Business IAL Unit 3

Mission Statement

A brief statement, written by the business, describing its purpose and objectives, designed to cover its present operations in their market

Stakeholder

Someone who has avested interest in a company, they are also affected by the success of failure of the business

Corporate objectives

Actions that are taken by a business to achieve the aims/vision/mission statement

Corporate aims

The long term targets and plans to fulfil the mission statement

Departmental and functional objectives

The objectives of a department within a business. They are short term goals

Critical Assessment

-What is the purpose of the mission statement

-What audience is it intended for

-How does the business strategy fit

-Are the aims & objectives realistic & achievable

-Balanced (Employees can follow through with the objective, appeals to customers, appeases shareholders)

Vision

A view of what the corporation wants to be like in the future

Objective Hierarchy

1-Aims

2-Mission statement

3-Corporate objectives

4-Functional objectives

Conflicting objectives

exists when subordinate objectives are established to achieve contrary goals or not directly aimed at accomplishing the overall organizational objective

Corporate strategy

The long term plan to achieve the aims and objectives of the business. It concerns the activities a business needs to undertake to achieve its goals, and whether the size of the business makes it capable of achieving the objectives that have been set

Ansoff Matrix

An analytical tool to devise various product and market growth strategies, depending on whether businesses want to market new or existing products in either new or existing markets.

Diversification

a strategy of increasing sales by introducing new products into new markets

Market penetration

a marketing strategy that tries to increase the growth of existing products in an existing market that a business operates in

Porter's Strategic Matrix

Identifies a competitive strategy, based on competitive advantage and market scope

Porter's forces

-Cost leadership (lowest cost provider in a market)

-Differentiation (Operating in a mass market with a unique position)

-Focus (Targeting a narrow range of customers:

-Cost focus, Emphasises cost minimisation within a niche market

-Differentiation focus, Following different strategies in a focused market)

Difference between strategic and tactical decisions

Strategies set out the long term direction that a business will take to achieve its objectives.

Tactics are short term responses to an opportunity or threat in the market.

Portfolio analysis

A method of categorising all the products and services of a firm (its portfolio) to decide where each fits within the strategic plans

SWOT Analysis

a planning tool used to analyze an organization's internal: (S) strengths, (W) weaknesses, and external: (O) opportunities, (T) threats

Internal audit

analysis of the business itself and how it operates

External audit

Analysis of the business enviornment in which the business operates in, analyses their market & competition

Internal audit analyses:

-Products/services: which includes the cost, quality and development of certain products and services

-Finance: review of profit, assets and cash flow

-Production: the capacity, quality, efficiency and stock management of finished goods

-Internal organisation: division and department structures, interaction between and within departments

-Human resources: skills of the current workforce, training and recruitment for current and future employees

External audit analysis of markets:

-Size and growth potential of the market: where the market is at now or how it can potentially grow

-Characteristics of the customers in the market

-Products offered by competitors

-The pricing structure of competitors' products

-How products are distributed (how it is delivered and where it is sold)

-How products are promoted (marketing by competitors)

-Any government regulations and trade associations that impact business operations

External audit analysis of competition:

-The nature and strength of competitors

-Structure of the industry looking specifically at the number and size of competitors in the market

-Production capacity and marketing methods of competitors

-How likely that there will be new entrants to the market

-How likely that businesses will leave the industry

-Competitors profits, investments, costs, revenues, cash flows and assets

(S)WOT

Strengths: what the business is good at that makes it successful.

-Strong leadership

-Motivated, skilled and loyal and flexible workforce

-Products with unique selling points

-State of the art production facilities

-A loyal customer base

-An innovative marketing department

S(W)OT

Weaknesses: negative aspects (what they do poorly or are lacking) of the business in comparison to its competitors. Things that will prevent business growth. Also are areas for improvement.

-Poorly motivated workforce and high staff turnover

-Organisational structure with too many layers of management

-An out of date product line

-Poor cash flow and increasing debt

-Outdated tools and machinery

-A poorly designed or out of date website

SW(O)T

Opportunities: opportunities that the business can take advantage of that can result in improvements such as higher revenue or lower costs.

-An opportunity in an overseas market due to a political change

-The decrease in the cost of essential raw materials (electricity, gas, oil)

-Low-interest rates which provide cheap finance for investment

-A decrease in the exchange rate which makes exporting cheaper

-A change in government regulations which allows for expanded business

-A major competitor failing in the marketplace

SWO(T)

Threats: possible dangers that could potentially damage the performance of the business.

-A new entrant in the market

-A possible recession

-New regulations that improve the rights of employees

-Increasing pressure from environmentalists

-A competitor hiring highly skilled management

-A change in social attitudes towards the key product

External influence

Events and issues that are unexpected and beyond a business' control. They can be positive or negative and usually require the business to make changes to their operations.

PESTLE

They are the:

Political

Economic

Social

Technological

Legal

Enviornmental,

factors that can affect or influence business activity and performance.

Competition

The rivalry that exists between firms when they are trying to sell goods in a particular market

Competitive market

-Large number of buyers & sellers

-Products sold are close substitutes (standardised)

-Low barriers to entry

-Market sets price (business holds little control over price charged)

-Free flow of info about all products in the market (price & quality)

Uncompetitive market

Either a single seller/producer of a few large producers/sellers

Monopoly

a market structure which is dominated by a single seller

Oligopoly

A market structure in which a few large firms dominate a market

Porters 5 forces model

An analysis tool used to analyse the competitiveness of an industry, which helps in determining the profitability of an industry. Porter argues that the ultimate aim of competitive strategy is to cope with and ideally change the 5 forces to be in favour of the business.

Porters 5 forces

-Bargaining power of suppliers

-Bargaining power of buyers

-Threat of new entrants

-Threat of substitute products

-Competitive rivalry within an industry

Bargaining power of suppliers

a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs

Bargaining power of buyers

the threat that buyers may force down prices, bargain for higher quality or more services, and play competitors against each other

Threat of new entrants

a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry

Threat of substitute products

the extent to which alternative products or services may supplant or diminish the need for existing products or services

Rivalry among existing firms

Amount of competition between existing firms within a market. Depending on how many rivals are in a market will determine the price and profits for each firm.

Cartel

A group of businesses that act together to reduce competition in a market, for example: maintaining prices

Barriers to entry

Measures to prevent or deter businesses from entering a market

External influence

The events and issues that are completely beyond the control of a business and can impact them unexpectedly

Growth

When a business is generating more revenue, owns more assets, uses more resources (capital & labour) and (hopefully) is making more profit

Economies of scale

The range at which an increase in output results in a decrease in cost per unit

Minimum efficient scale

The level of output that minimises long term unit cost

OR

The level of output that maximises economies of scale

Diseconomies of scale

Rise in long run average costs as a business expands beyond its minimum efficient scale

OR

The point at which minimum efficient scale is passed, it is the range in which as output increases the unit costs will also increase

Internal economies of scale

The fall in average costs a business enjoys when it is in a period of growth/expansion

Salesforce

a group of employees whose job is to sell their company's products or services, especially by visiting or phoning customers and possible customers

Capital cost

fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used during production

Indivisibility

The physical inability, or economic innapropriateness, of running a machine or some other piece of equipment bellow its optimal operational capacity.

OR

A good that cannot be divided without diminishing its value

External economies of scale

The reductions in costs that any business within an industry might benefit from as the industry grows. This usually happens when there is a large number businesses concentrated in a certain geographical region.

Purchasing economies of scale

A reduction in average costs as a result of buying in large quantities otherwise known as bulk buying

Marketing economies of scale

Reductions in average cost as a result of being able to divide up marketing costs between more units of output

eg: a firm can own its distribution channels (trucks or lorries that are branded) which reduces production cost

Technical economies of scale

-Reductions in average costs of production due to the use of more advanced machinery.

-Increased use of machinery will increase output, therefore the avg cost of machinery decreases.

-Mass production techniques could also be used by breaking down processes into many smaller ones. Each smaller process can be more efficient and use specialised machinery-->increased efficiency

Specialisation and managerial economies of scale

Efficiencies improve if businesses can hire specialist managers for each department rather than having one manager managing everything

Financial economies of scale

Reductions in average cost as a result of being able to borrow money more cheaply.

Larger firms also have a greater variety of raising capital, such as selling shares

Risk-bearing economies of scale

Reductions in the average costs of a single product failing due to having several product lines or several different markets. Such as diversification, product development or market development (Ansoffs Matrix)

Labour economies of scale

Many skilled employees that have been trained from previous jobs in the industry or from governments who provide free training in the industry. This will reduce the training costs for the business

Ancillary and commercial services economies of scale

Established industries will attract smaller firms that complement existing services (specialist banking, insurance, maintanaince, cleaning and distribution)

This attraction prompts the growth of these complementary businesses

Co-operation economies of scale

Firms in an industry are more likely to work together if they are concentrated in the same region. They may make industry info public so that all businesses can use it or create a technology/R&D centre that is shared by all businesses in the industry

Disintegration economies of scale

When an industry is concentrated in a certain region, businesses in this region may break down a larger production process into specialised processes

What does increased market share and brand recognition result in?

-It creates customer loyalty

-They can invest in Research & Development to make products different from those of their rivals

-They have greater product recognition

-They can launch new products more easily with success

-They can charge higher prices, which customers will pay

Organic growth

A business growth strategy that involves a business growing gradually by using its own resources, it is a slower and less risky growth strategy. It is a method of growth that does not include mergers or takeovers.

Inorganic growth

A business growth strategy that involves two (or more) businesses joining together to form one much larger one by either mergers or takeovers, it is a faster but riskier growth strategy

Methods of growing organically

- new customers

- new products

- new markets

- new business model

- franchising

Advantages of organic growth

-Less risky

-Relatively cheaper

-Keep control of the business

-Better financial protection

-Avoids diseconomies of scale

Disadvantages of organic growth

-Slow pace of growth

-Limited access to resources

-Unable to be competitive

-Unable to full exploit economies of scale

-May be innapropriate (rapid market growth)

Acquisition

the purchase of one company by another

Mergers

occurs when two or more organizations combine to become one

Takeover

an act of taking control of a company by buying most of its shares

Synergy

The combining of two or more activities or businesses creating a better outcome than the sum of the individual parts

Integration

When businesses join together to form one, as a result of a merger or takeover

Horizontal integration

Two or more firms in the same line of business & the same stage of production joined together

Vertical integration

When two or more firms in different stages of the production process join together. They do not need to be in the same line of business and usually are not

Forward vertical integration

When a business joins another business that is in the next stage of production (eg, car manufacturer purchases a car dealership business)

Backwards vertical integration

When a business joins with another business in a previous stage of production. This guarantees the supplies of components and materials and removes the profit margin of suppliers (eg, bike manufacturer joins with a bike tire manufacturer)

Conglomerate

A very large single business organisation that own a number of businesses producing a diverse range of unrelated products

Financial rewards of inorganic growth

-Stakeholder benefits

-Stronger balance sheet

-Lower costs

-Lower taxes

Financial risks of inorganic growth

-Integration costs

-Overpayment/Overvalue

-Bidding wars

Advantages of Inorganic growth

-Faster method of growth

-Improved strategic positions

-Economies of scale (especially internal: Technical+Specialisation & managerial economies)

-Eliminate competition

Disadvantages of inorganic growth

-Regulatory intervention (prevention of unfair competitive practices)

-Drains on resources

-Culture clash

-Alienation of customers (neglecting customers needs since focus of attention and resources is on growth)

-Loss of managerial control (not enough management for new operations & employees, additional layers of management make communication channels longer)

Culture clash

Conflict between corporate culture of two business who merge.

eg.

one company that promotes flexible working practices may lose important staff when merging with a firm that expect employees to be in the office all day

Benefits of rapid growth

-Lower avg costs

-Greater revenue

-High long term profits

-Market control

Internal diseconomies of scale

Rising costs caused by excessive growth in a business/Managing large business operations

Problems arising from growth

-Diseconomies of scale

-Internal communication

-Overtrading

Overtrading

When a business expands too quickly without having the financial resources to support such a quick expansion

Time series analysis

A quantitative sales forecasting method of forecasting future sales levels based on actual past sales levels. The factors that affect a time series analysis are:

-Trend

-Seasonal fluctuations

-Cyclical fluctuations (repeat multiple times in the same order)

-Random fluctuations

How can accurate sales forecast with businesses making decisions

-How much inventory to hold

-How many people to employ

-How many raw materials to purchase

-How much cash is needed

-What marketing strategies should be used

Extrapolation

Determining the future sales revenue given the line of best fit. It is an estimate that is based on fluctiations in the past sales numbers

Investment

Purchase of capital goods that are used in the production of other goods to be sold

Investment appraisal

Evaluation of an investment project to deterimene whether or not it is likely to be worthwhile

Capital cost

Amount of money spent when setting up a new venture

Net cashflow

Total Cash Inflow - Total Cash Outflow

Cash inflow

Cash coming into the business from sales or bank loans

Cash outflow

Cash going out of the business for their cost of operations

Payback period

Amount of time it takes to recover the cost of the initial outlay

Outlay

amount of money spent for a particular purpose, especially as a first investment in something

Advantages of simple payback method

-This method is useful when technology changes rapidly because it is important to recover the cost of the capital investment before the technology becomes obsolete or a new model is introduced.

-It is simple to use

-This is used by firms with cash flow problems because this method will payback the initial investment faster than the other investment appraisal methods.