Theme 3

Corporate Objectives- targets set for the whole firm to reach in a given time period.

-the key benefit to having a clear aim is the purpose and drive that the aim can bring to the day to day tasks of the business.

Typical corporate aims include:

1. Growth

2. Maximising profit

3. Entering new markets

Etc.

Mission- the underpinning purpose behind the existence of a business.

Mission statement- a catchy summary of the reason why a business exists.

If employees believe in a business’ mission, they are likely to find sufficient motivation from trying to achieve this purpose without the need for extra motivational techniques.

Major factors affecting the mission of a business:

1. Purpose- why the business exists

2. Values-what the business believes in

3. Standards and behaviours- the way people in business act

Corporate strategy: a medium to long-term plan for achieving the corporate objectives.

Porters Strategy Matrix

1. Low cost strategy (mass market): Being sufficiently efficient in its operations allows a business to be able to undercut rivals on price and still make a profit.

2. Differentiation strategy (mass market): the challenge is to find a way to differentiate the product which is cost effective and sustainable.

3. Focused low cost (niche market) : a strategy that focuses on a niche market and succeeds in being the low cost provider within that niche can bring success.

4. Focused differentiation (niche market): successful differentiation within a niche market can also lead to long term success generally with a very high margin.

1. Market Penetration (existing products/markets): Most common and most low risk strategy. Involves boosting market share through selling more of the same product to the same target market. e.g finding new customers within the target market.

2. Product Development (new products in existing market): selling to current markets so likely to have a good understanding of customer needs. Sell new products to these customers. Most new products fail so the risk level is v high.

3. Market Development (existing products in new markets): business now aims the products at new markets. Can be done by breaking into foreign markets or repositioning the product to aim at a diff type of customer. Major risk factor could be that the company may not understand consumer behaviours on the new market they are entering. Market research can help reduce this risk

4. Diversification ( new product/markets): selling new products to new markets. A business choosing this strategic decision faces the problems of product/market development combined. However, can bring v high rewards.

How to conduct a SWOT analysis

1. Top down approach- uses external management consultants working directly with the boss of the business
2. Consulatative approach- A boss who takes the opportunity to travel around the business engaging in conversations with those who understand each aspect best. A more thorough analysis.

Internal considerations: strengths and weaknesses- focus on the analysis of key performance indicators e.g market share, capacity utilisation.

External considerations: opportunities and threats-key areas to look for when looking for opportunities and threats include the following:
-demographics

• new laws and regulations
• technological factors
  economic factors

1. Political factors

2. Economic factors

3. Social factors

4. Technological factors

5. Legal factors

6. Environmental factors

1. Rivalry among existing competitors- profitability is more likely where rivalry is less intense. Where intensity of rivalry is high, pressure to maintain a low price and keep costs low enough to still make a profit is great.

2. Threat of new entrants-the danger of new companies entering the market creating extra competition is dependent on the barriers to entry. Typical barriers to entry include:
-strong brand identity and customer loyalty
-patents
-high costs to customers of switching suppliers
-high startup costs

3. Bargaining power of customers- for a business that sells their product to just a few
large customers, a threat from one of them to stop buying unless offered a discount could be too big to just ignore

4. Bargaining power of suppliers- if the suppliers get more this could be bad for the business as the suppliers could charge a higher price.

5. Threat of substitutes- considers the chances that a product/service in another market may become seen by customers as a viable substitute for our product.

Reasons why firms grow:

1. To achieve economies of scale- lower running costs for the firm. Economies of scale are reductions in unit costs caused by the growth of a business.

2. Increased market power over customers and suppliers- growth in size is likely to boost the power that a business has over both customers and suppliers.

3. Increased market share and brand recognition-growth that boosts market share involve taking share from rivals. This will help to boost power over customers.

Problems arising from growth:

1. Diseconomies of scale- growth can make organisations harder to manage. Could suffer from the following problems:
-poor internal communication
-poor employee motivation:personal contact can be reduced between staff members and managers
-poor managerial coordination

2. Overtrading- occurs when a business experiences cash flow problems as a result of expanding too quickly without sufficient cash in the bank.

Organic growth- growth that takes place without any merger or takeover activity

Advantages of organic growth

1. Leader’s influence stays strong- far greater chance of preserving the original business culture which is likely to be successful as it has put the company in the position to grow.

2. Reduction of financial risk- tends to be far slower than inorganic methods meaning the finance required is likely to be needed in smaller, more steady batches.

3. Secure career paths- if the business grows, its structure grows and more senior managerial positions.

Disadvantages of organic growth

1.limited speed leading to limited size- A business sticking to an organic growth strategy may fall behind growing rivals who use takeovers to add significantly to their scale rapidly.

2. Failing to fully exploit a short lived opportunity- with shortening product life cycle as rates of change in many markets increase, a firm that fails to fully expand its capacity before the product enters the decline phase in the marketplace may have missed out on significant levels of sales as a result of ignoring inorganic methods of growth.

3. Predictability- organic growth will often involve doing the same thing in a new year after year. Staff don’t have many challenges so they could leave

Reasons for mergers and takeovers
1. Growth- the ability to increase the size of an organisation is the general motive behind any merger or takeover.

2. Cost synergies-a synergy is the benefits of 2 things coming together that couldn’t exist when they are separate. When a business grows through merger or takeover, its increased size is likely to lead to economies of scale, allowing it to reduce their unit costs. Other costs savings can come by eliminating duplicating functions/jobs.

3. Diversification-a company that wants to spread risk for its business can do so using a merger/takeover to enter new markets with new products.

4. Market power- when 2 firms in the same market come together, the combined business is likely to increase their power over customers.

Problems of rapid growth
1. New business culture- staff could find themselves working for a new boss and could find it difficult to make adjustments. Many staff could end up leaving because of this.

2. Customers and suppliers who may have had a long standing relationship with their contact in the business may feel discomforted by the need to deal with someone else

1. Vertical Integration: refers to a merger or takeover involving 2 companies at different stages of the same supply chain. Forward vertical integration is when a company buys a customer e.g it could involve a manufacturer buying a retailer to secure distribution for its products. Backward vertical integration is when a company buys a supplier.

2. Horizontal integration: where a business buys or merges with a rival, in the same industry at the same stage of the supply chain. Likely to lead to economies of scale resulting in higher profit margins

3. Conglomerate integration: where a merger or takeover involves the coming together of 2 unrelated businesses. Designed to spread risk for the new business. Business is no longer reliant on just one product or market.

1. Survival in competitive markets- able to cope with rapid changes in the market. The boss will be able to make rapid and effective changes to respond to changes in the market. Can allow small firms to stay ahead of large firms.

2. Product differentiation and USP’s- Porters Matrix can help explain how some firms can trade successfully in the long run. A strategy of focused differentiation whereby a business finds a point of differentiation while selling to a niche market.

3. Flexibility in responding to customer needs- with fewer layers between bosses and customer-facing lower level staff, feedback from the shop floor is likely to reach managers quicker, enabling quicker response times than larger businesses.

4. Customer service-where staff are part of a small, close-knit workforce, they will understand clearly how their performance affects the overall success of the business. This can be highly motivating.

Moving average: a quantitative method used to identify underlying trends in a set of raw data.

Forecasting sales using extrapolation- predicting by projecting past trends into the future.

Scatter graphs (correlations)- where there is a link between sales and another variable, the relationship can be used to forecast sales if the other variable is controllable/predicatable.

Limitations of quantitative forecasting techniques

1. The future may not be like the past- changes in any number of external events can have a significant impact on sales.

2. The quality of a forecast is reliant on the ability of the forecaster to interpret the data being used to generate the forecast.

Investment Appraisal- The process of using forecast cash flows to assess the financial attractiveness of an investment decision, linked with a consideration of non-financial factors.

1. Payback Period- the period of time a business takes to pay off the investment.

Calculation:

Outlay outstanding/monthly cash flow in year of payback

2. Average rate of return (ARR)- the higher the ARR the more profitable the investment.

Calculation:

(Net return from project/number of years)/ initial cost of project X 100

3. Net present value (NPV)- a positive NPV shows that a product generates a greater return on its initial outlay than simply putting the money in the bank at an interest rate equal to the % discount factor used.

Other factors affecting investment decisions:

• corporate objectives
• corporate finances
• investment criteria

A decision tree is a diagram showing the options and possible outcomes involved in making a decision along with the probabilities of the outcomes occurring.

Advantages

• Technique allows for uncertainty
• Trees force managers to consider all possible actions
• Problems are set out clearly, allowing for a logical approach

Limitations

• Gathering the data required is hard and is likely to include guesswork
• Can lead to failure to consider qualitative aspects of decisions
• New problems mean previous occurences cannot be used to base estimated probabilities

Critical path analysis- A technique used in planning the most time efficient way to complete complex projects.

Critical path- The sequence of activities on which any delay will delay the whole project. The activities with zero float time.

Advantages

• Forces a thorough planning process: careful planning required to work out each activity involved.
• Identifying activities that can be carried out simultaneously shorten the overall duration of the project.
• Resources needed for a given activity can be delivered or hired just in time for the activity to begin. Delays cash outflow

Limitations

• Diagrams for really complex projects amy become unmangeably large
• Not drawing activity lines to scale can devalue the diagrams use

Short Termism: When the actions of managers show total prioritisation of immediate issues, ignoring long term ones.

Causes of Short Termism

• The threat of takeover: Boosting short-term profittends to push a company's share price higher. This means that anyone thinking of doing a atkeover will find it alot more expensive.
• Use of short term performance measures: If bonuses for plc bosses are based on indicators which can quickly be affected by short term action,could feel tempted to enhance bonuses

Effects of Short Termism

• Accounting adjustments that inflate current earnings
• A bias towards using profit for high dividend payments or to buy back shares, at the expense of investment
• Adopting pay schemes for directors that focus on achieving short-term objectives

• Major plcs play a far smaller role in the German economies which is dominated instead by medium-sized private limited companies, often family owned.
• These companies are collectively referred to as the Mittelstand.

Common features of a Mittelstand company are:

• family owned
• family run
• people centred management
• long term thinking
• a focus on doing one thing well

Corporate Culture- The spirit, attitudes, behaviours and the ethos of an organisation.

Handy's Classification of Cultures

1.  Power Culture- Occurs when there is one or a small group of extremely powerful people leading the organisation.Characteristics include: Everything goes through the boss, Few rules or procedures are laid down, Communication is through personal contact, autocratic leadership style.

2.  Role Culture-Likely to exist in an established organisation dominated by rules and procedures. Characteristics include: all employees are expected to follow the rules, career progress will be predictable, organisation will struggle to cope with rapid change, leadership is either autocratic or paternalistic. 

3. Task culture-project being worked on is the main focus. Characteristics include: each project team is formed for a single project, then disbanded once the project is complete. An individuals power depends on their expertise rather than status.

4. Person culture- operating in organisations with highly skilled professional staff. Sees individuals form groups in which they share their knowledge and expertise. Characteristics include: staff are well paid and treated. Democratic leadership.

Stakeholders: groups that are influenced by and influence the operations of a business.

Stakeholders Objectives

• staff- growth(organic), new technology product,rising profit (profit sharing).
• managers/directors-growth,new products ,rising profit
• shareholders-rising profits in both short and long term
• suppliers-growth
• customers-quality of products, innovative new products
• bankers-stable profits

Business ethics- the moral principles that underpin decision making.

CSR- the desire to run a business in a morally correct way, attempting to balance the needs of all stakeholder groups.

Reasons for CSR

• Marketing Advantages: Can be a point of differention for some businesses. Consumers who have enough disposable income will often pay a premium price so they can buy with a clear conscience from businesses that behave in a socially responsible way.
• Positive effects on the workforce: Recruiting high-flying staff may be easier if they do not want to work for a morally corrupt enterprise

Reasons against CSR

• Reduced profitability: CSR is likely to mean higher costs and perhaps lower revenue with suppliers paid a fair price
• Reduced growth prospects: Some business opportunities may be turned down if it involves comprosing the morality of the business  

Balance Sheet- A financial document showing a businesses assets and liabilities at a point in time. Shows how wealthy a business is.

Long term (non current) Assets

• land and buildings
• machinery and equipment
• vehicles
• patents/copyright

Current Assets

• Inventories- value of any stock
• Recievabnles- money owed to the business by customers
• cash

Capital on the Balance Sheet

• Bank loans
• Shareholders
• Profits

Profit and Loss Account- Shows a firm's revenue for a time period along with all the costs associated with generating that revenue.

Gross profit= Revenue - Cost of Sales

Operating Profit- Gross profit - Expenses

1. PROFITABILITY- This shows the relationship between profit and revenue/assets/capital.

Gross/operating/net profit margin= gross,operating or net profit / sales revenue x 100

Return on capital employed (ROCE): Expresses operating profit as a % of the capital that has been invested in the business.

ROCE= Operating profit / Capital employed x 100

Capital emplyed= total equity + long term liabilities

2.LIQUIDITY- This shows the ability of a firm to meet it's short term debts.

Current ratio= Current Assets/ Current Liabilities

Acid Test Ratio = Current Assets ( excluding inventories/stock) / Current Liabilities

3. GEARING- This shows the proportion of long term finance in a business that has come from loans.

Gearing ratio= Long-term Liabilities /Capital Employed x 100

Labour Productivity= output per period / no of employess per period

Labour Turnover= no of staff leaving the firm in a year / avg no of staff during the year x 100

Abseentism= Total days of absence / Possible total days that could've been worked x 100

Human Resource strategies to improve employee performance

• Financial Rewards- Pay to motivate staff will only create a temporary improvement which will disappear if the reward does ( Herzberg theory).
• Employee share ownership
• Consultation strategies- seeking and listening to the views of employees as part of a decision making process.
• Empowerment Strategies- Giving staff the authority not just to decide how to do a task but to decide what tasks need to be done in the first place.

Causes of Change

• Change in organistaional size
• Poor business performance
• New ownership
• Transformational Leadership
• Changes in the market
• Political Change
• Economic Change
• Social Change
• Technological Change
• Environmental Change

Possible Effects of Change

• Competitiveness- Change is focused on need to improve a firms ability to compete with rivals

• Successful Change
• Organisational culture- Some organisations have cultures that welcome changes a chance to improve
• Size of the Organisation- Smaller firms have fewer financial resources to help to move the change forward. With a smaller workforce, range of skills limited
• Time and speed of change- Incremental change occurs when change is slow and happens in small steps. Disruptive change occurs suddenly, unpredictably and has major effect on entire markets.
• Managing resistance to change- 3 main ways are: education and communication, paticipation and involvement, negotaition and agreement. ( suggested by Kotter and Schlesinger).