Topic 2

Buisness Planning

  • Objectives of buisness strategies include changing goals and performance measures.

  • Performance managment includes reviewing performance reports and determining where future improvements can be made.

  • As the company has limited capacity and resources, planning is one means of allocating scarce resources amongst competing uses.

Business Planning (Importance)

  • Goals are give the buisness a desired end point for achievement within a finite time and meet a certain deadline.

  • Objectives provide specific targets for a business and help to maximise profit.

  • Generic buisness strategies can be applied across businesses and industries and provide strategies to help a business achieve its goals and maximise performance.

Cost Leadership

  • This buisness strategy focuses on extreme efficiency.

  • It relies on tight cost control so that the company keeps costs to an absolute minimum.

  • Having the lowest possible cost allows the buisness to pass this on to the consumer and sell a low cost product thereby gaining market share.

  • The strategy can be uses by companies which produce a high volume of a fairly no frills, standardised product.

  • This allows the buisness to take advantage of economies scale.

  • This means the average cost per unit falls the greater the production levels.

  • The aim is for a low cost product being sold to a large customer base.

  • The business is involved with a mass production and mass distribution.

  • Due to this it is a strategy which only large firms can engage in.

Differentiation

  • This buisness strategy focuses on making the product/service offered by the business in some way different to that's of its competitors.

  • For example, iPhone vs other models.

  • This product differentiation allows for a higher price to be charger due to the customers loyalty that tends to build up in these situations.

  • The bigger advantage of this strategy is that the customer tends to remain loyal to the product buying it because they want it is and not due to the price of it.

Strategic Initiatives/ decisions and Performance Management

  • Strategic initiatives are initiatives put into place to help the business gain a competitive advantage.

  • Performance management includes activities which ensure that goals are consistently being met in an effective and efficient manner.

  • Performance managment can focus on the performance of an organization, a department, employee, or even the processes to build a product of service, as well as many other areas.

  • PM is also known as a process by which organizations align their resources, systems and employees to strategic objectives and priorities.

Reducing costs and risks

  • Business risk is a growing concern, especially in todays economy.

  • Buisness owners need to take control of their companies, assess the risk inherent in both either firms and industries and determine how to best reduce these risks.

  • Risks can be safety related, financial or operational.

  • However, for each potential risk, an effective system of internal controls can be implemented to reduce risks.

  • Strategic business planning will help reduce the costs and risks associated with a buisness.

Cost

  • An economic sacrifice of resources or a particular purpose, such as making a product or providing a service.

  • Examples: Fixed, variable and mixed costs

Fixed Cost

  • Are those that are relatively fixed over a range of activity, volume or output, They do not change as a direct result of changes in volume (amount of goods produced).

  • Example: Rent rates, salaries, Insurance

Variable Cost

  • Vary directly and proportionately with change in the level of activity, volume or output, This means that if volume or output goes up or down, cost will  go up and down by a proportionate amount.

  • Example: Wages if employees who make the product, Raw material.

Mixed Cost

  • These are costs containing fixed and variable elements. Such cost vary with changes in volume, but generally by a less than proportionate amount.

  • Example: Vehicle expenses (registration, insurance, running costs), Electricity, Telephone bills.

Qualitative factors

  • Factors such as environmental, legislation, government regulations, competition impact on suppliers and consumer all of which will affect a decision.

Quantitative factors

  • The numerical data used to help make a CVP decision - expressed in dollar value or number value.

Contribution margin

  • CM per unit represents the revenue available after subtracting variable costs from sales to cover fixed cost and add it to profit.

Break even

  • The point where revenue equals variable and fixed expenses or where no profit or loss is made. Helps mangers determine the minimum number of units that need to be sold in order to cover all costs. Any amount of units sold above break even will result in profit.

Margin of Safety

  • The dollar amount of actual or expected sales above BEP.

  • Provides managers with information about how sales can fall before a buisness starts to make a loss.

  • Provides managers guides in offering discounts.

  • A reduction in the margin of safety can send warning signals to management that there may be a problem.

  • Gives managers time to investigate changes and make adjustments to productions or cost.

  • Often expressed as a percentage.

CVP Analysis

  • Where a constraint exists or manufacturing capacity, management of multi product buisness is able to determine the optimal production mix decisions for maximising business profits.