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BUSINESS THEME 3 - Coggle Diagram
BUSINESS THEME 3
TOPIC 3.1 - Business Objectives and strategy
3.3.1 Corporate Objectives
Aims
are very broad, long term ideas as how the business should develop but can be rather vague. A
Mission statement
is a more inspirational and motivating version and should be short and convey the value of the brand
Corporate objectives
are specific, realistic and measurable goals which a firm plans to achieve in a given period of time
A
strategy
is a plan of action that's designed to fill an objective
Mission statements and aims can give a sense of direction, increase motivation and inform the consumer. However, they can sometimes just be used to create a good image and can be rather vague
3.1.2 Theories of corporate strategy
Ansoffs matrix is used to analyse both business's products and it's markets as well as reflecting the degree of risk
Market penetration (same products to same customers), Product development (new products to same customers), Market development (same product new market), Diversification (new product new customers)
Porters strategic matrix is made up of cost leadership, differentiation, cost focus and differentiation focus
the product portfolio is the whole range of products and brands that a business sells. Portfolio analysis is the appraisal of the product portfolio to determine the relative worth of each item in the range. two common measures are market growth rate and relative market share
The boston matrix uses these measures ot sort products
Distinctive capabilities are the ideas, resources and capabilities that a business possesses. The three key ideas are
architecture
(relates to managerial skills to build relations),
reputation
and
innovation
(provide new and improved products)
Strategic decisions
are made in order to meet the objectives of the business and are normally long-term.
Tactical decisions
are the shorter term steps taken to achieve the strategy
3.1.3 SWOT analysis
STRENGTHS, WEAKNESSES, OPPORTUNITIES, THREATS
Identifies internal and external factors that will affect the business
3.1.4 Impact of external influences
PESTLE is another analytical tool designed to make a business think about external influences
It stands for Political, Economic, Social, Technical, Legal and Environmental
Direct competitors are businesses selling similar products/services whereas indirect competitors have different products but still competing for same consumer
Micheal Porter determined there were 5 forces that determine where power lies in a market. They are:
Rivalry amongst existing competitiors
The threat of new entrants
The threat of substitute products
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Topic 3.2 - Business growth
3.2.1 Objectives of growth
Growth may lead to
internal economies of scale
which is brought about by an increase in size of the business
Some internal EoS are...
Technical (more efficient and specialised machinery)
Marketing (wider advertising)
Managerial (range of specialist managers)
Financial (can be cheaper to borrow money)
Purchasing (bulk buying)
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Growth can also lead to
external economies of scale
which is brought about by the growth of the industry
Market power is the ability to behave independently of competitors and big businesses can sometimes force suppliers to lower prices
Expansion may bring more market share which comes with more brand recognition. This recognition can result in more loyalty, allowing firms to charge more and make higher profits
Profitability measures ability to make profits e.g profit margins
Growth can also result in
Diseconomies of Scale
such as it being harder communicate, less staff motivation, reduced flexibility and overtrading. They're particularly common in mergers due to a clash of culture
3.2.2 Mergers and takeovers
A merger involves joining two or more firms to form a single business
A takeover occurs when one firm secures over 50% of shares of another
There are many causes such as growth, complementary strengths, sharing costs, brand names, access new markets, diversification, defensive reasons or synergy
Horizontal integration is two businesses in same industry
Vertical integration is same industry but different stages of production
conglomerate integration is no relation at all
Only about 50% of mergers and takeovers deliver anticipated benefits as corporate cultures can be very different and there can be clashes
Firms can also encounter diseconomies of scale due to ineffective communication, harder management, demotivation, less flexibility, worse customer service
3.2.3 Organic growth
Organic growth occurs when the business grows from within by using it's own resources to produce and sell more
It can be done through retained profit or loan capital by opening new stores, expanding into new markets, investing in workforce, etc
Pros - Less risky, Reduces reliance on others, Preserves business cultures
Cons - Slower, Takes time, Overtrading, Hard to control
External/Inorganic growth is where the firm grows by joining with another firm e.g merger or takeover
3.2.4 Reasons for staying small
Easy to setup and run, Profit satisficers, Limited market, Niche benefits, More flexibility, Personal service, Better communication, Technology
Topic 3.3 - Decision making techniques
3.3.1 Quantitative sales forecasting
Quantitative sales forecasting involves using statistical techniques to analyse existing data in order to make decisions. The two main types are time series analysis and scatter graphs
Time series analysis looks at existing short and long term data in order to provide information on likely current and future trends
A scatter graph shows the degree of correlation between two variables
Extrapolation means that future trends are predicted by analysing past data and making assumptions about its continuing behaviour
Overall Quantitative sales forecasting is good as it's easy to interpret, less biased and easy to present. However, it can be too simple and doesn't guarantee the future
3.3.2 Investment appraisal
Investment appraisal covers a range of analytical techniques designed to aid decision making
Business spending might be used for construction or new projects or other things and business need to review what to do
The payback period measures the length of time it takes to get the cost of investment back from the net cash flow it generates (Cost of initial investment / net cash earned per time period). However, this ignores the time value of money
Average Rate of Return (ARR) is a method of comparing the average annual level of profit with the original cost of investment (ARR%= Average annual profit / cost of investment)
Discounted cash flow takes into account the future or time value of money
Net present value is the sales revenue generated by the investment, less the other costs of production, all discounted from the year they are received, to give their present value, today
3.3.3 Decision trees
Decision trees are mathematical methods that use probability as a way of determining the best outcome
The expected value can be calculated by multiplying the probability by the expected outcome
3.3.4 Critical path analysis
This is a technique used to work out the shortest and most cost effective way to complete a project
Float Time is the spare time available between the time an activity takes and the time it must be completed by
Free float is the time it can be delayed without effecting the start time of the next activity
Total float is the total time it can be delayed without delaying the scheduled end date of the project
Topic 3.4 - Influences on business decisions
3.4.1 Corporate influences
Short-termism refers to an excessive focus on short-term results at the expense of long-term interests. Profit maximisation is the driving force and managers cut investment in certain areas
Evidence based decision making means arriving at an objective decision based on the best available evidence in a rational and logical manner. The data provides useful guidance, makes it more organised and can help influence others. However, analysis isn't always without bias, sufficient evidence may not be available and doesn't take ethical issues into account
Subjective decision making means relying more on instinct and gut feeling without developing a logical argument. It's good as managers understand long-term aims and what's good for the business. However, past experience may not be relevant in dynamic markets
3.4.2 Corporate culture
This is the set of important assumptions that are shared by people working in a particular business and influence the ways decisions are taken there
In a strong culture staff are more loyal, theres high motivation, good communication and high productivity. A weak culture is the opposite
4 types of company culture...
Power culture, where authority is centred on an individual or small group, employees driven to please the boss, autocratic leadership style
Role culture, has hierarchical power with authority defined by job title, they tend to be cautious and have a paternalistic leadership style
Task cultures are driven by the need to get things done. Teams are created for specific tasks, power lies with main departments + teams and individuals, likely to have democratic leadership style
Person culture describes loose organisations of individuals, often professional partnerships, laissez-faire leadership style
Factors influencing cultures...
Wishes of business founders, personalities of key personnel, expectations of customers e.g ethical, scrutiny of the public and the nature of the product itself
3.4.3 Shareholders versus stakeholders
Stakeholders are those who have an interest in a business e.g customers, employees, suppliers, government, etc
internal stakeholders are those directly affected e.g employees and external are those indirectly affected e.g customers, government
The shareholder model assumes the shareholders are the most important and profit maximisation is the main goal of the managers to please shareholders, very short-term
The stakeholder model means that managers have a responsibility to take account of the interests of all stakeholder groups
Shareholders
want high returns on investment
Employees
want high wages and good working conditions
Managers
want to expand the business using profits
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3.4.4
Business ethics
Business ethics are the principles and standards that determine socially acceptable conduct in business
Social responsibility is the obligation a business has to maximise its positive impact and minimise negative impacts on employees, customers, society and environment
Ethical decision making means following codes of practice that embody moral values
There is a likely trade off between being ethical and profitable as behaving ethical is likely to increase costs
However, behaving ethically can influence consumers and save fines as well as keeping a good reputation
Corporate Social Responsibility means taking decisions in a way that takes into account all stakeholders interests
The reasons for implementing a CSR policy varies from a genuine desire to behave responsibly, improving brand image, increasing sales, etc
Topic 3.5 - Assessing Competitiveness
3.5.1 Interpretation of financial statements
A financial statement is a general term for a key document based on financial information generated by the business. The two most important statements are the statement of comprehensive income (Profit + Loss account) and the statement of financial position (balance sheet)
the profit and loss account shows a companies net profit or loss over a period of time
Stakeholders such as potential shareholders will be interested in a companies operating profit whereas employees will be interested in how much is paid out
the statement of financial position shows the assets, liabilities and net worth of a business on a given date
Liquidity refers to the ease and speed of which assets can be turned into cash
3.5.2 Ratio analysis
Ratio analysis uses information from the financial statements to relate one measure of performance to another
A profit margin is a financial ratio taken from the statement of comprehensive income to show what % of revenue is profit
The gearing ratio measures the proportion of capital employed which comes from long term liabilities (Long-term liabilities / Capital employed) x 100
Return On Capital Employed = Operating profit x 100 / capital employed
This shows how much is being made by the business, compared to the sum that has been put in
Borrowing incurs interest as well as providing collateral to the loaner
Ratio analysis doesn't provide any detail and can be influenced by current economic climate to make it look worse
3.5.3 Human resources
Labour productivity
measures output per person employed = output per time period / no. of employees
Labour turnover
measures the proportion of employees who leave over a certain time period = no. of staff leaving / no. of staff employed x 100
Labour retention
is about reducing the frequency with which employees leave = no. of employees in post for more than one year / no. of staff in post one year ago
Financial incentives...
piecework pay increases motivation
performance related pay
bonus schemes
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Topic 3.6 Managing Change
3.6.1 Causes and effects of change
Change can be internal such as new owners, managers, organic growth, new products. As well as external from competitor actions, economic events, legal changes, shifts in trends.
Causes of change can be changes in size (growth), poor performance (restructuring), new leadership and the market + other external factors (PESTLE)
The effect of change can be seen from financial performance, competitiveness, productivity and response from stakeholders
3.6.2 Key factors in change
Culture is "the way we do things around here" so culture effects how well the firm does with change
The size of the company can benefit due to EoS but also damage as smaller companies will have more flexibility to respond to change. This is due to the size of hierarchy making communication easier or harder
The time and speed of change also matters as in some industries its much faster such as mobile phones or fashion
One of the biggest issue with change is internal resistance to it and this can be avoided by managers communicating directly and being open about how things will always be changing
3.6.3 Scenario planning
Scenario/Contingency planning means having a plan in readiness in case of crisis or an unwanted event
Reducing risk is a large part e.g installing smoke detectors
Contingency planning can also include having a diverse product portfolio to counter fluctuating demand