth of the market.
-Can lead to a lack of new ideas from outside the business
Inorganic growth
Distinction between mergers and takeovers
-A merger where two or more businesses agree to join to form a new business
-Takeovers usually involve one business taking control of another business following a buyout of their shares
Horizontal and vertical integration
-In a horizontal integration, a company takes over another that operates within the same chain of production.
-A vertical integration, on the other hand, involves the acquisition of business operations not within the chain of production.
Vertical integration
-low prices. A company that’s vertically integrated can lower costs of supplies.
-company can avoid supply disruption
-a company benefits by avoiding suppliers with a lot of market power
Horizontal integration
Larger Market Share, the two companies may be operating in the same industry, they may not necessarily have the same consumer base.
Conglomerates
A very large business organisation which owns many other businesses in different markets
Benefits Conglomerates
Diversification: spread risk
Size: economies of scale
Drawbacks Conglomerates
-difficult to merge cultural value, employees
-If the company is taking over another company without having any experience about the industry it could lead to mismanagement
diseconomies of scales
-when a business expands so much that the average costs increase.
-communication problems
-the loss of strategic direction
-Loss of focus on core competency
Problems arising from growth
Overtrading
This is when a business tries to fund a large volume of new business without sufficient resources
Quantitative sales forecasting
An estimation method that provides insights into future sales by using historical sales data
Extrapolation
The action of estimating or concluding something by assuming that existing trends will continue or a current method will remain applicable
Variation
Difference between the trend and the actual sales
Calculating the Net Present Value
Limitations of quantitative sales forecasting techniques
-past performance is no guarantee of the future.
-Businesses need to appreciate the additional factors (both internal and external) that can affect future predictions.
However, it is more likely to be reliable when:
-Forecast is for a short period of time
-They are revised frequently
-The market is slow changing (not dynamic)
-Market research data is available
Investment appraisal
A set of techniques that can be used to determine whether a capital investment project should be undertaken, or not.
Simple payback
The payback period refers to the amount of time taken for a project to recover, or pay back, the initial costs.
Refer to simple payback and consider
-What is the purpose of this decision-making technique?
-What is the quantitative information that results and how might a business use it?
-What increases the accuracy of the results? For example, has this business made similar forecasts in the past? Have these been accurate?
-What assumptions is the method based on?
-How much of the information is based on estimates and how can a business aim to improve the accuracy of these estimates?
-What qualitative issues will impact on the decision and how can a business consider these?
Advantages of PayBack
-Simple and easy to calculate + easy to understand the results
-Focuses on cash flows – good for use by businesses where cash is a scarce resource
-Emphasises speed of return; may be appropriate for businesses subject to significant market change
Drawbacks of payback
-Ignores cash flows which arise after the payback has been reached – i.e. does not look at the overall project return
-Takes no account of the “time value of money“
-May encourage short-term thinking
Investment Appraisal Techniques
-Simple payback
-Average (Accounting) Rate of Return
-Discounted Cash Flow (Net Present Value only)
Average rate of return (ARR)
Compares the average annual profit generated by an investment with the amount of money invested in it.
Formula (ARR)
AVERAGE ANNUAL RETURN (net return / profit per year)
———————————————– x100
INITIAL OUTLAY (capital cost)
Interpretation of ARR
-35% means - If I invested £1, 35p would be the return of profit for the investment. If I invested £100, £35 would be the return
-Comparing the difference between ARR and banks interest rate.
Advantages of (ARR)
-ARR provides a percentage return which can be compared with a target return
-ARR looks at the whole profitability of the project
-Focuses on profitability – a key issue for shareholders
Disadvantages of (ARR)
-Does not take into account cash flows – only profits (they may not be the same thing – distinction between cash and profit)
-Takes no account of the time value of money (we look at this in more detail with NPV)
-Treats profits arising late in the project in the same way as those which might arise early.
Discounted cash flow and Net Present Value
-Takes into account how much money a project is forecasted to return over time and compares that to how much money would have to be simply invested into a savings account today in order to earn the same return.
Calculating the Net Present Value (NPV)
-This is the difference between the present value (the amount that would need to be saved in the bank) and the cost of the project investment (present value – costs of project)
-If the result is a positive number, then the project is likely to be a good idea
-If the result is a negative number, then it is likely that the project is not a good idea.
Advantages of NVP
-Looks at all the cash flows involved through the life of the project
-Enables the business to reach a decision - negative NPV = no
Disadvantages of NPV
-More complicated method – users may find it hard to understand
-Difficult to select the most appropriate discount rate – may lead to good projects being rejected
The usefulness of using decision trees
-a decision tree will lead to a decision based on a logical sequence of considered answers to questions involved in a decision, rather than making a random decision without the necessary consideration
-a decision tree will reduce the risks involved in making a wrong decision, as it takes the user through a series of questions/steps which lead to a conclusion
-it can be used to give some justification to a decision
-because they are simple to construct/easy to interpret, they are likely to be used more readily/ more frequently than more difficult methods of making decisions
Decision trees
It is a diagram that shows the possible outcomes for a project. It is based on probability
The disadvantages of a Decision tree
-Decision trees may be good for making tactical decisions but are not suitable for making strategic decisions
-decision trees can become overly complex if too much data is entered
-the decision is limited to the data used
-Decision trees are based on predicted data of the potential impact of a decision such as a recall
-Decision tree does not take into account unforeseen costs and circumstances
Critical path analysis
A project management tool that uses network analysis to help project managers handle complex and time-sensitive operations.
Its use and role…
Its purpose is to plan projects in a way that limits the use of limited resources and enables a project to be completed in the shortest time possible.
Float is…
how long activities can be delayed by
Nature and purpose of critical path analysis
-CPA helps with planning which is essential when a business wants to complete a project as soon as possible
-Helps to identify the shortest/most effective route to complete a project
-Useful when a project involves a number of different elements/steps
-Costs/waste/time could be minimised by identifying and following the critical path
-It reduces the risk of time being lost if different functions are not working together to a managed time critical plan
-Other stakeholders such as suppliers can gain an understanding of the time frames involved and when they will be needed.
Limitations of using critical path analysis
- CPA is based on predictions and is only as valid as the data being used.
-doesn’t take into account external shocks
-CPA can’t always deal with unforeseen problems
2.If the project is reasonably simple, the time involved in creating the CPA may be wasted
-conclusion>
-it’s value depends on all teams working to plan/taking the plan seriously
Contribution
- contribution is selling price minus variable cost per unit
-contribution is a financial factor taken into account when making strategic and tactical decisions
Nature and purpose of contribution
- -
Use of contribution as a decision-making technique
-A business may receive orders from a choice of customers
-Can be used to help decide whether a new product is a good idea
-Can be used to decide between suppliers
-A business may not always choose an order with the highest contribution
Corporate culture
Business culture is the unwritten code that affects the attitude and behaviour of staff. The values, attitudes, beliefs and typical behaviours of the organisation.
Some may refer to it as “the way we do things around here!”
A strong culture…
A strong culture is one which is deeply embedded into the ways a business or organisation does things. With a strong culture, employees and management understand what is required of them and they will try to act in accordance with the core values.
A weak culture…
A weak culture can arise when the core values are not clearly defined, communicated or widely accepted by those working for the organisation. It can also occur if there is little alignment between the way things are done and the adopted values.
classification of corporate culture
The key things that separates these 4 types of culture is “where the power comes from”
1.power
2.role
3.task
4.person
benefits of a task culture
-Motivation
-Innovation
-labour turnover reduction
-productivity
Problems of a task culture
-lack of control by management, difficulties in managing people from many different roles and departments
-short-term nature of the team
-the need for certain skills and expertise to enable the team to complete the project
Stakeholder model versus shareholder model
Internal stakeholders
Groups of people inside the business who have a direct interest in its survival and well-being
External stakeholders
Groups of people outside the business that may have an interest in its activities
stakeholder
that the business considers all of its stakeholders in its business decisions/objectives
shareholder
that the business should focus purely on shareholder returns (increasing share price and dividends) in its business decisions/objectives
The potential for conflict between profit-based (shareholder) and wider objectives (stakeholder)
Shareholders and employees
Shareholders and customers
Shareholders and managers
Shareholders and environment (pressure groups / local community)
Shareholders and government
Business ethics
Business ethics considers the moral ‘rights and wrongs’ of a decision
trade-off
in some circumstances, it is not possible for a business’s strategy to be both profitable and ethical, or at least ethical dimensions may have to be sacrificed
Corporate Social Responsibility (CSR)
Is concept within businesses whereby companies ensure the integrating of social and environmental activities within their business operations
Assessing competitiveness
1.Interpretation of financial statements
Statement of comprehensive income (profit and loss account)
What turnover, cost of sales and gross profit mean and what can affect these.
A ‘top-down approach’ shows an understanding of what the business ‘begins with’ and what it ‘ends up with’ – the bottom line.
stakeholder interest
-Looking at the whole document and learning about the business’s profitability — something owners or potential investors might want to do
-It could be focusing on specific sections; for example, expenses might be particularly interesting for managers and workers, particularly if labour costs make up a large part of these expenses
1.Suppliers would want to see whether a business can pay its bills on time
2.Potential investors and owners would want to see the business’ ability to distribute cash in the form of dividends
Statement of financial position (balance sheet)
-it is the ‘worth of a business on a given day’ – a snapshot.
-It shows whether a business:
-can pay its bills on time
-its financial flexibility to acquire capital
-its ability to distribute cash in the form of dividends to the company’s owners.
Ratio analysis
1.profitability (gross profit margin and profit for the year margin)
2.liquidity (current and acid test ratios)
3.gearing ratio
4.return on capital employed (ROCE)
profitability
(gross profit margin and profit for the year margin)
To improve its profitability a business can try to do two things:
1.Decrease costs
2.Increase price
liquidity
(current and acid test ratios)
To improve its liquidity a business can try to do two things:
1.Decrease current liabilities
2.Increase current assets
capital employed =
non-current liabilities + total equity
non-current liabilities
-Long term debts
-Loans
-Mortgages
total equity
-Capital from shareholders / investors
-Retained profit
gearing ratio
capital employed x100
Gearing
Gearing measures the proportion of a business that is financed from long-term borrowing
-These lenders are often banks and therefore expect an interest payment in addition to the repayment of the original loan amount. A higher gearing ratio indicates a greater vulnerability to interest rate changes.
Gearing potential
-In theory, the higher the level of borrowing (gearing) the higher are the risks to a business, since the payment of interest and repayment of debts are not “optional” in the same way as dividends.
However, it is important to remember that financing a business through long-term debt is not necessarily a bad thing!
return on capital employed (ROCE)
-Can help to understand how well a company is generating profits from its capital as it is put to use
-It tells us what returns (profits) the business has made on the capital they have raised from non-current liabilities, share equity and retained profit
To improve its ROCE a business can try to do two things:
1.increase operating profit without a corresponding increase in capital employed
2.Maintain operating profit but reduce the value of capital employed
The usefulness of ratio analysis
-easy to understand and can be used to compare the performance of a business over time or with similar businesses
-Can produce extra information from published accounts and indicate areas for action such as
The limitations of ratio analysis
-is only one indicator used to judge the overall performance
-need to be compared over a long time period
-Comparison with competitors is needed
-They are only as useful as the financial documents on which they are based
HR strategies to increase productivity and retention and to reduce turnover and absenteeism:
1.Financial rewards
2.Employee share ownership
3.Consultation strategies
4.Empowerment strategies
Managing change
Is the process of organising and introducing new methods of working in a business
Transformational leadership
the driver of change comes from the management, rather than the management dealing with other reasons for change
Contingency planning
Contingency planning is the process of anticipating possible changes in a business’s situation and devising ways of dealing with them.
A back-up plan
A back-up plan designed to reduce risk if things go wrong, or problems arise. It is a plan prepared for unwanted/unforeseen/unlikely possibilities
Identifying key risks through risk assessment
In order to put together a contingency plan the business needs to identify possible crises. It may use a “risk assessment” to identify the possible risks
-natural disasters
-IT systems failure
-loss of key staff
mitigation
-Once risks and crises have been identified the business may then carry out a “risk mitigation plan”
-This seeks to identify, assess and prioritise risks.
-Use a number of mitigation strategies to reduce the damage caused such as…
business continuity
Minimising disruption is an incident happens (contingency plan – plan B – back up plan)
succession planning
identifying current employees who have the potential to play key roles in the future
Usefulness of business continuity & contingency planning
-this saves them time and money when things go wrong because they have a pre-planned response in readiness
-Stakeholders would be reassured
E.g. shareholders their investment would be protected
Employees feel secure
Drawbacks of of business continuity & contingency planning
-contingency planning cannot cover everything and does not prevent things from going wrong
-contingency plans might be out of date or too complex to be effective
Usefulness of succession planning
-maintaining the culture within
Because identify and preparing an internal successor means the business will be led by someone who shares the company values
-maintaining brand identify
Because identify and preparing an internal successor means the business will be led by someone who understands the company’s brand
-Often leaders developed from within the business tend to be more successful
because they have benefited from inhouse leadership programmes
-Quicker way to replace senior positions (which are hard to fill) without the need for expensive external recruitment
