Business Theme 3

Corporate Aims:

Aims are a generalised statement of where a business is heading, this may be to become profitable in the long-term, move into new markets or become a blue chip company.

Mission Statements:

A mission statement is an attempt to put corporate aims into words that inspire. For example Coca-colas mission statement is "To refresh the world - in mind,body and spirit"

Not all companies have mission statements, feeling it is better to prove it then say it

Purpose:

This is the reason why a business wants to serve its customers                           

Values:

This is what a company believes in, such as ethics, quality or innovation

Corporate Stategy is a medium to long-term plan to achieve the objectives they have set.

Porters Strategic Matrix:

Low cost strategy -  there is no better position for long-term stability than being the lowest cost operator, as long as there is an unique selling point

Differentiation strategy -  Porter believes that differentiation works when it adds more value than it costs to implement that USP

Focused low cost - being the lowest cost producer will provide economies of scale in mass markets, sustaining this position is hard to maintain, but it is a very strong place to be

Focused differentiation - perhaps the most sustainable postion, when the company is in a niche maket, yet can charge high prices for its products, e.g Hermes.  

Portfolio analysis can be used as a marketing tool, but also as a way for directors to make decisions

Market Penetration:
This is about increasing market share by concentrating on existing products within existing markets. It is a very safe strategy because it does not stray from the companies knowledge. Opportunities can arise by finding new customers, taking customers from competitors and persuading existing customers to increase usage

Market Development:
This is about finding new markets for existing products, it is more risky as the company may not know the new market. Market development can be achieved by repositioning (targeting a new segment) or moving into a new market

Product Development:
Product development means lauching a new product in the existing market. This strategy is much harder as only 1 in 7 products succeed. In competitve markets, companies use product development to stay ahead of other companies. This can be done by developing a new product (e.g new iPhone) or changing an existing product (e.g shampoos)

Diversification:
Diversification involved launching a new product in a new market. This is the most risky strategy as the company will have little knowledge of the market and will need to ensure their marketing is very successful.

The strengths and weaknesses represent the current situation for the business, they are essentially what areas the business succeeds and those it is failing in

The opportunities and threats section are external factor whichcan provide opportunities to businesses as well as threats. For example the economy and technological change  

Key performance indicators are indicators which measure whether the company is doing well or not, for example in like-for-like sales or market share. This can be used to find out whether a business is doing well or is weak.

External considerations include:

Demography - Population change may impact the industry the business is operating in

New laws and regulation - May prevent the business from operating

Technological factors - Such as the rise of social media  

Commodity prices - Increases/reduced costs lead to reduced/increased costs

PESTLE = Political, Economic, Social, Technological, Legal and Environmental

Political - Political events usually do not have a massive effect on businesses, however, big events such as the UK leaving the single market may have big implications for the businesses ]

Economic -The main factors of importance are inflation, the exchange rate and the unemployment rate. These all have big effects on UK businesses depending on their industry

Social - The changes in social attitudes towards certain industries may impact UK businesses as demand may rise or fall

Technological - For example the rise of the internet has changed how businesses operate greatly, due to the opportunities and threat it presents

Legal - Certain laws passed such as the EU banning vacuum cleaners over 1600 watts can impact businesses greatly if it affects them

Environmental - This can lead to laws being passed, also climate change etc may provide future opportunties and threats for businesses.

Rivalry among existing competitors:
This usually occurs when there are many competitors in one market who are all of similar size. This can lead to it being hard to establish a market share, the products are usually undifferentiated (supermarkets)

Threat of new entrants:
The entrance of a new competitor into a market can lead to competition as the new company may decide to undercut the market. It is usually good for consumers, as it prevents companies from being too greedy, so they offer competitive prices.

Changes in the buying power of customers (suppliers):
For example if ASDA bought Morrisons then they would have a larger market share and therefore more buying power, as a supplier this is bad as you will have less options and will feel more restricted.

Changes in the selling power of suppliers:
If the supplier has many options than it may choose to get a better price from the customer as it has better options

Threat of substitutes:
When there is a threat of new entrants from an outside market, providing the same thing you can at a lower price, for example renewable energy companies competing with oil companies.

Reasons why businesses want to grow -

Increasing Profitability -  Many companies believe that by growing their profits will increase

Economies of Scale -  growth in the long-run can lead to cost per unit to fall as it boosts competitiveness. Internal economies of scale arise within the business such as purchasing economies. External economies of scale arise when the whole industry grows

Increased Market Power - This can lead to power over customers, where the business is able to have strong negotiating power with customers, boosting profits. Can also lead to power over suppliers as they will have fewer choices, meaning businesses can charge higher prices.

Increased Market Share - Increased market share pleases all stakeholders, leading to more secure jobs and bigger profits. Market share can be increased by increasing R&D expenditure as well as investing in branding

Diseconomies of Scale - Problems which arise from growth can include poor internal communication, poor employee motivation and poor managerial co-ordination.

Overtrading is a cash-flow problem when the business expands too quickly without the required finance.

Organic growth is when a business grows internally, whereas inorganic growth is when a business acquires another.

Methods of growing organically include investment in research and development, increasing the number of stores there are and employing more staff

Advantages of growing organically can include:
- leadership remaining close
- minimal financial risk
- provide a secure career path.

There are also disadvantages of growing organically such as:
- The job may become predicatable and boring for creative staff
- Difficulty of getting scale to match competitors
- Many products have small product life cycles  

The main reasons for mergers and takeovers are for growth (fast way of obtaining growth), cost synergies( saves costs through economies of scale),diversification (entering new markets with less risk) and market power( combined power is greater than seperate companies)

A merger occurs when two firms of similar size decide to come together. It is a friendly deal, meaning there usually isnt a leadership struggle such as with a takeover.

Vertical Integration -  When a firm takes over or merges with another in the same industry but different stage of production. Backward vertical includes buying a supplier and foward vertical includes buying a customer

Horozontal Integration -  Horozontal integration occurs when a firm buys another company which is in the same industry and in the same stage of production.

Conglomerate integration - This occurs when a company with no affiliation buys anotherThe best way to analyse the risk and reward from takeovers and mergers is to apply porters strategy.

There are many financial rewards associated witth mergers and takeovers if they are successful including market power and market share. However, if they fail then it can be very damaging to a business, especially if they have spent a lot of money purchasing the company. 

Product Differentiation and USPs:
A USP may require a business to remain small as it limits it to this niche. If the company wishes to grow it must appeal to a greater audience. Essentially, in order to grow a company must move away from the strategy which made it successful

Flexibility in responding to customer needs:
When the business is small it is more adaptable to changing consumer trends, staying small may therefore be an advantage to those in a dynamic market

Customer Service:
Providing exceptional customer service can be a huge selling point for a small business. By expanding business owners risk losing this, as staff are stretched or the owner has to be in multiple places etc

E-commerce:
Companies whos sales come from online do not need many staff to be hugely successful. In many cases if the framework for these companies is sound there is no need to expand its operations.

There are three main methods of providing a quantitative sales forecast:
- Moving Averages
- Extrapolation
- Correlation

Moving Averages:
Calculated by adding three months together and dividing by three. Using a moving average is most useful when there are strong seasonal influences on sales and when sales are erratic for no reason.

Extrapolation:
This method is essentailly predicting future results by looking at past figures and making an educated guess. However, stability and predictability is needed, which is rare

Correlation:
This is typically represented in the form of a scatter graph. If the points are scattered in a certain pattern it can be seen that it is poistively or negatively correlated. e.g between advertising and expenditure.

Limitations of using these methods include:
Population changes, legal changes, new entrants to the market, sudden change in demand, the weather and internal changes.

Pros of Payback:

- easy to calculate

- more accurate as it ignores long-term forecasts

-Takes the timing of cash flows into account

Disadvantages of payback:

- provides no insight into profitability

-encourages short-termism

-not useful on its own

Pros of ARR:

-uses all cashflows over project lifetime

-focuses on profitability

Disadvantages of ARR:

-ignores opportunity cost of project

Pros of NPV:

-Takes opportunity cost into account

-considers different scenarios

Cons of NPV:

-complex to calculate

-initial investment must be the same

SEE NOTES ON THEME 3 FORMULAS + CALCULATIONS

Summary of Decision Trees:

- Problem is laid out left to right
- each chance event must have a probability assigned to it
- Two money values are shown (cost of decision and the benefit or cost of decision occuring)

Advantages:

- It allows for uncertaincy
- All alternatives are considered
- Sets out the problem clearly
- Show the probability of event occuring
- Most useful in tactic/routine decisions

Disadvantages:

- May be difficult to get meaningful data
- Less useful in totally new problems
- data can be easily manipulated

SEE NOTES ON THEME 3 FORMULAS + CALCULATIONS

Rules for drawing CPA:
- network must start and finish on a single node
-no lines can cross each other

Benefits of CPA:
-identifying events which can occur simultaneously can save time
-The network diagram can be used to work out implications of delay

Limitations of CPA:
-Projects with lots of activities can be difficult to draw
-drawing a diagram does not ensure success
- the length of lines do not represent length of activity

Short-Termism:

This is when a business is focused on short-term gains rather than sustainable long-term growth. It is caused by short-term perfomance measures such as EPS, but also when there is a threat of a takeover or due to poor understanding of the beenfits of long-term thinking from executives. The effects include reluctance to invest in capacity, poor decisions in the long-term and staff aiming to achieve goals today but at the expense in the future.

Evidence Based Decision Making:

This is when there is scientific process behind a decison. For example a computer calculating how many staff are needed, taking external factors into account. Generally it is more accurate as it is based on numerical data

Subjective Decision Making:

This is when the decison is made by someones own intuition. Essentially, somebody believes that this is the best decision to make, without any evidence to support this. For example deciding to back a business, which may or may not succeed.

Signs of a strong corportae culture include focusing on customer needs,united staff and people sticking together during a crisis. If the culture is weak, staff will follow a script, the business may be departmentalised and when things go wrong, skilled staff look elsewhere.

Power Cultures:
-They are found in cultures where there is a small group fo people who hold all the power.
-There are few rules and regulations, with personal contact

Role Cultures:
- They are found in established organisations that have developed a lot of rules
- Power depends on the position the employee holds within the organisation
-This culture is bureaucratic, and focused on avoiding mistakes

Task Cultures:
- This culture has no power source, there is a lot of delegation
- Effectve in rapidly changing envirobnments due to its flexibility.

Person Culture:
- This is developed when individuals with similar training work together and for groups to share their expertise.

Corporate culture is formed by leadership style, type of ownership and recruitment policies.

Examples of internal stakeholders + their goals include:

Employees - stable employment, good working environment and pay

Managers -  growth, new technology and rising profits

Owners - growth, profits and happy staff

Examples of external stakeholders + their goals include:

Suppliers - Growth and stable orders

Society - good treatment of employees/ no environmental damage caused

Government - businesses which keep to legislation and laws

Creditors - Stable profits and good cash flow

Shareholders - profits and growth

Customers - good quality and cheap products

Stakeholders can be highly influencial as the public image of companies are often based on respect from stakeholders

Shareholders can aslo infleunce business decisions. Shareholders look for quick profits and their pressure may force executives to adpot a short-termist outlook.

Common Business Ethics include:
- Dealing with customers fairly and honestly
- Protecting the environment through sustainable behaviour
- Dealing with bullying, harassment and discrimination in the workplace

Trade-offs between profit and ethics:
- This is essentially refering to the extent to which companies consider ethic practises. If a company was to be completely ethical its profits would significantly fall. Instead a trade-off is reached. For example innocent drinks released a product with less sugar, but it still had a significant amount of sugar in it.

Pay and Rewards:
- Top bosses in large organisations usually have the power to pay themselves large sums of money. However, this can cause issues if they pay themselves large amounts when the business has performed poorly.

Reasons for CSR:
- Marketing advantages (consumers will look on the company positively, influencing their decisions on whether to buy their products)
- Positive effects on the workforce (staff may feel good about working for an ethical company)

Reasons for doubting CSR:
- Reduced profitbaility (through labour costs and schemes)
- Reduced growth prospects (they may have to turn down investment opportunities)
- Rejection of CSR has a PR tool (many may see it as a facade, such as banks)

see notes on formulas etc

Non-current assets:
- Land and buildings
- machinery and equiptment
- Vehicles
- Patents/copyrights

Current assets:
- Inventories (value of the stock a firm holds)
- Recievables (sums owed by customers)
- Cash (all forms of bank account that can be accessed)

P&L Accounts:
- Of interest to shareholders and stakeholders

SEE FORMULA BOOKLET

The three types of formula are :
- Profitability ratios
-Liquidity ratios
- Gearing

Liquidity ratios:
- current ratio should be 1.5:1
-low current ratio means a business may not be able to pay back debts
- to raise the current ratio a company can sell under-used assets

Gearing:
- To raise gearing the company can buy back ordinary shares and obtain more loans
- To lower gearing a company can issue more ordinary shares and repay loans

Profitability ratios:
-ROCE

See notes on formulas etc

Labour Productivity

Labour turnover:
Factors affecting labour turnover include poor recruitment, ineffective motivation, and poor wages. The impacts fo this include the cost of recruiting new staff, but new staff can bring fresh ideas to the table

Absenteeism

HR strategies to improve employee performance:
- Financial rewards
-employee share ownership
-Consultation strategies
- Empowerment strategies

Internal causes of change:
- Changes in organisational size (when there is growth in the business or contraction the businesses goals will change)
- Poor business performance (Poor financial performance cannnot be sustained so changes are made)
- New ownership (The new owners may have a different vision for the company)
- Transformational leadership (An incredible leader can motivate employees better etc)

External causes of change
- Changes in market (economic/social factors may boost growth etc)
-PESTLE factors

Effect of change on Competitiveness: changes can lead to cost minimisation and differentiation.

Effect of change on Productivity: can lead to increased output,

Effect of change on Finances: can boost profits significantly or lead to financial turmoil

Organisation Culture:
When making changes the culture of the organisation must be taken into consideration, if the change goes against core values staff may not be happy

Size of the Organisation:
In large companies it is neccessary to rely on managers to relay the messages, meaning communication may be an issue. In smaller companies the main issue is with finances, as they may lack the resources to invest in change

Time and Speed of Change:
Planning change is very important in its success, if the time period is unrealistic there is little point of carrying it out. incremental change implements change slowly meaning it integrates better, disruptive change may unsettle staff and stakeholders

Managing Resistance to Change:
Education and communication - explain why the change is needed before it is implemented
Participation and Involvement - include all staff members in the changes
Negotiation and agreeement - negotiate with staff to achieve a common goal

A risk assessment is carried out by identifying the risks faced by a business, quantifying the potential cost to the business and quantifying the probability of the risk occuring.

Natural disasters:
Natural disasters such as floods or earthquakes can lead to extensive infrastructure damage. Companies can prepare for such events by backing up their systems regulary and protecting their property with anti-disaster measures

Loss of key staff:
Some staff may be key to the running of the business and if they leave the hole may not be easily filled. Therefore, companies may use "golden shackles" to retain valuable staff

IT Systems failure:
IT failures can be both damaging and embarassing for businesses. If customer details are lost/stolen they may be hard to retrieve and the way the customer views the company may be tainted. Businesses can prevent loss by backing up their data daily.