Theme 3: business decisions and strategy

Mission statements

a concise explanation of an organisation’s reason for existence and describes its purpose, intention and overall objectives

evaluation of using extrapolation

+ simple method of forecasting
+ not much data required
- unreliable if significant fluctuations
- ignores qualitative factors

low cost provider positioning

a strategy where a business is able to operate at the lowest unit cost in the market, enabling it to change lower prices than the competition or earn higher profit margins

increment change

changes to the business made in small steps rather than all at once

cyclical variation

refers to how sales fluctuate within a given cycle
actual sales figuire - moving average

business continuity

a plan a business puts together to get a business back to normal operations following a big change/event

disruptive change

changes that arise from an external factor impacting on the whole market, not giving businesses much time to react

smaller firms common objectives

- survival
- revenue maximisation
- profit maximisation
- cost efficiency & scale
- customer service

forward and vertical integration

acquiring business further up the supply chain

backward and vertical integration

acquiring a business operating earlier in the supply chain

horizontal integration

acquiring a business at the same stage in the supply chain

conglomerate integration

where the acquisition has no clear connection to the business buying it

drawbacks of takeovers

- high cost involved
- problems of valuation
- non-existent cost savings
- high failure rates

reasons for takeover

- increase market share
- acquire new skills
- achieve economies of scale
- spread risks by diversifying
- eliminate competition

communication challenges as business grows

- dispersion of people in the business
- more formal and less frequent methods of communication
- taller organisational hierarchies
- centralized decision making

calculation of unit costs

total production costs in period/total units of output in period

economies of scale

arise when unit costs fall as output increases

determinants of intensity of rivalry

- number of competitors in the market
- market size and growth prospects
- product differentiation and brand loyalty
- power of buyers and availability of substitutes
- capacity utilisation
- cost structure of the industry

evaluation of SWOT analysis

+ logical structure
+ focuses on strategic issues
- can quickly become out of date
-

Boston matrix

a portfolio analysis tool categorizing products based on their market growth rate and relative market share
star, question mark, cash cow, dog

the challenge facing business strategy

to find a way of achieving a sustainable competitive advantage over the other competing products and firms in a market

evaluation of Boston matrix

+ portfolio decision making
+ uses market share
- only a snapshot

good mission statements

- clear sense of purpose
- excites, inspires, motivates
- easy to understand
- differentiates

UBER’s mission statement

“transportation as reliable as running water, everywhere for everyone”

business objectives

are the specific intended outcomes of business strategy, targets which the business adopts in order to achieve its aims

corporate objectives

relate to the business as a whole, the overall purpose,aspiration,aims and goals

hierarchy of business objectives

aim
mission
corporate/strategic
functional
team
individual

purpose of corporate objectives

informed decision making, provide strategic focus, measure performance of the firm as a whole, set the scene for more detailed functional obj

functional objectives

set for each key business function and are designed to ensure that the corporate objectives are achieved

SMART objectives

specific, measurable, achievable, realistic, timebound

internal influences on COs

ethical stance, business ownership,attitude to profit, strategic position and resources, stakeholder influence, leadership, organisational structure

key external influences

short-termism, economic enviroment, political/legal enviroment, competitors, social & technological change

Ansoff’s matrix

a marketing planning model that helps a business determine its product and market strategy
market penetration, product development, market development, diversification

market penetration

widen the range of existing products to existing customers to increase market share
+business focuses on markets and products it knows well

+ can exploit insights on what customers want

+ unlikely to need new market share

+ will allow the business to achieve growth objectives

product development

a growth strategy where a business aims to introduce new products into existing markets

+ plays on strengths of the business

+ emphasises on market research and successful innovation

+ great way to exploit customer base

- being first to market is usually important

market development

sells existing products into new markets (new geographical markets, new distribution channels, different pricing policies)

+ logical when existing markets are saturated or in decline

- more risky than product development (fresh n easy)

- may not suit new markets

Diversification

business markets new products in new markets

+ gives competitive advantage

- inherently risky strategy

challenge facing business strategy

to find a way of achieving a sustainable competitive advantage over the other competing products and firms in a market

Porters strategy matrix

markets where a business competes v source of competitive advantage

cost leadership, cost focus, differentiation leadership, differentiation focus

low cost strategy

objective is to become the lowest cost operator, access economies of scale (lean production methods, high levels of productivity and efficency, access to widest and most important distribution channels)

+ if selling prices are similar, lowest cost operator will enjoy the highest profits

+ lowest cost operator can also offer lowest prices

strategy of focus & differentiation

aims to offer a product that is distinctively different from the competition with the customer valuing this (superior product quality, branding)

PESTLE analysis of external influences

Political, Economy, Social, Technology, Legislation, Enviroment

Kays distinctive capabilities

Architecture (relational contracts), Reputation + Innovation

achieves a competitive advantage

SWOT analysis

Strengths, Weaknesses, Oppurtunities, Threats, helps a business assess its competitive strength and the nature of its external enviroment

internal economies

arise from the increased output of the business itself (purchasing economies, technical, marketing, network)

external economies

occur within an industry is all competitors benefit, often associated with particular geographic areas

diseconomies of scale

when a business expands beyond an optimum size and becomes less efficient

due to: control, co-operation, negative effects of internal politics

overtrading

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

porters five forces

disruptive innovation, competition, market share, efficiency, economies of scale

framework for analysing the nature of competition within an industry

extrapolation

estimating an unknown value based an extending a known sequence of values of facts

correlation

a statistical measure that expresses the extent to which two variables are linearly related

investment appraisal

the process of analysing whether investment projects are worthwhile

payback period, average rate of return, discounted cash flow(NPV)

payback period

the time it takes for a project to repay its initial investment (time,days,years)

average rate of return

the annual percentage return on an investment project based on average returns earned by the project

ARR calculation

1. calculate the average annual returns earned by the project

2. divide the average annual profit by the initial investment

3. compare with the target percentage return

decision trees

mathematical model used to held managers/owners make decisions

probability

percentage change or possibility that an event will occur, between 1 and 0, total probability must add up to 1

expected value

the financial value of an outcome calculated by multiplying the estimated financial effect by its probability

net gain

the value to be gained from taking a decision, calculated by adding together the expected value of each outcome and deducting the costs associated with the decision

organic growth

involves expansion from within a business (franchising, exporting)

inorganic growth

from outside the business

(takeovers, mergers)

short-termism

where a business prioritises short term rather than long term performance

features of mittelstand and longtermist companies

- family ownership/family-like culture
- long term investment in R & D
- flexibility
- lean organisational hierarchies

evidence based decision making

- based on data and analysis
- time consuming & costly
- common and automated

subjective decision making

- based on intuition
- quick
- hard to justify decisions with significant risk

factors that influence corporate culture

- influence of the founder
- size and development stage of business
- leadership and management style
- organisational structure, policies and practises
- employee & management reward structures
- market/industries in which it operates
- working environment and nature of tasks
- external environment
- attitude of organisation to risk-taking & innovation

examples of good corporate culture

google, microsoft

examples of bad corporate culture

amazon, uber

Ed Schein’s organisational levels

Artefacts (easily viewed, heard and felt by employees)
Values (thought processes and attitudes of employees)
Assumed (inner aspects of human nature, sexism)

Charles Handy types of business culture

- Power (who it belongs to)
- Task Culture (where teams are formed to achieve targets)
- Person Culture (where employees feel their importance)
- Role Culture (where employees are delegated responsibilities based on what best suits them)

stakeholders

any individual or group with an interest in the actions of the business, can be internal or external

shareholder

a person, company or institution that owns at least one share of a company’s stock or in mutual funds.

primary stakeholder

directly linked to the business

secondary stakeholder

influence the business but don’t have a direct link to the business

limitations of the short-termist approach

- loss of profitability and competitive edge

- long-term opportunities are ignored in favour of short-term
- managers lack time, as they need to produce and analyse very regular financial reports
- reliance on short-term contracts is likely to lead to higher than necessary costs

benefits of the long-termist approach

+ investment in research and development
+ less emphasis on frequent financial reporting
+ investment into recruitment, training and retention of staff
+ meaningful and lasting relationships with suppliers

trade-offs

when a decision results in the loss of an alternative outcome, for each decision made there may be multiple trade offs

Mallen Baker on CSR

‘CSR is about how companies manage the business processes to produce an overall positive impact on society’

Benefits of CSR

+ financial benefits (attract investments, avoidance of fines, bad PR)
+HR benefits (staff recruitment and retention, motivation)
+marketing benefits(customer loyalty, use of CSR as an USP, positive media)
+organisational benefits(lower production costs, positive relationship with suppliers)

limitations of CSR

- financial costs(looking after employees, ethical suppliers, appointing CSR director)
- not meeting COs
- opportunity cost

Carroll’s Corporate Social Responsability

highlights four aspects
- Economic responsibility
- Legal responsibility
- Ethical responsibility
- Philanthropic responsibility

income statement

this measures the business’ performance over a given period of time, usually one year

balance sheet

a snapshot of this business’ assets and its liabilities on a particular day

cashflow statement

shows how the business has generated and disposed of cash and liquid funds during a specific period

ratio analysis

involves the comparison of financial data to gain insights into business performance

process of ratio analysis

gather data
calculate data
interpret data
take action

Return on capital employed

a widely used measure of return on investment

(operating profits \total capital employed ) x100

gearing ratio

measure the proportion of a business’ capital provided by debt

(non-current liabilities / capital employed) x100

evaluation of ratio analysis

+ can find why one business is more profitable that another

+ can discover return on investment

- one set of data isn’t enough to describe the whole business

- data is based on the past (may not be completely reliable)

labour productivity

output per employee

(output per time period/ no. workers or house worked) x100

labour turnover

percentage of staff who leave during a period

(no. employees leaving/ average no. employees) x 100

labour retention

the ability of a business to convince its employee to remain with the business

(number of employees leaving during period / average number employed during period ) x 100

absenteeism

percentage of staff who are absent from work

(no. work days with absence / total possible days worked) x 100

human resource strategies to improve labour productivity & retention (decrease turnover and absenteeism)

- effective recruitment and training

- provide competitive pay and incentives

- job enrichment

- reward staff loyalty

causes of change within a business

- significant competitor actions

- political and legal change

- significant changes in economy

- longer term changes in society

- technological change

Kotter & Schlesinger factors for resistance to change

- self interest

-different assessment of the situation

- misinformation and misunderstanding

- low tolerance for change & inertia

scenario planning

identifying and understanding how things may go wrong and putting in place strategies to deal with those problems before they happen

potential risks in scenario planning

- natural disasters

- IT systems failure

- loss of key staff

ways a business can plan for risk mitigation

- business continuity (readiness for emergency)

- succession planning (identifying and developing new potential leaders)

evaluation of a mission statement

+ outlines a company’s goals & position in the industry

+ useful to guide and motivate employees in line with company values

- sometimes lofty and unrealistic, distracts employees from goals

- can take a lot of time and money to develop