Special Orders, Investment Appraisal and Descion Making

What is Porters Five Forces and name all 5 forces

Porters five forces describe the five forces that impact the profitability of a particular industry. These include the level of competition, threat of new entrants, threat of substitutes, power of buyers and power of suppliers.

How does the level of competition impact the profitability of a market (Porters Five Forces) and give some potential strategies to improve a company’s situation

Increased competition = Reduced prices and therefore reduced profits

Strategies to improve this

• Differentiation → depends on market/type of product

• Marketing efforts → depends on capital available to business

How does the threat of substitutes impact the profitability of a market (Porters Five Forces) and give some potential strategies to improve a company’s situation

Increased substitutes → reduced demand and therefore prices

Strategies to improve

• Create brand loyalty → depends on size of business

• Differentiation → depends of market/product

• Prevent switching → depends on buyer power

How does buyer bargaining power impact the profitability of a market (Porters Five Forces) and give some potential strategies to improve a company’s situation

If there are few buyer and many sellers, buyer have more power and so prices will decrease

Strategy’s to improve

• Create ‘buyer group’ → depends on customer loyalty

• Find new customers

• Increase marketing/price wars → depends on capital available

How does supplier bargaining power impact the profitability of a market (Porters Five Forces) and give some potential strategies to improve a company’s situation

If there are few suppliers but lots of firms - costs increase and so does competitive advantage

Strategy’s to improve

• Supplier contracts → depends on relationship with supplier

• Merger with supplier → depends on business goals and leadership

How does the threat of entry impact the profitability of a market (Porters Five Forces) and give some potential strategies to improve a company’s situation

Easy to enter → encodes existing firms competitive advantage and decreases market share for all firms

Strategies to improve/overcome

• Using patents/copyrights → depends on business size and power

• Create brand loyalty → depends on market share

• Increasing market share → depends on growth strategy

What is the Ansoff Matrix

The Ansoff Matrix outlines the options open to a business if they wish to grow, with a view to increase profitability and revenue. It gives 4 strategies in terms of market and products that can be used by a business to grow. These include: Market penetration, Market development, Product development and Diversification

What is Market Penetration (Ansoff Matrix strategy), how would it be carried out and what are its advantages and disadvantages

Market penetration is a growth strategy that focuses on on selling more of existing products in existing markets in order to increase market share.

This could be done by:

• Creating more brand loyalty

• Marketing campaign targeting existing customers to increase their consumption

• Gain market share from competitors

• Change marketing mix

Advantages

+Low risk

+No market research/R+D required so low cost

Disadvantages

-Market may already be fully saturated

-Relatively short term option (limited growth)

What is Market Development (Ansoff Matrix strategy), how would it be carried out and what are its advantages and disadvantages

Market development involves attracting new customers to but existing products

This could be done by:

• Entering new international markets

• Changing promotional tactics to attract a different group of customers

• New distribution channels

Advantages

+More streams of revenues

+Increased brand awareness

+No R+D costs as product is already well established

Disadvantages

-Product may not be desired in a new market

-Business may not understand new market

-Alienation of current customers

What is Product Development (Ansoff Matrix strategy), how would it be carried out and what are its advantages and disadvantages

Involves selling new and better products to existing customers

Possible approaches include:

• Launching new and improved products

• Introducing complementary products

• New product innovations

Advantages

• Leverage existing market knowledge

• Improved quality

• Product portfolio

Disadvantages

• Other firms may copy new products

• Shorten life cycle of other existing products

• Potential damage to brand

• High R+D costs

What is Diversification (Ansoff Matrix strategy), how would it be carried out and what are its advantages and disadvantages

Developing new products to new markets

Possible approaches

• R+D into new products and market research into new markets

• Acquisition of another business

Advantages

• Very high reward

• More revenue streams

• Long term rewards

• Spreads costs/risks across several different markets

Disadvantages

• Dilution of brand name

• Cultural differences

• Relies on heavy investment

Define organic/internal growth and name some strategies of organic growth

Organic growth is the expansion of a business by selling more of its products A business will use its existing resources to grow and will not involve any other businesses

Strategies

• Expanding product range

• Targeting new markets

• Expanding distribution channels

• Benefiting from economies of scale

What are the advantages and disadvantages of organic growth

Advantages

+Less risky as it uses retained profits and avoids conflicts

+Greater consistency

+Maintain distinctive capabilities

+Maintain brand

+Maintain control

Disadvantages

-Miss opportunities for acquisitions

-Limited growth

-Lack of shared expertise

-Lack of competitiveness due to lower economies of scale

-Pressure on leaders/managers

-Shareholder dissatisfaction

Define inorganic/external growth and give some examples of strategies to achieve it

External or inorganic growth occurs when a business expands in size by either merging with or taking over another business.

Strategies for external growth

• Mergers

• Takeover

• Horizontal integration

• Forward vertical integration

• Backwards vertical integration

• Conglomerates

What is a merger

When two or more businesses agree to become integrated to form one business under joint ownership

What is a takeover

When one business gains control of another and becomes the owner. Can be achieved by buying 51% of the shares

Can be agreed or hostile

What are the advantages of external growth

• Access new markets

• Increased market share

• Diversification

• Acquiring new skills/technologies

• Economies of scale

• Synergy (2+2=5)

• Cost savings

• Underperforming managers easily removed

What are the disadvantages of external growth

• Diseconomies of scale

• Culture clashes

• Inherit problems (e..g debts, legal issues, bad brand identity)

• Legal procedures/CMA investigations

• Brand dilution

• Duplication of resources

What is horizontal integration

When a business merges with or takes over another business in the same industry at the same stage in the production process

What is forward vertical integration

When a business merges with or takeover another business at the next stage of the production process in the same industry. This allows the business to get closer to their consumers

What is backwards vertical integration

When a business merges with or takes over another business at an earlier stage in the production process to get more control of suppliers

What is a conglomerate

When a business merges with or takes over another business in a completely different industry

What is a franchise

A franchise is the replication of a successful business formula. Franchising occurs when the owner of a business, the franchisor, licenses the use of trademarks and proven business ideas to another party, the franchisee.

What is a franchisee

A franchisee is a business that is given permission from other business to trade using its name or goods/services in return for a fee and share of profits

What is a franchisor

A franchisor is a business that sells a license giving permission to another business to trade using its name or goods/services

What are the benefits and drawbacks of franchising to a franchisor

+Rapid expansion

+Investment from others

+Motivation - franchisee has own capital tied up in business

+Economies of scales

+Increased brand recognition

+Mass advertisement - reduced costs

-Loss of control

-Managing growth

-Risk of brand damage

What are the benefits and drawbacks of franchising to a franchisee

+Lower risk

+Established product

+Proven operations

+Assistance from franchisor

-Lack of control

-High initial cost and costs of supplies

What is rationalisation and what are the possible reasons for it

Rationalisation is the downsizing of the scale of a business’s operations. Possible reasons include:

• Increase efficiency

• Turn around poor performance

• Focus on core business

• Sell less profitable parts of business to improve overall performance

• Following a merger/takeover to remove duplication of resources

What factors would influence a business’s decision to relocate

• Cost of labour, land, utilities

• Availability of government grants

• Target market

• Quantitative analysis (e.g. break even, investment appraisal)

• Corporate objectives and strategy

• Ethical considerations

• Infrastructure

• Legislations

• Political environment

What is offshoring and what are its benefits and drawbacks

Offshoring is the process of moving a business functions (e.g. operations or IT support) to a different country

+Lower costs

+Enter new market

+Talent pool

+Closer to customers/demand

-Longer lead times

-Management costs

- Exchange rates

-Communication issues/ time zones

What is re-shoring and why would a business re-shore

Re-shoring is the process of moving previously off-shored business functions back to the country of origin

A business may re-shore because

• Cost savings in no longer significant

• Quality issues

• Shorter lead times

• Government incentives

What is outsourcing and what are the benefits and drawbacks

Outsourcing is doing any process through a third party. This done because other business may be more specialised in completing a task

+Lower costs

+Increased capacity

+Greater flexibility

+Concentrate on core functions

+Improved quality

-Less control over quality

-Control and coordination

-Customer dissatisfaction

-Loss of domestic jobs

-Damage to brand reputation

-Impact on economy if outsourcing to foreign firms

What is critical path analysis

Critical path analysis is a method of planning and controlling large projects and is used to make decisions about the management of resources and time

What is EST and LST in CPA

EST - Earliest start time

LST - Latest finish time

What is float time (CPA) and how is it calculated for a single activity

The amount of time that non-critical activities within a project can be delayed without affecting the deadline for completion of the whole project

= LFT - EST - Duration of activity

What is a decision tree and what does it help a business to identify

A simple, visual way of presenting the alternative courses of action available when making decisions

Identifies:

• When a decision has to be made

• Choices available

• Costs associated with each option

• Potential outcomes and there likelihood of occurring

What are the benefits and limitations of Decision Trees

Benefits

• Clearly shows options available

• Encourages logical thinking

• Allows structured discussions and comparisons

• Takes into account risk

• Quantifies outcomes of decisions

• Highlights likelihoods of success

Limitations

• Relies heavily on estimates

• Doesn’t take into account qualitative factors

• May not consider external influences

• Non-dynamic → may become out of date quickly

What is cost-benefit analysis

CBA is a method for measuring, in financial terms, the costs and benefits of an investment project. It includes considerations of the external costs and benefits as will as the private costs and benefits

What are some examples of private benefits and costs in CBA

Private benefits

• Increased revenue

• Increased productivity

• Brand value

Private costs

• Training and recruitment costs

• Purchase of new equipment

• Marketing costs

What are some examples of public benefits and costs in CBA

Public benefits

• Jobs created by the business

• Jobs created outside the business

• Increased revenue for local economy

• Reducing social problems

Public costs

• Environmental impact

• Noise pollution and traffic

• Loss of open spaces

What are the advantages and disadvantages of Cost benefit analysis

Advantages

• Puts monetary value on projects

• Impacts of society are included

• Helps PR (shows if a firm cares about society)

Disadvantages

• Cost of undertaking analysis

• Monetary values are estimates and will become less accurate in the future

What are the different ways technology can be integrated into the decision making process

• Management Information Systems (MIS)

Provides managers with information by continuously collecting and processing data

• Enterprise Resource Planning (ERP)

Platforms companies can use to manage and integrate the essential parts of their businesses

• Electronic Point of Sale (EPOS)

Systems that monitor sales

• Data Mining

Computers look for patterns in data relating to consumer behaviour and automatically creates directed advertising campaign

• Cookies

Records the sites visited by a user and therefore your browsing history provides a valuable starting point for relevant adverts

• Big Data

Refers to the volume of data that can be accessed as a result of technological advancement

• AI

Computers are able to stimulate human thought processes and behaviours to speed up the decision making processes

What is investment appraisal

Investment appraisal is the use of numerical techniques to predict the financial outcome of potential investment. Investment appraisal is a tool used by a business to compare projects, to help them to work out which project will best meet their business objectives

What are the three main quantitative methods of investment appraisal and what do they help a business analyse

• Payback - Works out how long each project will take to pay back the initial investment to the business

• Average Rate of Return - Shows the expected profitability of an investment project over a projected cash flow period

• Net Present Value - Found by discounting future money to make allowances for the opportunity cost of tying up capital

What are the qualitative factors to be considered when making investment appraisal

• Impact on staff

• Impact of existing products

• Does investment match business objectives

• State of the economy

• Actions of competitors

• Ethical considerations

• Is sufficient funding available

• Availability of new technologies

• Confidence and leadership style of managers

• Businesses need for cash flow