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Transcript of A2 Business Studies r
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1AL.2BusinessStructure
Tradinglinks
InternationaltradehasgrownrapidlyintherecentyearsMorecountriestradingtogethermeanscanbebeneficial:
Improvetheirpolitical&socialaspectsandresolvedifferencesbetweenthem
Widerchoicesforconsumersmayleadtobetterstandardsofliving Countriesmayobtainanyrawmaterialsthatarenotavailableintheirown
countries
Importsmaycreatecompetitionfordomesticfirmsandencouragethemtobemoreefficient
Countriescanspecialiseintheproductstheyarebestatmakingandbenefitfromtheeconomiesofscale
However,thesearethedrawbacks: Lossofoutput&jobsfromdomesticfirms(cannotcompetewithimported
goods)
Strategicindustries(foodstuffs,electricity,coal,etc.)shouldnotbedependentonothercountriesbecauseiftherewereaconflictbetween
countriesoranotherfactorleadingtolossofimportsthenthecountrywouldlosethesupplyofimportantgoods
New/smallbusinesses(infantindustries)maynotcompetewithimportedgoods
Importersmaydumpgoods(pricelowerthancost),whichisunfair Toomuchimportscouldleadtoacurrentaccountdeficit&depreciationin
currency
MultinationalsMultinationalbusinessbusinessorganisationthathasitsheadquartersinone
country,butwithoperatingbranches,factoriesandassemblyplantsinother
countries
Whatsgoodaboutbecomingamultinational? Closertomainmarkets(lowertransportcosts,betterinformationof
market)
Lowercostsorproduction(lowerlocalwages,cheaperrentandsitecosts,bettergovernmentgrantsandtaxes)
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Avoidimportrestrictions Accesstolocalnaturalresources
Problemsthatmultinationalsmightface: Communicationproblems(languagebarriers) Culture&legaldifference(soneedtoadapt) Biggesttypeoforganisationsoneedtoensurethattheobjectivesare
coordinatedbetweenallplantsofthebusiness
Benefitstohostcountries: Createemployment&trainingopportunity(improvedlabourskills) LocalfirmsmaybenefitfromsupplyingmaterialstothemultinationalsMayimproveinfrastructureforthecountry Encouragelocalfirmstoimprovestandardstocompetewithbigger
businesses
Increasedgovernmenttaxrevenuefromtheprofitsmade GDPmayincreaseandthiscauseseconomicgrowth
Possiblelimitationstohostcountries: Exploitationofworkerswithlowwages,unfairworkingconditions,long
workinghours,etc.
Pollutionanddepletionofnaturalresourcesofhostcountries Localfirmsmaygooutofbusiness Profitsmaybesentbacktohomecountry,ratherthankeptfor
reinvestmentinthehostnation
Privatisation
Privatisationsellingstate-ownedandcontrolledbusinessorganisationstoinvestors
intheprivatesector
Argumentsforprivatisation:
Theprofitmotiveofprivate-sectorbusinesseswillleadtogreaterefficiencyDecisionmakinginstatebodiescanbeslow&bureaucraticMarketforceswillbeallowedtooperate,failingbusinesseswouldgooutand
successfuloneswouldexpand(nolimitsongrowth)
SaleofnationalisedindustriescanraisefinanceforgovernmentPrivatebusinesseswillhaveaccesstoprivatecapitalmarkets(leadstoincreased
investmentintheeconomy)
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Argumentsagainstprivatisation:
Thestateshouldtakedecisionsaboutessentialindustrieswhicharebasedonsocietysneedsnotjustinterestofshareholders(someunprofitablecompanies
maybekeptopen)
Itismoredifficulttoachievecoordinatedpolicytobenefitthewholecountrywithmanyprivatelyrunbusinesses
Manystrategicindustriescouldoperateasprivatemonopoliesifprivatisedandtheycouldexploitconsumerswithhighprices
Nationalisation
Nationalisationsellingprivatelyownedandcontrolledbusinessorganisationsto
thestateorpublicsectorArgumentsfornationalisation:
Weaknessesoffreemarket(freemarketpricetoouncertainorvolatile)Publicownershipmeetssocial&economicneedsLoss-makingservicesmightstillbeopenedifthesocialbenefitisgreatenough
Argumentsagainstnationalisation:
LackofprofitmotivesmayleadtoinefficiencyOnlyproducewhattheythinkpeopleneed(maynotalwaysbecorrect)Governmentmaymakebusinessdecisionsforpoliticalreasons(e.g.openinga
newbranchinacertainareatogainpopularity)
Public-privatepartnerships(PPP)
PPPgovernmentservicesorbusinessventuresthatarefundedandmanaged
throughapartnershipofgovernmentandoneormoreprivate-sectorcompanies
Governmentfunded:governmentfinancesthebusinessandprivatesectormanagesandcontrols
Privatesectorfunded:ofteninvolvelargesumsofcapitalinvestment(sogovernmentdoesnothavetocollectgreatertaxrevenuetofinancethebusiness).
Statecontrols&managestheservices
1AL.3Sizeofbusiness
Externalgrowth
Businessexpansionachievedbymeansofmergingwithortakingoveranother
businessfromeitherthesameoradifferentindustry
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Mergeranagreementbyshareholdersandmanagersoftwobusinessestobringbothfirmtogetherunderacommonboardofdirectorswithshareholdersinboth
businessesowningsharesinthenewlymergedbusiness
Takeoverwhenacompanybuysover50%ofthesharesofanothercompanyandbecomesthecontrollingownerofit.Alsocalledacquisition
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Advantagesofmerging/integrating:
Twofirmsmaybeabletoshareresearchfacilities&ideasthatwillbenefitbothbusinesses(onlyiffirmsusethesamekindoftechnologies)
Largerfirmsmaybenefitfromeconomiesofscale Thenewbusinesscansaveonmarketing&distributioncostsusingthe
sameoutletsandsalesteams
Disadvantagesofmerging/integrating:
Thefirmmaybecometoobigandfacesdiseconomiesofscale Theremaybelittlemutualbenefitfromsharedfacilitiesormarketing
systemsifthefirmshaveproductsindifferentmarkets
Thebusiness&managementcultureofthefirmsmaybedifferentandconflictscouldoccur(e.g.environmentalissues,CSRandetc.)
1AL.6Externalinfluencesonbusinessactivity
Economicsconstraintsandenablers
Marketfailurewhenmarketsfailtoachievethemostefficientallocationofresourcesandthereisunder-oroverproductionofcertaingoodsorservices(you
shouldalreadyknowthesolutionsforallofthem!)
Macroeconomicobjectivesofgovernments
1. Lowunemploymentworkersintheworkingpopulationarewilling&abletoworkbutareunabletofindajob
Costsofunemployment:
Theeconomycouldproducemoregoods&services,whichwouldthenbeavailableforconsumption
Governmenthastopayunemploymentbenefitsfromthetaxrevenuewhilethemoneycouldbeusedinbetterwaystoimprovethecountry
Seriousunemploymentcouldleadtosocialproblemssuchascrime Unemploymentreducesdemandforgoods&servicesandthiswillreduce
theincomesforthoseworking
Lossofincomeleadstolowerstandardsofliving Unemploymentcausestheskillstobecomeobsolete
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Cyclicalunemploymentresultingfromlowdemandforgoodsandservicesintheeconomyduringaperiodofsloweconomicgrowthorarecession(ADfalls,firms
produceless,lessworkersneeded)
Governmentneedstoavoidsubstantialswingsinthebusinesscycle(stabilise
inflation&exchangeratesothatdomesticandinternationaldemandsdonot
fluctuatemuch)
Structuralunemploymentcausedbythedeclineinimportantindustries,leadingtosignificantjoblossesinonesectorofindustry(changesinconsumertastes
e.g.switchingfromhigh-streetbankingtoonlinebanking,changeinthestructure
ofindustry,improvementintechnologye.g.employersarelookingformulti-
skilledworkers)
GovernmentneedstoprovidetrainingandeducationfortheunskilledworkersNOTtopreventchangesintheeconomy
Frictionalunemploymentresultingfromworkerslosingorleavingjobsandtakingasubstantialperiodoftimetofindalternativeemployment
Governmentcanimprovethelabourmarketbyprovidingmoreinformationabout
jobopportunities(moreemploymentagenciesandreduceunemployment
benefitsforpeoplewhoareslowtofindanewjob)
2. Lowinflationanincreaseintheaveragepricelevelofgoods&serviceswhichresultsinafallinthevalueofmoney
Causesofcost-pushinflation(riseincostofproduction):
Lowerexchangeratepricesofimportsrise Labourcostrises(higherwagedemands) Transportationcostsrise(oilpricesrise)
Demand-pullinflation:
Economicboom Demandrisesandtheeconomyhasnosparecapacitytomeettheincreased
needs
Impactsonbusinessactivity
Benefitsoflowinflation(approx.2%):
Inflationmeansafallofrealmoneyvalue.Thevalueofbusinessliabilitiesordebtswouldfall
Thevalueoffixedassets(buildingandland)couldrise,thisincreasesthevalueofthebusinessonthebalancesheet&makethefirmmorefinanciallysecure
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Sincestocksareboughtinadvanceandthensoldlater,thereisanincreaseinprofitduetoinflation
Drawbacksofhighinflation(5-6%):
Higherwagedemandsfromworkers(addstocosts) Consumersdemandmayfall GovernmentneedstoraiseinterestratestoreduceADandtrytocontrolthe
risinginflation,thiswouldincreasethesizeofdebtabusinesshastopay
Cash-flowproblemsmayoccurbecausebusinesseshavehighercosts Inflationaddsuncertaintyaboutthefuture Ifinflationishigherthanothercountries,thenthecountrywilllossinternational
competitiveness(exchangeratefallsbecausenobodywantstobuytheproducts
andthusthecurrency)
Businessesmaynotofferextendedcreditperiodsbecausemoneyislosingvalue
Businessstrategyduringinflation
CuttingbackoninvestmentspendingCuttingprofitmarginstostayascompetitiveaspossibleReducingborrowing
ReducingtimeperiodfordebtorstopayReducinglabourcosts
Deflationisnotgoodeither!
Demandwouldfallbecauseconsumerswouldthinkthatpriceswillcontinuetofallanddelaymakingpurchases
Businesseswouldnotwanttoborrowbecausetheyarerepayingdebtswiththemoneywithhighervalue,thereforeinvestmentmayfall
Businesseswouldrefusetoholdlotsofstocksbecausetheylosevaluesastimepasses,theywouldreduceordersandthisleadstoalossofnationaloutput
2AL.3Humanresourcemanagement(HRM)
Measuresofemployeeperformance
Labourproductivitytheoutputperworkerinagiventimeperiod(indicatesefficiency)
Totaloutputintimeperiod
Totalstaffemployedatthattime
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Improveby:
IncreasestaffmotivationMoreefficient&reliablecapitalequipment Betterstafftraining Increaseworkerinvolvementinproblemsolvingtospeedupproduction Improveinternalefficiency(e.g.nowaitingforsuppliesofmaterialsto
arrive)
Absenteeismratesmeasurestherateofworkforceabsenceasaproportionoftheemployeetotal
NumberofstaffabsentX100
Totalnumberofstaff
Maybecausedbypoorworkingconditions(leadtoillness,stress,lossofmotivation)
Staffabsenteeismmayleadtopoorcustomerservices.Itisexpensivetoemploy
extrastaffjusttocoverforthestaffawayfromworkortoaskotherstowork
overtime.Firmsneedwell-focusedandmotivatedstafftoavoidtheseextracosts
Labourturnovermeasurestherateatwhichemployeesareleavinganorganisationgoodindicatorofstaffdiscontent
Numberofstaffleavingin1yearX100
Averagenumberofstaffemployed
Othermeasuresofworkforceperformance
Wastagelevels(wastedordamagedproductsasaproportiontototaloutput) Rejectratesorconsumercomplaintsovertotalcustomersserved Dayslostduetostrikeswithinthebusiness
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Improvingemployeeperformance
Regularperformanceappraisalagainstpre-settargetsifconstantlyfailingthendisciplinaryproceduresorfurthertrainingmaybeneeded
Offeringtrainingopportunitiestostretchandchallengeeveryworkermayhelptoincreaseefficiency
Qualitycirclesinvolveeveryoneinsuggestingsolutionstoproblems Teamworkgivecompletesectionofworktoeachteam(improvemotivation) Offeringfinancialincentives
Managementbyobjectives(MBO)
Dividingtheorganisationsoverallaimintospecifictargetsforeachdivision,
departmentandindividual.Targetsaresetduringtheannualappraisalprocesswithworkersagreement
Benefits:
Staffinvolvementisakeyfeatureofjobenrichmentaidsmotivation Allstaffwillknowexactlywhattheyhavetodo,thishelpsthemtoprioritisetheir
timeandworkmoreefficiently
Everyoneisworkingtowardsthesameoverallobjectivesincreasedcoordination Settingtargetsmeansthatmanagersareabletomonitoreveryonesperformance
andmeasuresuccessorfailureProblems:
Settingtargetsforeveryonecanbetime-consuming Objectivescanbeoutdatedveryquicklyfixingtargets&monitoringprogress
againstthemcanbeuselessifthebusinesssenvironmentchanges
Settingtargetsdoesnotguaranteesuccess,theremustbesufficientresourcesandstafftrainingaswell
Co-operationbetweenmanagementandworkforceApproachestolabour-managementrelations:
1. Autocraticmanagementstyleworkersemployedonshort-termcontracts,littlejobsecurity.Ifanyworkersdonotagreewiththeconditions,managerswillsimply
sackthemandreplacewithanotherperson.Leadstolowlabourcosts.BUT:
Nojobsecurity=lessmotivationStaffarenottrainedtobemulti-skilledNoclearobjectivesbetweenlabour&managementNostaffinvolvementorparticipation,nojobenrichment
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2. Collectivebargainingbetweentradeunionsandemployerswhenunionsandnationalemployersnegotiatewagelevelsandworkingconditionsforthewhole
industry.Unionsarepowerfulbecausetheymaycallforstrikeactions,whichbring
theentireindustrytoahalt.DISADVANTAGES:
Nationalagreementsmaynotbeaffordable/suitableforsmallbusinesses Industrialactions(strikes)causedisruptionandlostoutput&salesPowerfulunionsmayresisttochanges,thisleadstolackofinvestmentand
developmentofkeyindustries(adverselyaffectsunionmembers)
Lessnegotiation&confrontationleadstoincreasecompetitiveness3. Cooperationbetweenlabourandmanagement
InvolvingworkersinimportantdecisionsandissuesLessconfrontation,fewerstrikesandmorecooperationBasedonmutualrespect,understandandcommonaimsLeadstoacompetitive,efficientandproductivebusinessMaycostmoreorbetime-consumingbutgoodforlong-termsuccess
Tradeunions
Anorganisationofworkingpeoplewiththeobjectiveofimprovingthepayand
workingconditionsoftheirmembersandprovidingthemwithsupportandlegal
servicesReasonsforjoiningatradeunion:
1. Strongerpositionforworkersincollectivebargainingandnegotiationsthantheyareiftheynegotiatedindividuallybecausetradeunionsrepresentalltheir
membersinabusiness
2. Individualindustrialaction(oneworkergoingonstrike)isnotveryeffective3. Providelegalsupporttoemployeeswhoclaimunfairdismissalorpoorconditions
ofwork
4. Unionsensurethatalllegalrequirementsaremet(health&safetyrules,etc.)
Negotiation
1. Nationalbargainingtradeunionleadersdiscussoverpayandworkingconditionsatanationallevelwithemployersassociations.Agreementswould
thenbeappliedinallbusinessesintheassociation.However,theseagreements
maynotreflecttheneedofallbusinessesbecauseoftheirdifferentcost
structuresandprofitmargins
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2. BusinessbargainingWhenafirmnegotiateswithunionofficialstoestablishpayandconditionsforallthebranchesofthebusinessinthatcountry.Dealsmaynot
reflecttheproblemonefactoryhasinrecruitingstaff
3. Plantbargainingeachfactoryagreesadealbetweenunionofficialsandlocalmanagement.Thisismorecustomisedforeachfactoryandavoidsallthe
problemsabove
Single-unionagreement
Anemployerrecognisesjustoneunionforpurposesofcollectivebargaining
Whenworkforceinabusinessaremembersofdifferentunions:Collectivebargainingmoredifficultandtime-consuming
Inter-uniondisputesoverwhichgradesofworkersshouldgetthehighestpayrise
Alsoreducesflexibilityofaworkforceifmembersofoneunionarepreventedfromdoingtheworkofotherworkersbelongingtoanother
unionandreducesproductivity
Problemssolvedwhenemployerssignrecognitiondealswithjustoneunion
Conciliation
Theuseofathirdpartyinindustrialdisputestoencouragebothemployeranduniontodiscussanacceptablecompromisesolution(athirdpartywilllistentobothsides
andhelpthemtocometoacompromiseagreement)
Arbitration
Resolvinganindustrialdisputebyusinganindependentthirdpartytojudgeand
recommendanappropriatesolution(makedecisionforthem)
2AL.4OrganisationstructureOrganisationalstructureTheinternal,formalstructureofabusinessthatshowsthewayinwhichmanagementisorganizedandlinkedtogetherandhowauthorityis
passedthroughtheorganization
Itindicatesformalrelationshipbetweendifferentpeopleanddepartments Itshowsthechainofcommand(thewayinwhichauthorityispasseddownthe
business)
Itshowsthespanofcontrol(numberofsubordinatesreportingtoeachmanager)
Helpsindividualstoseetheirpositioninanorganisation Allowsstafftobeawareoftheirresponsibilities
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Seewhohasauthorityoverthem,andtowhomtheyareaccountableforHierarchicalstructure
Theorderofmanagementinanorganisationlowesttohighestshowingchainof
commandandthewayauthorityisorganised/distributedlevelsofaccountability
Advantages:
RolesandrelationshipsmadeclearAccountabilitiesandcontrolsareestablishedInformationandcommunicationchannelsareestablishedAuthorityandresponsibilitylevelsestablishedLinemanagementauthoritymadeclearVeryappropriateforsomeorganisations(e.g.Army)withmanylevelsandnarrowspansofcontrolSupportiveofbureaucraticorganisationsrequiringdetailedcontrol
Disadvantages:
One-waycommunication(notefficient)Fewlinksbetweendepartments(mayleadtolackorcoordination)Inflexible(changeresistance)becauseallmanagersaretryingtodefend
theirownpositioninthehierarchyandtheimportanceoftheirown
department
Matrixstructure
Anorganizationalstructurethatcreatesprojectteamsthatcutacrosstraditional
functionaldepartments-anemphasisawayfromfunctionstowardsprojectsortasks;
reducelayersinhierarchy;combinelinedepartmentswithprojecttaskteams
Advantages:
EncouragesteamapproachStaffareassignedbyabilityandskill,notrankorpositionAllowstotalcommunicationbetweenallmembersoftheteamand
traditionaldepartmentalbarriersbrokendown
MorevariedworkGreatermotivationforstaffingmulti-disciplinaryteamsReducesbureaucracyandcontrolStafffocusonwhatisgoodforthebusinessasawholenotjustonlyfor
theirdepartment
Allowpeopletoshareideasandfindthebestsolution
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Disadvantages:
LessdirectcontrolfromtheseniormanagersSeniormanagersmaynotwanttoworkwithmorejuniorstaff
Cancauseconflictswithinteams
Levelofhierarchyastageoftheorganisationalstructureatwhichthepersonnelonithaveequalstatusandauthority
Chainofcommandtheroutethroughwhichauthorityandpower,andinformationarepasseddownabusinesstheflowofauthority,power,and
information
SpanofcontrolThenumberofstaffthatamanagerhasauthorityoverorthenumberofpeopledirectlyunderthecontrolofamanager.
WideSpanofcontrol:
Greaterdelegationrequiredsomoreresponsibilityforsubordinatesandlesscentralcontrol
Therearelesslayersofmanagementtopassamessagethrough,sothemessagereachesmoreemployeesfaster
Itcostslessmoneytorunawiderspanofcontrolbecauseabusinessdoesnotneedtoemployasmanymanagers
Communication+coordinationproblems(morepeopleundercontrolsomorecomplex)
Limitedopportunityofcloseconsultationwithstaff(cancausedemotivation)
Increasedstress+workloadformanagers/supervisorsNarrowSpanofControl
Anarrowspanofcontrolallowsamanagertocommunicatequicklywiththeemployeesunderthemandcontrolthemmoreeasily
FeedbackofideasfromtheworkerswillbemoreeffectiveItrequiresahigherlevelofmanagementskilltocontrolagreaternumberof
employees,sothereislessmanagementskillrequired
DelegationpassingonauthoritydowntheorganisationalhierarchyAdvantages:
SeniormanagerscanfocusmoreonmoreimportantrolesShowstrustinsubordinatesandincreasemotivationlevelDevelopsandtrainsstaffformoreseniorpositionsHelpsstafftoachievefulfilmentthroughtheirwork(self-actualisation)
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Disadvantages:
Delegationwouldbeunsuccessfuliftaskisnotwelldefinedorifinadequatetrainingisgiven
Delegationwouldbeunsuccessfulifinsufficientauthorityisgiventosubordinate
Staffwillbedemotivatedifmanagersonlydelegateboringtaskstothem
Centralisationkeepingalloftheimportantdecision-makingpowerswithintheheadofficeorthecentreoftheorganisation
Advantages:
Rapiddecision-making(nodiscussion)Samepoliciesthroughoutthebusinessreduceconflict&confusionSeniormanagerstakedecisionsintheinterestofthewholebusinessnotjustonedivisionofit
Centralbuyingallowsgreatereconomiesofscale
Decentralisationdecision-makingpowersarepasseddowntheorganisationtoempowersubordinatesandregional/productmanagers
Advantages:
MorelocaldecisionscanbemadethatreflectdifferentconditionsMorejuniormanagerscandevelopandprepareformorechallengingrolesDelegation&empowermentcanleadtomotivationDecisionmakinginresponsetochangesshouldbequickerasheadoffice
willnothavetobeinvolvedeverytime
Factorsinfluencingtheorganisationalstructure
1. Sizeofthebusinessthebiggerthemoreformal&complicatedthestructurewillbe.Clearrelationshipsandpositionsneedtobemadeinlargefirms
2. Styleofmanagement3. Theneedtoreducecostse.g.duringrecessionafirmmightconsiderdelayering
toreducelevelsofhierarchyandoverheadsleadstoshorterchainofcommand
4. NewtechnologiesITcanreplacecertaintypesofemployeeLineandstaffrelationships
Linemanagersmanagerswhohavedirectauthorityoverpeople,decisionsand
resourceswithinthehierarchyofanorganisation.Theyhaveresponsibilityfor
achievingspecificbusinessobjectives
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Staffmanagersmanagerswho,asspecialists,providesupport,informationand
assistancetolinemanagers(specialistsemployedtogiveadvicetoseniorline
managers)canbeeconomists,scientificexpertsormarketresearchers.They
performsupportingrolesbutdonottakedecisions
Somelinemanagersmightresentexpertscomingintotheorganisationand,asthey
seeit,tellingthemhowtodotheirjobs
2AL.5Businesscommunication
Purposesofeffectivecommunication
Effectivecommunicationcanleadtosolutionstoproblems(ifallstaffareinvolvedandaskedfortheirideas)
Leadstofasterdecisionmakingandfasterresponsetomarketchanges Reducesrisksorerrorincorrectunderstandingscanleadtoincorrectresponses Effectivecommunicationwouldleadtocoordinationofdepartments,motivated
staff,goodcustomerserviceandasenseofoveralldirectionofthebusiness
Methodsofcommunication
Electronicmediatheprocessofsendinginformationfromsendertoreceiver
throughtheinternet(plusfeedback)
Strengths:
Accuracyoforderse.g.automaticorderingsystemsviacomputerlinksReducedstocklevelsJITbasedITsystemsQuickere.g.thanarrangingmeetingsLesstime-consumingthanfacetofacecontactEncouragesresponseWeaknesses:
CapitalcostonhardwareStafftrainingrequiredRiskofcommunicationoverloade.g.toomanye-mailsRequiressuppliers/customerstohavecompatiblesystemsDiminishespersonalcontact
Oralcommunicationcanbeone-to-oneconversations,interviews,groupmeetings
orteambriefings
Strengths:Directandallowsfeedback
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CanbevariedtosuitneedsofreceiverEasytounderstandCanbequestionedquicklyWeaknesses:
NeedtolistencarefullyAffectedbynoiseNopermanentaccuraterecordCanbequicklyforgotten
Writtencommunicationletters,memos,noticesonboards,reports
Strengths:
PermanentrecordavailableMorestructuredEasytodistributeCannotbevariedCanbereferredtoagainWeaknesses:
MessageidenticaltoeachreceiverNobodylanguageshownFeedbackisslowerNoimmediateresponseCanbemisinterpretedTime-consuming
Factorsinfluencingchoiceofmedia
1. Importanceofthemessage(mayneedpermanentrecordsifimportant)2. Cost(electronicmedianeedsexpensivecapitalresources)3. Speed4. Quantityofdatatobecommunicated(oralwouldbeinappropriateforlongand
detailedmessages)
5. Sizeandgeographicalspreadofthebusiness(regularmeetingsmaybeimpossibleformultinationals)
Barrierstocommunicationreasonswhycommunicationfails
1. Inappropriatemediaused2. Receiverforgot
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3. Misleadingorincompletemessage4. Jargons&languagethatcanbehardtounderstand5. Informationoverload6. Channelofcommunicationistoolong(theroutethroughwhichamessageissent
fromsendertoreceiver)
7. Senderisnottrusted8. Unmotivatedworkers=poorreceivers9. Poorsender(notensuretheclarityofthemessageorunderstanding)10.Noiseinthefactories
InformalcommunicationUnofficialchannelsofcommunicationthatexist
betweeninformalgroupswithinanorganisation
3AL.4Marketingplanning
Marketingplan
Adetailedreportofafirmsmarketingobjectives,budgetandmarketingstrategy
Contents:
Purposeandmissionprovidesinformationandpurposeoftheplan(e.g.toprepareforthelaunchofnewproductornewbusinessproposal)
Situationalanalysiswherearewenow?(Currentstrengths,existingproductrangeandmarketshares,existingandpotentialcompetitors,consumertastes,
externalproblemsandopportunities)Requiredalotofresearch&time-
consumingbutessential.Ifnottaken,businesscouldaimtoreachinappropriate
objectiveswhichwouldbeevenmoreharmfultoit
Marketingobjectiveswheredowewanttobe?Canbeexpressedintermsoftotalsales(valueorvolume),marketshare,profitabilityorsalesgrowthrate.
Givessenseofdirectionandcanbebrokentospecifictargets.Allowsfinalreview
ofmarketingstrategytobecomparedagainsttargets
Marketingstrategyhowthefirmintendstoachieveitsobjectives?Overallapproach:massornichemarket?existingornewmarket?developanew
product?Oncedetermined,tacticscanbeestablished
MarketingmixtacticsProduct:briefsummaryofexistingproducts,outlineofkeyfeatures,USP,
branding,packagingandlabellingdetails
Price:factorsaffectingcosts,PED,competitorsprice,marketconditions
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Promotion:howtheproductwillbepromoted?Advertising,salespromotion,PRandpersonalselling.Thescaleandtypearedependenton
theimagebeingcreated,pricebeingcharged,budgetavailable
Placeordistribution:gettingtheproducttoconsumers.Coversthedetailsofchanneltobeused,outletsorretailers
MarketingbudgetFinanceavailableforpromotionalexpenditureplanningonexpectedexpenditure&revenue(howtospendeffectively?)
Summaryandtimescalegivesashortsummaryoftheplanandthetimescaleoverwhichitwillbeintroduced
Reviewingtheplan
Howsuccessfulwasit?Resultsneedtoberegularlycheckedagainstobjectivesduring
theprocess.Ifstrategiesarenotworking,thenchangestooverallplancouldbe
made.Finalresultscanbeusedtoaidfutureplan
Evaluation
Benefits:
Potentialentrepreneursneedtoconvincefinancialinvestorsthattheproposalispotentiallyprofitablemorechancesofreceivingfinancialsupport
Reducerisksoffailurehelpsestablishstrategiesandmarketingmix Providesdirectionandpurposeforthebusiness,progresscanbemonitored Moreaccuratebudgetcouldbeallocated
Limitations:
Complex Costlyandtime-consuming Requiredskills Planscouldgooutofdateandbeuseless(externalenvironmentchanges)
Promotionalcampaigns
AIDAamodelthatexplainsthesuccessivestagesacustomerpassesthroughin
buyingaproduct:AttentionInterestDesireAction
DAGMARaprocessofestablishinggoalsforapromotioncampaignsothatitis
possibletodeterminewhetherithasbeensuccessfulornot:DefiningAdvertising
GoalsforMeasuredAdvertisingResults(passcustomersthroughthestages:Unaware
AwareComprehensionConviction(belief)Action)
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Importanceofcoordinatedmarketingmix
1. Integratingwithotherdepartmentsfinance(toobtainessentialresources),humanresources(toobtainadequatestaffing),operations(todiscussaboutthe
productanditsadaptations)2. Thefourelementsofthemarketingmixmustbeintegratedwitheachother
Productdevelopment
Newproductdevelopment(NPD)thedesign,creationandmarketingofnewgoods
andservices
Theprocess:
1. Generatingnewideas CancomefromcompanysownR&Ddepartment Adaptationofcompetitorsideasneedtobecarefulnottoviolate
copyright/patentlaws
Marketresearch,suchasfocusgroupsdiscussionaboutnewproductsthatconsumerswouldliketoseeonthemarket
Employeesworkersknowalotaboutexistingproducts Salespeopletheyhaveclosecontactwiththefinalconsumers,theymay
suggestimprovementsornewproducts
Brainstormingingroupsgeneratenewideasbeyondthelevelthatwouldbeachievedbyindividualsworkingseparately
2. Ideascreening Ideaswiththeleastchanceofsuccessareeliminated Questionsthatneedtobeconsidered:Howwillconsumersbenefitfrom
thisproduct?
Isittechnicallypossibletomanufacturethisproduct?
Willtheproductbeprofitableenoughatthesellingprice?3. Conceptdevelopmentandtesting
Whoarethemostlikelyconsumers? Whatfeaturesshouldtheproducthave? Howwillconsumersreacttoit?(Canbetestedbysurveys&market
research)
Whatarethemostcost-effectivemethodsofmanufacture? Whatwillitcosttoproduce?
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4. Businessanalysis Whatarethelikelyimpactonsales,costsandprofits? Isfinanceavailabletodeveloptheproduct? Willitfitwiththeexistingproductmix?
5. Producttesting Developingamodeloftheproduct Testingtheproductintypicaluseconditions Usingfocusgroupstogatheropinionsabouttheproduct Adaptingtheproductasrequiredaftertestingorfocusgroupfeedback
6. Testmarketingthelaunchoftheproductonasmall-scalemarkettotestconsumersreactionstoit
Actualconsumerbehaviourcanbeobservedandmeasured Feedbackfromcustomerswillhelpdecisionwhetherthefirmshouldinvest
inafull-scalelaunchornot
Risksofproductfailingarereduced Anyweaknessesintheproductidentifiedbyconsumerfeedbackcouldbe
usedtoadjustandimprovethefinalversionoftheproduct
Testmarketingcanbeexpensive Competitorscanobserveafirmsintentionandreactbeforeafull-scale
launchisputintoeffect
7. Commercialisation Afull-scalelaunchoftheproduct(introductionphaseoftheproductlife
cycle)
Promotionalstrategy&advertisementstoinformthemarketofthearrivalwillbeputintoplace
Distributionchannelwillbefilledupwithstockstoensuretheavailabilityoftheproduct
Researchanddevelopment
Thescientificresearchandtechnicaldevelopmentofnewproductsandprocess.R&D
canleadtoproductinnovation,whichallowsthebusinesstochargepremiumprices
andearnhigherprofits.
FactorsinfluencingthelevelofR&Dexpenditure:
ThenatureoftheindustryrapidlychangingtechnologiesinthemarketwouldrequirehigherinvestmentintoR&D
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R&Dspendingplansofcompetitorsitmaybeessentialtospendasmuchasormorethancompetitorstomaintainmarketshareandtechnicalleadership
Businessexpectationsifthefirmisoptimisticaboutfuturedemandsandeconomicgrowth,thenitismoreabletoagreetosubstantialbudgetsforR&D
Cultureofthebusinesssomebusinessviewshort-termprofitasaverycrucialissue.ThiswouldpreventlargespendingonR&D
GovernmentpolicygrantsandtaxreductiontobusinesseswouldencouragemoreinvestmentintoR&D
R&Ddonotguaranteesuccess,newideascanfailtoreachthemarketbecause:
Defectsindesignsormanufacture Competitorsproductsrisingahead Inadequatemarketresearchandinappropriatepricing Changesintechnologyleavingtheproductoutdated
Regardlessoftheserisks,manyfirmsstillcontinuetoinvestinR&D.Theybelievethat
theywouldbenefitfromthelong-termsuccessandprofitabilitythatR&Dwouldlead
themto
Salesforecasting
Predictingfuturesaleslevelsandsalestrends
Helpsreducerisksofbusinessoperations Thefirmwouldknowhowmanymaterialstoorder(aidsstockcontrol) Marketingdepartmentknowshowmanyproductstodistribute Moreaccurateworkforceplan(correctlevelofstaffing) Cashflowsandotherforecastswouldalsobemoreaccurate(financedepartment
couldplanmoreaccurately)
Movingaveragemethod
Factorsthatmayinfluencefuturesales:
Trendbasicmovement(pattern)inatimeseries Seasonalfluctuationsregular&repeatedvariationsthatoccurinsalesdata
withina12monthsperiod
Cyclicalfluctuationsvariationsinsalesoccurduetothebusinesscycle Randomfluctuationsoccuratanytime&willcauseunpredictablesalesfigures
(e.g.poorweather,negativepublicimage,productfailure)
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Example
Description:
Four-quartermovingtotal:4salesrevenuesaddedtogether Eight-quartermovingtotal:two4four-quartermovingtotalsaddedtogether Movingaverage:eight-quartermovingtotaldividedby8 Seasonalvariation:actualsalerevenuemovingaverage Averageseasonalvariation:seasonalvariationsforeachquarteraddedtogether
anddividebynumberofresults
Forecastingsales
1. Plotthemovingaveragesonatime-seriesgraph2. Extrapolateintothefuture3. Readofftheforecasttrendresultfromgraph4. Adjustbytheaverageseasonalvariationforthatparticulartimeperiod
Evaluation
Advantages:
Usefulforapplyingseasonalvariationtopredictions Canbeaccurateforshort-term
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Identifiesaverageseasonalvariationsforeachtimeperiod(aidsfutureaccuracy) Usefulforoperationsmanagement&marketingdecisions(ifsalesareforecasted
tobefalling,pricecouldbelowered)
Disadvantages:
Complexcalculation Onlyusefulifexternalenvironmentdonotchange(inrealitythingschange) Forecastingintolongertermrequiresqualitativemethodsthatarelessdependent
onpastresultsaswell(e.g.marketresearch)
3AL.5Globalisationandinternationalmarketing
Globalisationthegrowingtrendtowardsworldwidemarketsinproducts,capital
andlabour,unrestrictedbybarriers
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Internationalmarketing
Internationalmarketingsellingproductsinmarketsotherthantheoriginal
domesticmarket
Whyinternational? Saturatedhomemarketstoomuchcompetitionwithlargefirms Profitssalesgrowthandlowercostsofoperation Spreadingriskssalesandprofitsorthebusinessarelessdependentoneconomic
&legalconstraintsinhomecountry
Legaldifferencesothercountriesmayhavefewerrestrictions(e.g.advertising)
Differences:
Politicalchangesingovernmentcancauseinstabilityinsomecountries,thismayleadtorisksofterrorisme.g.Thailandprotests.Mayleadtodestructionof
companysassets
Economic&socialagestructure,roleofwomen,taxandinterestrates(sobusinessneedstoselltherightproducts&usetherightstrategies)
Legalbannedgoodsinsomecountry,advertisingrestrictions,safety Culturalpeoplesbehaviour,language,perception Differentbusinesspracticesformalitiesofsettingupabusinesscanvaryfrom
countrytocountry
Methodsofentry
Exportingcanbesellingdirectlytoaforeigncustomer(onlinewebsite),orthroughexportintermediary(agentortradingcompanybasedinthecountry)
Internationalfranchisingcanbeonecompanyinchargedofallbranchesinthecountryorindividualfranchiseesoperateeachoutlet
JointventuresLicensingallowinganotherfirmtoproduceditsbrandedgoodsorpatented
productsunderlicence.Goodsdonothavetobeexported,savestime&
transportcost.Butqualitymustbeensured,anyunethicalpracticebythelicensee
maycreatenegativeimpactontheparentfirm
Directinvestmentinsubsidiariessettingupfactoriesinforeigncountry.Canbedecentralised(localmanagersincharged),orcentralised(controlfromthehead
officeinthehomecountry)
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Pan-globalmarketing
Adoptingastandardisedproductacrosstheglobeasiftheentireworldwereasingle
marketsellingthesamegoodsinthesamewayeverywhereAdvantages:
Relativelylowcost(EOS)useonemarketingstrategy&mix Acommonidentityfortheproductcanbeestablished.Thisaidsconsumer
recognition
Disadvantages:
Sometimesfirmsneedtoadapttosuitvariousculture&religion(orelsepeoplewontbuyit)
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Legalrestrictionscanvaryadvertisingstrategymayneedtobedifferentorthesameproductmaybelegalinonecountryandillegalinanother
Settingthesamepriceinallcountrieswillnotreflectthedifferentaverageincomelevelsindifferentcountries
Theremaybelocaloppositiontomultinationalbusinessactivity
Globallocalisation
Adaptingthemarketingmix,includingdifferentiatedproducts,tomeetnationaland
regionaltastesandcultures
Advantages:
Localneeds,tastesandculturesarereflectedinthemarketingmixofthebusinessthiscouldleadtohighersales
Thereisnoattempttoimposeforeignbrandsorproductsadvertisementsonregionalmarkets
Theproductsaremorelikelytomeetlocalnationallegalrequirementsthaniftheyarestandardisedproducts
Therewillbelesslocaloppositiontomultinationalbusinessactivity
Disadvantages:
ThescopeforEOSisreduced Thebrandcouldloseitspower&identityifdifferentiateproductstoadapt Additionalcostsofadapting(e.g.adverts,storelayouts)tospecificlocalneeds
4AL.2Operationsplanning
Enterpriseresourceplanning
Theuseofasinglecomputerapplicationtoplanthepurchaseanduseofresourcesin
anorganisationtoimprovetheefficiencyofoperations
Coordinate&linktogetherallsystemsofabusinessstockcontrolandordering,invoicingtocustomers,humanresourceplanning,production
planningandsoon
E.g.acustomerordersaproductTheorderisrecordedontheERPsystem,whichupdatesthestockThenareplacementisorderedfromthemanufacturerThecustomerissentaninvoiceWhenpaymentismadetheaccountingrecordsareupdated
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BenefitsofERPsoftware
Supplyonlyaccordingtodemandleanproduction(avoidwaste) Just-in-timeorderingofstocks Reducescostsatallstagesofsupplychainmaterials&productsare
electronicallytracked
Improveddeliverytimesandbettercustomerservice(computerisedsystemworksfasterthanlabourforcedoes)
Alldepartmentsarelinkedbettercoordinationandlesswastage Datafromalldepartmentsandallstagesofproductionwillbeavailableto
managementviathecomputersystemmayhelpfuturedecisionmaking
LimitationsofERPsoftware
Highcostsofinstallation(advancedtechnologyisexpensive) Differentdepartmentsnowneedtoworkinonecommonsystemmaynotbe
suitableforsomemanagers/workers
ImplementationofERPcantakemanyyears,chosensoftwarecanbecomeobsoletebythetimeinstalledorcompetitorscouldcomeupwithabetterand
moreadvancedsystemalready
4AL.4CapacityutilisationCapacityutilisationtheproportionofmaximumoutputcapacitycurrentlybeing
achieved(measureoperationalefficiency)
CurrentoutputlevelX100
Maximumoutputlevel
Excesscapacityhassparecapacity
Rationalisationreducingcapacitybycuttingoverheadstoincreaseefficiencyof
operations,suchasclosingafactoryorofficedepartment,ofteninvolveredundancies
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Fullcapacityproducingatmaximumoutput
Benefits:
Lowersfixedcostsperunit(spreadamonglargenumberofunits) Increasescompetitivenessasaresultthisisacompetitivemarket Givesstaffjobsecurity&prideinthefirmtheyworkfor Cutsdownonwastedtime/resources
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Drawbacks:
Littletimeformaintenance/repairs Thismayleadtobreakdownofmachinery Worsenshealthandsafetyrecord Putspressureonstaff/managers(stress&workoverload) Notabletomeetincreasedorderse.g.fromestablishedcustomers
Outsourcing
Usinganotherbusinesstoundertakeapartoftheproductionprocessratherthan
doingitwithinthebusinessusingthefirmsownemployees
Advantages:
Reductionofoperatingcostsspecialistfirmsarecheaperbecausetheybenefitfromeconomiesofscale)
Increasedflexibilitycontractscanbeendedwhendemandfall Improvedcompanyfocusthebusinesscanconcentrateonitsmainaims&tasks
andoutsourceotherfunctions
Accesstoqualityserviceorresourcesthatarenotavailableinternally Freed-upinternalresourcesforuseinotherareas
Disadvantages:
Lossofjobswithinthebusinessreducestaffmotivation&jobsecurity
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Qualityissuesdifficulttomonitoronquality Customerresistancecreatesdoubtsandconsumersmayquestionthequality&
reliability
Securityrisksofimportantdataofthebusinessbeinglostwhenoutsidebusinessesinvolve
Evaluation
Outsourcingmayhelptoimproveefficiencyandthismayleadtoincreased
opportunityforbusinesses.However,therearerisksinvolved.Thecompanyshould
weighupthecostsandbenefitsbeforethedecision.Itislessriskytooutsourcethe
minorsectionsofthebusinessandfocusonthecoreactivityitself
4AL.5LeanproductionandqualitymanagementLeanproduction
Philosophyofoperationsthataimstominimisewasteofallresourceswhile
maintainingquality:
Involvesqualitycircles,efficientuseofcapacity&JIT(producequalityoutputwithfewerresources)
Gettingrightthefirsttime Cuttingoutanythingthataddscomplexity,costandtime,anddoesnotadd
valuetocustomer
Flexiblespecialismsflexibleemploymentcontracts/machinery/multi-skilledworkers.Adaptableforchanges,reducestockholdingcost,cutwastetime
Simultaneousengineeringdifferentstagesofproductdevelopmentaredoneatthesametimeinsteadofinsequence(reducetime)
Cellproductionsplittingflowproductionintogroupsthatareresponsibleforwholeworkunits(motivation=faster&betterqualitywork)
Advantages:
Reducedwastetime&resourcesReducedunitcosts=higherprofitsWorkingareaislesscrowdedandeasiertooperateinLessstockshold=lessrisksofdamageandobsolescenceNewproductslaunchedmorequickly
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Just-in-time
Apartofleanproduction,involvesfewerresourcesbeingtiedupinbufferstocks
(notesinASrevision)
Kaizencontinuousimprovement1. Aseriesofsmallimprovementcanleadtobigimprovementinefficiencyovertime2. Involvingallstaffsometimesworkersknowbestabouthowproductioncouldbe
improvedbecausetheyhavealotofexperiencewiththetaskstheyaredoing
3. Teamworkingdiscussingideastoimprovequalityorsolveproblems4. EmpowermentbygivingeachKaizengrouppowertotakedecisions,ideascan
beputintopracticefasterandworkerswouldbemoremotivated
5.Improvementsinonepartoftheproductionsystemrequiresimprovementsfurtherdownthelineaswelltoavoidbottleneckandincreasedworkinprogress
LimitationsofKaizen
Somechangescannotbeintroducedgraduallyandmayneedacomplete&expensivesolution(e.g.completenewinvestmentinthebusiness)
Theremayberesistancefromseniormanagerstoinvolveallsubordinates Maybecoststothefirmofsuchscheme(e.g.training,meetingtime) Diminishingreturnsbigimprovementstendtobemadeonlyinthebeginningof
thescheme,thenlesssignificantchangesaremadelateron
SuitabilityofJITandleanproduction
Advanced&flexiblestaffandequipmentrequiredforleanproduction.Sothattheycanadapttodifferentproductsquickly,notbuildingpilesofstocks.BUT
training&equipmentareexpensive,maynotbesuitableforsmallbusinesses
Cooperationofallstaffneededbecausechangesinworkingconditions,levelofempowerment,cultureandetc.willtakeplace.Workersneedtoacceptandobey
Notsuitable:
Whenbusinesscannotforecastdemandzerostocks,whatifdemandrisesunexpectedly?
Whenproductionprocessesareexpensivetostartafterabreakdown(keepinglowlevelofstockscanleadtoproductionbreakdown)
Whenfirmsuseittocreateredundancies(leanproductioncanresultinjoblosses).Nosupportfromexistingworkforce
Whencostsoftechnologyandretrainingaresohighandunaffordable
Whensuppliersarenotreliable
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Qualitycontrolandassurance
Qualityproductagoodorservicethatmeetscustomersexpectationsandis
thereforefitforpurpose.Itisnotnecessarilymadeofhighestqualitymaterialsbut
mustmeetconsumerrequirementsforit.Qualitydependsontheproductspriceandtheexpectationsofconsumers
Qualitystandardstheexpectationsofcustomersexpressedintermsofthe
minimumacceptableproductionorservicestandards.Firmsestablishthequality
standardsthatcustomersexpectbyusingmarketresearchandconsumerfeedback
data
Advantagesofproducingqualityproducts
1. Gaincustomerloyalty2. Savesthecostsassociatedwithcustomercomplaints(replacementetc.)3. Longproductlifecycles4. Establishesaqualityimageforthebrandlessadvertisingmaybeneeded5. Possibletochargehigherpriceforqualityproductshigherprofits
Qualitycontrol
Inspectionofcompletedproduct
1. Whenrawmaterialsarereceivedbeforeproduction2. Whilstproductsaregoingthroughproductionprocess3. Whentheproductsarefinished
Includesinspection,testingtheproducts,andrandomsampling.Itismorelike
identifyingthedefectsratherthanpreventinginthefirstplace
Weaknessesofqualitycontrol
Lookingforproblemsisanegativeprocess.Workersmayfeelthattheyarenottrustedandtheworkingrelationshipinthebusinesswillnotbegood
Thejobofinspectioncanbetedious,inspectorscanbecomedemotivatedandmaynotcarryouttheirtasksefficiently
Checkingcanbedonetoolateintheproductionprocess;faultyproductsmaypassthroughseveralstagesbeforebeingnoticed.Alotoftimeneedstobespent
findingthesourceofthefault
Workerswillnotseequalityastheirresponsibilitybecausetheyknowthattherewillbeinspectorscheckingonthequalityanyway.Thislackofresponsibilitycan
leadtodemotivationandlower-qualityoutput
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Qualityassurance
Asystemofagreeingandmeetingqualitystandardsateachstageofproductionto
ensureconsumersatisfaction.Qualityassurance:
Focusesonpreventionofpoorqualitybydesigningtheappropriateproductionprocess,ratherthaninspectingforpoorqualityproductsattheend
Emphasisesontheneedforworkerstogetitrightthefirsttimetoavoidexpensivereworkingoffaultygoods
Establishesqualitystandardsandtargetsforeachstageoftheproductionprocess
Checkscomponents,materialsandproductsateverystageoftheproductionprocess,notonlyattheendwhenmuchtimeandresourcescouldhavebeen
wastedalreadybythattimeAdvantagesoverqualitycontrol
1. Everyoneisresponsibleforqualityleadstojobenrichment2. Makingeffortstoimprovequalityincreasemotivation3. Easiertotracebackqualityproblemstothestageofproductionprocesswherea
problemmighthavebeenoccurring
4. ReducestheneedforexpensivefinalinspectionandcorrectionoffaultyproductsImportanceofqualityassurance
Involvesallstaff&promoteteamwork=increasedmotivation Allmaterialsarecheckedagainstsettargetsbeforeitistoolateandthewhole
producthasbeencompleted
Reducescostsoffinalinspection(alreadycheckedateachstage) Improvedquality=reducedcostsofwastage&faultyproducts Gainaccreditationforqualityawardandgoodpublicimageofthecompany
TotalQualityManagementAnapproachtoqualitythataimstoinvolveallemployeesinthequality-improvement
process
Everydepartmentisrequiredtomeetthestandardsexpectedbyitsinternalcustomers(peoplewithintheorganisationwhodependuponthequalityof
workbeingdonebyothers)
Tobeeffective,theconceptmustbefullyexplainedandtrainingmustbegiventoallstaff
Staffmustcheckthequalityoftheirworkbeforepassingontothenextstage
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Benchmarking
Itinvolvesmanagementidentifyingthebestfirmsintheindustryandthencomparing
theperformancestandardsincludingqualityofthesebusinesseswiththoseof
theirownbusiness.Process:
1. Identifytheaspectsofthebusinesstobebenchmarked(whatisthoughttobethemostimportantfactors,e.g.speedofdelivery)
2. Measureperformanceintheseareas(e.g.deliveryrecords&customercomplaints)
3. Identifythefirmsintheindustrythatareconsideredtobethebest4. Usecomparativedatafromthebestfirmstoestablishthemainweaknessesinthe
business(maybeobtainedbypublishedaccounts,contactwith
suppliers/customers)
5. Setstandardsforimprovement6. Changeprocessestoachievethestandardsset7. Re-measurementitisacontinuousprocesstoachievethelong-term
improvementsinproductivity&quality
Benefits:
Faster&cheaperwayofsolvingproblemswhenhavecomparisons Mostimportantareastocustomerscanbeidentifiedandimproved HelpsincreasefirmsinternationalcompetitivenessLimitations:
Therelevantandupdateddatafromotherfirmscanbedifficulttoobtain
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Copyingtheideasandpracticesofotherfirmsmaydiscourageinitiative&originalideas
Thecostsofthecomparisonexercisemaynotberecoveredbytheimprovementsobtainedfrombenchmarking
4AL.6Projectmanagement
Projectaspecificandtemporaryactivitywithastartingandendingdate,clear
goals,definedresponsibilitiesandabudget(e.g.installingmachinery,buildinga
factory,settingupanewITsystem)
Projectmanagementusingmodernmanagementtechniquestocarryoutand
completeaprojectfromstarttofinishinordertoachievepre-settargetsofquality,
timeandcost
Keyelementsofprojectmanagement
SettingclearobjectivesDividingtheprojectupintomanageabletasksMonitoringthetimeoftheprojectateverystageGivingeachstaffaclearroleProvidingcontrolsoverqualityissues
Causesofprojectfailure
CustomerswerenotinvolvedintheplanningprocessNoornotenoughresourcesvitalforitscompletionSeniormanagementdidnotgiveinterestingivingassistancetotheprojectDetails&instructionskeepchangingduringthecourseoftheprojectPlanningwaspoorProjectsscopebecameoutdatedduetochangeinbusinessenvironmentTheprojectteamwastechnicallyincompetent
Resultsoffailure
BadpublicityintheindustryPenaltypaymentshavingtobepaidLossoffuturecontracts
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Criticalpathanalysis
CPAAplanningtechniquethatidentifiesalltasksinaproject,putstheminthe
correctsequenceandallowsfortheidentificationofthecriticalpath
CPAprocess1. Identifytheobjectiveoftheproject2. Putthetasksinorderanddrawanetworkdiagram3. Addthedurationsofeachactivities4. Identifythecriticalpath5. Usenetworkasatoolduringtheproject
NetworkdiagramthediagramusedinCPAthatshowslogicalsequenceofactivitiesandthelogicaldependenciesbetweenthemandthecriticalpathcanbeidentified
Criticalpaththesequenceofactivitiesthatmustbecompletedontimeforthewholeprojecttobecompletedontime(nodesthatESTandLFTareequal)
Arrowindicateseachactivity Nodeacirclethatindicatesthestart&endofeachactivity ESTearlieststarttimenextactivitycannotstartuntiltheonebeforefinishes LFTlatestfinishtimecalculatefromrighttoleftofthediagram,subtractthe
timeoftheactivitybefore(iftherearetwoanswers,usethelowestnumber)
Totalfloatamountoftimeanactivitycanbedelayedwithoutdelayingthewholeprojectduration(LFTdurationEST)
Freefloatlengthoftimeanactivitycanbedelayedwithoutdelayingthestartofthefollowingactivity:EST(nextactivity)durationEST(thisactivity)
Dummyactivitynotanactivityatall,onlyusedtoshowlogicaldependency.Thearrowshowsthedirectionofdependency
Advantages:
Putstasksinorder;helpswithidentifyingsimultaneousactivitiesHelpsmanagerstoplantheorderingofequipmentsandmaterialsAllowsbusinesstogiveaccuratedeliverydatesFloattimescanbeusedtoallocateresourcesmoreefficiently(resourcescouldbe
takenfromactivitiesthathavesparetimefirsttoaidotheractivities)
Delayscanleadtomanagersusingnetworktoidentifywhichactivitiesneedtobespeededup
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Disadvantages:
Onlyaplanningtoolneedsgood&skilledmanagementtoseetheprojectthroughtosuccessfulcompletion
Outsideeventscouldresultinunforeseendelayse.g.planningpermissionproblems
Dependsgreatlyonreliabilityofthedurationestimates
EvaluationCPAcanbeausefultooltomanagers,butskillsarerequired.Staffwillbemore
motivatediftheyinvolvedintheplanningprocess.UsingCPAfornewprojectswould
beharderbecausethebusinesshasnopreviousexperienceaboutthedurationsof
theactivities.ThetimeandexpenseofusingCPAmustbejustifiedbythefollowing
cost&efficiencysavingsofapplyingthetechnique
5AL.4Costs
Costcentreasectionofabusiness,suchasadepartmenttowhichcostscanbe
allocatedorcharged
Profitcentreasectionofabusinesstowhichbothcostsandrevenuescanbe
allocatedsothatprofitcanbecalculated
Full/absorptioncosting
Amethodofcostinginwhichallfixedandvariablecostsareallocatedtoproductsor
services(fixedcostscanbesharedonabasisofspacetakenupbyeachproduct,
percentageofdirectlabourcostsforthatproductandetc.)
Evaluation
Relativelyeasytocalculate&understand Allcostsareallocatedcomparedwithcontributioncostingmethod Relevanttosingle-productfirms Goodbasisofpricingdecision(fullunitcostiscalculated) Butoverheadcostisnotallocatedbaseontheactualexpenditureusedbythat
centre(e.g.aproductmaytakeupalotoffactoryspace,butuselow-cost
machinerywhichaddsuponlyalittleamounttotheoverheadcost)
Sofinalcostingfigurecanbemisleadingorinaccurate Samebasisneedstobeusedovertimeforcomparisonstobemade
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Marginalorcontributioncosting
Costingmethodthatallocatesonlydirectcoststocost/profitcentres,notoverhead
costs
Thefirmwouldcontinueproductioniftheproductisstillmakingapositivecontributiontowardsfixedcosts
Endingproductionwillreduceoverallprofitsasthefixedoverheadcostswillstillhavetobepaidandtherewillbereducedcontributiontopaythem
Contribution=sellingpriceminusmarginal(variabledirect)costs Profit=contributionminusoverheads
Evaluation
Overheadcostsarenotallocatedtocostcentres,soitavoidsinaccuraciesofallocatingthesecosts
Excesscapacitycanbeusedeffectivelyasordersthatmakeapositivecontributionwillbeaccepted
But,ignoringoverheadcostsuntilfinalcalculationcanleadfirmstoignorethatfactthatsomeproducthavemuchhigherfixedcoststhanothers
Firmsmaycontinueproductionjustbecauseitismakingapositivecontribution,anddonotconsiderthatanewproductcanmakeanevengreatercontribution
Qualitativefactorsarecrucialtoo(e.g.stopmakingoneproductmayaffecttheimageofthewholerangeofproductsofthefirm)
5AL.6Budgets
Budgetadetailedfinancialplanforthefuturethatabusinessaimstofulfil
Benefits:
Planning:thebudgetaryprocessmakesmanagersconsiderfutureplanscarefullysothatrealistictargetscanbeset
Effectiveallocationofresources:sothatthebusinessdoesnotspendmoreonresourcesthanitcanfinance
Settingtargetstobeachieved:thissetsaimsforeachstaffandmotivatesthemtoworkhardtowardstheobjectives
Co-ordination:alldepartmentsneedtodiscussovertheallocationofresourcesandworkeffectivelytogethertoachievetomaingoal
Monitoring&controlling:thebusinessprocessandbemonitoredandcheckedagainsttheplantoseeifanythingcanbedonetoimprove
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Assessingperformance:oncethebudgetedperiodhasended,varianceanalysiswillbeusedtocomparetheactualperformancewiththeoriginalbudgets
Drawbacks:
Lackofflexibility:externalfactorsareconstantlychanging,theplancouldbeunrealisticifnotsetflexibleenoughtoadapt
Focusedontheshort-term:managersmaymakedecisionsaccordingtotheshort-termbudgetplan,butthismaynotbebeneficialforthelong-termsuccessofthe
firm(e.g.reducelabourtostaywithinbudgetbutmaylimitthefirmsabilityto
increaseoutput)
Mayleadtounnecessaryspending:managersmaythinkthattheyunder-spenttheirbudgetsandthereforespendonunnecessarythingsjusttopreventhavinga
surplusandtomaintainthesamelevelofbudgetfornextyear
Trainingrequired:settingfinancialplansandobjectivesarenotsimpletasks,stafftrainingisrequiredforaneffectiveplan
Producingbudgets
1. Organisationalobjectivesareestablishedbasedonthepreviousperformanceofthebusiness,externalchangeslikelytoaffectthebusinessandthesaleforecasts
basedonresearchandpastdata
2. Thebudgetforthekeyfactoraffectingthesuccessofthebusinessneedstobesetfirst(salesformostbusinesses).Inaccuracyofthekey-factorbudgetwoulddistort
allotherbudgetaswell(e.g.ifsalesbudgetisinaccuratethencash,production,
labourbudgetswouldbeinaccurateaswell)
3. Thekey-factorbudgetispreparedafterdiscussionwithallbranches&divisionofthebusiness
4.Theotherbudgets(cash,labour-cost,material-cost,sellinganddistributionbudgets)arepreparedbasedonthekey-factorbudget
5. Thecoordinationofbudgetsneedstobeensured.Budgetscannotconflictwitheachotherandthespendinglevelplannedcannotexceedtoresourcesofthe
business
6. Amasterbudgetisprepared(maindetailsofallthebudgets&concludeswithabudgetedprofitandlossaccountandbalancesheet)
7. Themasterbudgetisthenpresentedtotheboardawaitingforapproval
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Flexiblebudgeting
Costbudgetsforeachexpenseareallowedtovaryifsalesorproductionvaryfrom
budgetedlevels.Newbudgetsaresetdependingontheactualoutputlevelachieved
(e.g.ifoutputlevelrises20%,thenotherbudgetsareset20%higheraswell)Thisis
moreaccurate&efficientandmoremotivatingformanagersbecausetheywillnot
becriticisedforadversevariancesthatoccurjustbecauseoutputwasslowerthan
budgeted
Zerobudgeting
Settingbudgetstozeroeachyearandbudgetholdershavetoarguetheircaseto
receiveanyfinance.Thiscanbeverytime-consuming,asmanagersneedtoprovideareviewoftheirworkandtheimportanceofeachoneinordertojustifythefinance
needed.Butitcouldprovideincentiveformanagerstodefendtheworkoftheirown
sectionanditcanpreventmanagersfromspendingonunnecessaryitems
Variances
Avarianceisthedifferencebetweenbudgetedandactualfigures
Itassistsinanalysingthecausesofdeviationsfrombudget(e.g.ifprofitislowerthanbudgeted,wasthisduetolowersalesorhighercosts?)
Thecausesidentifiedmayhelpthebusinesstosetmoreaccuratefuturebudgets
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5AL.7Contentsofpublishedaccounts
Intangibleassets
1. Goodwillariseswhenabusinessisvaluedatorsoldformorethanthebalance-sheetvalueofitsassets
Willappearonbalancesheetonlywhenthebusinessispreparedforsaleorjustafterthefirmhasbeenpurchased
Itiswrittenoff(getridof)ASAPbecauseitisdifficulttovalueandcanchangeordisappearrapidly
Itwillappearonthebusinessthathasboughtanotherfirmandhaspaidforgoodwillundernon-currentintangibleassetandwillbetakenoffASAP
Inventoryvaluation Canbeinformsofrawmaterials,workinprogressandfinishedgoods Netrealisablevaluetheamountforwhichanasset(inventory)canbesoldfor
minusthecostofsellingit(thecostofdamageorfixingtheassetneedstobe
reducedfromtheoriginalvalue)
Depreciation
Thedeclineintheestimatedvalueofafixedassetovertime
Profitswouldbemoreaccuratebecausethecostofassetboughtisspreadoveritsusefullife(notlowerthanactualinthefirstyearandhigherinlateryears)
Itwillreflectthetrueretainvalueoftheassetonthebalancesheeteachyearuntilfullydepreciatedorsoldoff
Originalcostofassetexpectedresidualvalue
Expectedusefullifeofasset(years)
Evaluation
Straight-linemethodiseasytocalculate&understand
Butitrequiresestimates,mistakeswillleadtoinaccuracies Assetstendtodepreciatemorequicklyinthefirstfewyearsthaninlateryears,
straight-linemethoddoesnotreflectthis
Repair&maintenancecostsofanassetusuallyincreasewithageandthiswillreducetheprofitabilityoftheasset(notshowninthismethod)
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5AL.8Analysisofpublishedaccounts
Accountingratios:
1.Profitabilityratio
Returnoncapitalemployed(RoCE)NetoroperatingprofitX100
Capitalemployed
Capitalemployed:thetotalvalueofalllong-termfinanceinvestedinthebusiness
Totalassetcurrentliabilities Non-currentliabilities+shareholdersequity
Comparesprofitwithcapitalinvestedinthebusiness(howmuchprofitcana$1investmentgenerate)
Thehigher,thegreaterreturnoncapitalinvestedinthebusinessComparisonswithpreviousyearsorotherfirmscanbemade(allowstrend
tobeidentified)
Canbecomparedwiththereturnfrominterestaccounts(doesinvestinginbanksgetmorereturn?)
RoCEisnotrelatedtorisksinvolvedinthebusiness.HighRoCEmayresultfromahigh-riskoperationnotatruebusinessefficiency
2.Liquidityratios(inASnotes)
3.Financialefficiencyratios Inventoryturnoverratio
Costofgoodssold
Valueofinventories
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Numberoftimesstockboughtinandresold(turnover)inaperiodoftime(howfastcanthefirmsellstocks)
Thehighertheratio,thelowertheinvestmentininventoriesefficientstockmanagement(smallstocksbuthighvalueofsales)
Dependsonindustry(perishableproducts=lessstocks)Notrelatedtoservicefirms(theyarenotsellingproductsheldinstock)
Dayssalesinreceivableratio(debtordays)AccountsreceivableX365
Salesturnover
TellshowlongittakesforcustomerstopaydebtsTheshorter,thebettercontrolofworkingcapitalMoredaysmeansbusinessgiveslongcredittocustomersmanagement
strategytogaincustomers.Buttoohighmeanspoorcontrolofdebtors&
repaymentperiods
Dependsontheindustry(sellingforcash=lowresults)Canbereducedbygivingshortercredittermsorimprovingcreditcontrol
4.Gearingratio Long-termloansX100
Capitalemployed
Non-currentliabilitiesX100Shareholdersequity+non-currentliabilities
Long-termdebtX100Shareholdersequity
Showstheextenttowhichthefirmsassetsarefinancedfromexternallong-termborrowing
Highlygeared=morerisks(havetopayinterestrates,lessprofits÷nds)couldcauseworkingcapitalproblems
Toolow=safebutmaybenotborrowingandinvestingenoughCanbereducedbyusingnon-loansourcesoffinancetoincreasecapital
employed(issuingsharesorretainedprofits)
5.Investorratios Dividendyieldratio
DividendpershareX100Currentshareprice
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Measurestherateofreturnashareholdergetsatthecurrentshareprice(howmuchyougetforinvesting$1)
RateofreturncanbecomparedwithotherinvestmentsMoreeffectivewhencomparedwithpreviousyearsorsameindustryPotentialinvestorswillbeattractedwhenyieldishighandpriceisnot
expectedtofallsoon
Ahighdividendyieldmaynotindicateasuccessfulinvestmentyieldcouldbehighbecausepriceisfalling(notnecessarilyagoodsign!)
Yieldcouldalsobehighonlybecausedirectorswanttokeepshareholdershappy(profitstaysthesamebutpayfromreserves)
Directorsmayreducedividendtoreinvestinthebusiness,butwouldshareholdersbehappy?
DividendcoverratioProfitaftertaxandinterest
Annualdividends
Comparesdividendwithprofit(howmuchprofitthefirmhastopayoutdividends)
High=firmisabletopaythedividendsandstillhaveaconsiderableamountofprofitlefttoreinvestback
Low=paysdividendsoutoflowamountofprofit(lowretainedprofits)
Price/earningsratioCurrentshareprice
Earningspershare(profitearnedpershare)
Showshowmuchinvestorsarewillingtopayforeach$1ofearnings IndustrieswithhighgrowthprospectswouldhavehighP/EMoreusefultocomparefirmswithinthesameindustrybecauseofdifferent
growthprospectsandinvestorsexpectations
Limitationsofaccountingratios
1. Oneratioresultaloneisnotveryuseful,comparisonstootherfirmsorpreviousyearsneedtobemadefortheanalysistobemeaningful
2. Financialyearsendatdifferenttimesforbusinesses,thismayleadtomisleadingresultswhencomparisonsaremade
3. Somefactorsoutsidethecompanyscontrolcanaffectitsperformanceandratioresultstoo(e.g.recession)
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4. Someratiosarecalculatedusingdifferentformulae,comparisonswouldbemisleading(sameformulaehavetobeusedtoallowaccuratecomparison)
5. Differentdepreciationmethodswillleadtodifferentratioresults.Alsowindowdressingcanmakeresultslookmorefavourableintheshortterm.Therefore,
resultswouldnotreflectthetrueperformanceofthebusiness
6. Qualitativefactorsregardingbusinessperformancearecrucialaswell7. Ratiosonlyhighlightissuesthatneedtobetackled;theydonotsolvebusiness
problemsorindicatethecausesoftheproblems.Managersstillhavetocomeup
withstrategiestoovercomethem
5AL.9Investmentappraisal
Investmentappraisal
Evaluatingtheprofitabilityordesirabilityofaninvestmentproject
Quantitativemethodscomparecashoutflowswiththeexpectedfuturecashinflows
Managersusethistoassesswhetherthelikelyfuturereturnsonprojectswillbegreaterthanthecostsandbyhowmuch
Usedtogetherwithqualitativefactorstodeterminewhetherornotaprojectisprofitableorshouldbeundertaken
Forecastingcashflowsisnotaneasytask Itispossiblethatunpredictedeventsorexternalfactorswilloccurmakingthe
forecastsinaccurate
Managersneedtobareinmindthattherearesomerisksinvolvedininvestmentdecisionsduetotheuncertaintyofcashflowforecasts
Basicmethods
PaybackmethodPaybackperiodisthelengthoftimeittakesforthenetcashinflowstopaybacktheoriginalcapitalcostoftheinvestment.Formulatofindout
theexactmonth:
AdditionalnetcashinflowneededX12months
Annualcashflowinthatnextyear
Advantages:
Quick&easytocalculateResultsareeasytounderstand&analyse
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Thefocusonthespeedofreturnofcashflowsmeansmoreconcentrationonshort-termforecastoftheprojectsprofitability
ResultscanbeusedtoeliminateprojectsthattaketoolongtogivereturnsUsefulforbusinesseswhereliquidityismoreimportantthanoverall
profitability
Disadvantages:
Doesnotmeasureoverallprofitabilityofaproject&ignorescashflowsafterpaybackperiod(possiblethataprojectgivesrapidreturnbutthenofferno
morecashinflows)
Thebusinessmayrejectveryprofitableinvestmentsjustbecausetheytakesometimetorepaythecapital
Itdoesnotconsiderthetimingofthecashflowsduringthepaybackperiod
Averagerateofreturn(ARR)measurestheannualprofitabilityofaninvestmentasapercentageoftheinitialinvestment
Annualprofit(netcashflow)X100
Initialcapitalcost
Advantages:
Itusesallthecashflows(unlikethepaybackmethod) Itfocusesonprofitability(maybethefirmsobjective)Resultsareeasytocomprehend&comparewithotherprojects
Disadvantages:
Itignoresthetimingofthecashflows(someprojectsmayhavethesameARRbutonecouldpaybackmuchmorequicklythantheother)
PredictedorexpectedcashflowsinthefuturemaynotbeaccurateThetimevalueofmoneyisignoredasthecashflowshavenotbeendiscounted
Discountedcashflowmethods
Thisiswhenthetimevalueofmoneyistakenintoaccount.Discountingisthe
processofreducingthevalueoffuturecashflowstogivethemtheirvalueintodays
term;thefuturevaluedependsontheinterestrate
Discountedpaybackusesthediscountedcashflowstocalculatethepaybackperiodoftheprojects(samedis/advantagesaspaybackperiodexceptthatittakes
intoaccountthetimevalueofmoney)
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Netpresentvalue(NPV)todaysvalueoftheestimatedcashflowsresultingfromaninvestment
1. Multiplythegivendiscountfactorsbythenetcashflows2. Addallthediscountedcashflowstogether3. SubtractthecapitalcosttogivetheNPV
Advantages:
Itconsidersbothtimingofcashflows&sizeoftheminarrivingatanappraisalTherateofdiscountcanbevariedtoallowfordifferenteconomic
circumstances
Ittakesintoaccountthetimevalueofmoney&theopportunitycostofmoney
Disadvantages:
Complextocalculate&explainforsomemanagersResultsdependgreatlyontherateofdiscountused,andthatcouldbe
inaccurate
NPVcanonlybeusedtocompareprojectswithsameinitialcostsbecauseitdoesnotprovideapercentagerateofreturnontheinvestment
Internalrateofreturn
TherateofdiscountthatyieldsanetpresentvalueofzerothehighertheIRR,the
moreprofitabletheinvestmentprojectis(becauseastherateofdiscountincreases,
thenetpresentvaluedeclines)
CanbecomparedwithIRRofotherprojectshighest=moreprofitableCanbecomparedwithcriterionrate(minimumlevelssetbymanagement
forinvestment-appraisalresultsforaprojecttobeaccepted)presetbythe
business
Qualitativefactors
Non-numericalfactorsincludingimpactonenvironment&localcommunity,publicity&imageofthebusiness
Theaimsandobjectivesofthebusinesssomeprojectsmayseemprofitablebutreducethecustomerservicewhichisthemainpriorityofthefirm
Managersattitudetowardsrisk Firmsviewoftheimportanceofethicalissues
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Ifdifferentmethodsofinvestmentappraisalsuggestdifferentprojectstobe
profitable,thenthedecisionwilldependonthebusinesssmainaimsandthe
managersattitudetorisk
6AL.1Whatisstrategicmanagement
Corporatestrategyalong-termplanofactionforthewholeorganisation,
designedtoachieveaparticulargoal(howwegetfromwherewearenowtowhere
wewanttobeinthefuture).Involvesalldepartmentsinthebusiness.Allfirmsneed
acorporatestrategytoprovideintegration,directionandfocus
Corporatestrategyareinfluencedby:
1. Resourcesavailablescarceresourceswillforcefirmstochoosewhichstrategiestoproceedandwhichtodroporscaleback
2. Strengthsofthebusinessthefirmwillbemorelikelytobesuccessfulifitappliesitsstrengthsinthestrategies
3. Competitorsactionsfirmsneedtorespondtocompetitorsactiontoretainorattractcustomerstothebusiness
4. Objectivessocial-responsibilityorshort-termprofits?Etc.
Tacticsshort-termpolicyordecisionaimedatresolvingaparticularproblemor
meetingaspecificpartoftheoverallstrategy(smaller-scaledecisionswhichoftenimpactononlyonedepartment)
Strategicmanagementtheroleofmanagementwhensettinglong-termgoals
andimplementingcross-functionaldecisionsthatshouldenableabusinesstoreach
thesegoals
1. Assessingcurrentpositionofthebusiness2. Settingmission,visionandobjectives3.
Takingimportantlong-termdecisionsthatleadtoobjectivesset
4. Coordinatingactivitiesofalldepartments5. Allocatingsufficientresourcestoallownewpoliciestowork6. Evaluatingsuccessagainstgoalsthenimprovementscanbemade
Businessstrategyandcompetitiveadvantage
Worldtradeisgrowingrapidly,businessesnowhavetocompetewithdomesticand
alsointernationalcompetitors,whichmayhave:
1. Lowercosts2. Differentiatedproducts
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Theseare2mainfactorsthatcanleadtoamajorcompetitiveadvantage
Strategiestoincreasecompetitiveadvantage:
Automationadvanced&flexibleproductionprocesshelptoreducecostsofmanufactureandalsocreatedifferentiatedproducts
Rationalisationcutanyunnecessarycosts(e.g.makeworkersredundant) Researchanddevelopmentallowsdiversificationawayfromoriginalactivities
andcreateproductdifferentiation
6AL.2Strategicanalysis
Strategicanalysistheprocessofconductingresearchintothebusiness
environmentwithinwhichanorganisationoperates,andintotheorganisationitself,
tohelpformfuturestrategies(whereisthebusinessnow?whatishappeningor
likelytohappen?howcanthebusinessrespondtothechanges?)
SWOTanalysis
Aformofstrategicanalysisthatidentifiesandanalysesthemaininternalstrengths&
weaknessesandexternalopportunities&threatsthatwillinfluencethefuture
direction&successofabusiness
OnlycarryingouttheSWOTanalysisisnotsufficient,managersneedtodecidehow
toovercomethethreats&weaknessesandhowtotakefulladvantagesofthe
strengths&opportunities.Thebusinessalsoneedstocarryoutfurtheranalysis
beforestrategicchoicescanbemade.OneweaknessoftheSWOTanalysisisthe
subjectivity,onemanagercouldseeonethingasstrengthandanothercouldseeitas
aweakness
PESTanalysis
Thestrategicanalysisofafirmsmacro-environment,includingpolitical,economic,
socialandtechnologicalfactors
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PESTiscomplementarytoSWOT,notanalternative.PESTanalysisshouldbe
constantlyreviewedandupdatedbecausebusinessesareoperatinginadynamic
environment
Vision/missionstatement
Visionastatementofwhattheorganisationwouldliketoachieveoraccomplishin
thelongterm(outlinesthepreferredfutureofthefirm)
Missionastatementofthebusinessscorepurposeandfocus,phrasedinawaytomotivateemployeesandtostimulateinterestbyoutsidegroups
Thevision&missionstatementarenotsettoimpressanyone,theyshouldbeclearly
understoodbyallemployees.Theybothgivethesenseofpurposetoanorganisation,
andpreventbusinessfromdriftingawayfromitsmainaims.Thereforestrategies
shouldbesetaccordingtothosemainfocusesoftheorganisation
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BostonMatrix
Awayofanalysingtheproductsofafirminthedifferentmarketstheyarein.The
matrixcomparesmarketshareandmarketgrowthandfirmstrytocategoriseeachof
theproductssothattheycananalysewhattodowiththem.Thisanalysisworksforamulti-productfirmandtheimportantconclusionsarebasedaroundthefuturetactics
notthelabellingofthediagram
Star
Asuccessfulproductinanexpandingmarket Needstotryandmaintainmarketposition Butfast-changingmarketsopromotionisneededtodifferentiateproduct&
reinforcebrandimage
HighmarketingcostsbutgenerateshighamountsofincomeforfirmCashcow
Well-establishedinamaturemarket Salesarehighandpromotionalcostsarelow(highconsumerawareness) Thefirmneedstomaintainthisforaslongaspossible ThecashcanthenbeinjectedintootherproductsProblemchild
Haspotentialtosucceedbecausethemarketisgrowingfast Consumesresourcesbutgenerateslittlereturn.Needsheavypromotioncoststo
competewithcompetitorsintheexpanding&evolvingmarket
Ifsalesdonotimprove,thefirmcouldrevisethedesign,relaunchorevenwithdrawfromthemarket
Dog
Offerslittletothebusinessandhaslowpotentialofsuccess Themarketisnotgrowing,thefirmcouldtrytogainhighmarketshareorstop
producingthisproductandfocusonotherproductintherange
Theanalysishelpstoestablishthefirmscurrentproductpositionsbutdonot
predictfuturesuccessofthebusiness.Itdoesnottellmanagerswhattodowith
theproducts.Furthermarketresearchisrequiredandotherexternalfactorsneed
tobeconsideredwhenmakingdecisions.Italsoassumesthathighermarket
sharesmeanhigherprofits,butthismaynotalwaysbetrueifsalesaregainedby
reducingpricesandprofitmargins
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PortersFiveForcesanalysis
Thefiveforcesanalysisisawayofassessinganindustryinwhichabusinessoperates.
Theanalysisassumesthatthereare5factors,whichneedtobeanalysedforthat
business1. Barrierstoentrytheeasewithwhichotherfirmscanjointheindustry2. Buyerpowerameasureofthepowerthatthecustomershaveonthefirm3. Supplierpowersuppliersmaybemoreimportantthancustomersinthis
relationshipwhenthebrandisverypowerfulorwhencustomershavevery
littlepower
4. Threatofsubstitutesproductsinotherindustriesthatmightaffectthebusinesssindustry.Itmustbeawareofwhatisbeingproducedelsewhere
5. Competitiverivalrythemostimportantforce.Thesuccessofanybusinessisafunctionofitsabilitytocompeteinthemarketplace.Insomemarkets
competitionishigh,inothermarkets,itcanbehardlynoticeable
Benefits:
Byanalysingnewmarkets,thefirmmaydecidewhethertoenterornot Byanalysingexistingmarkets,thefirmmaydecidewhethertostayinornotand
whetherifithaspotentialtobecomeprofitable
Theanalysisaidsbusinesstodecidewhethertodifferentiateitsproduct,buyoutsomecompetitors,enterdifferentmarketsegments(lesscompetitive)
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Drawbacks:
Onlyworksataspecificpointintime(butthebusinessenvironmentisconstantlychanging)
Canbecomeverycomplexwhenanalysingmodernindustries
Corecompetencies
Corecompetenceanimportantbusinessabilitythatgivesafirmcompetitive
advantage(abilitythatmakesthebusinessdifferentfromotherfirmsintheindustry).
Acorecompetenceshould:
ProviderecognisablebenefitstoconsumersNotbeeasyforotherfirmstocopy(e.g.patenteddesign)Provideaccesstoawiderangeofmarkets
Onceacorecompetenceisestablished,thebusinesshastheopportunitiesto
developcoreproductsandthennewendproducts&markets
Coreproductproductbasedonabusinessscorecompetences,butnotnecessarily
forfinalconsumerofenduser(canbeaproductthathasmanyusesorareusedto
producemanyotherproducts)
6AL.3Strategicchoice
AnsoffsmatrixAmodelusedtoshowthedegreeofriskassociatedwiththefourgrowthstrategies
of:marketpenetration,marketdevelopment,productdevelopmentand
diversification
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Evaluation
Managerscananalysethedegreeofriskassociatedwitheachopportunity However,itonlyconsiders2factorsinthestrategicanalysisofabusinesssoption.
Otheranalysisareneededaswelltogiveamorecompletepicture
Thematrixdoesnotsuggestactualdetailedmarketingoptions(whichmarkettoenter?Orwhichproducttoproduce?)
Managersstillneedtomakedecisionsbasedonexperiencetoo
Force-fieldanalysis
Techniqueforidentifyingandanalysingthepositivefactorsthatsupportadecision
andnegativefactorsthatconstrainit
1.Analysecurrentandthedesiredsituation
2. Listallthedrivingfactors3. Listalltheconstrainingfactors4. Giveanumericalscore,scaleof1-10(1=weakest&10=strongest)5. Listallforcesonthediagram6. Totalthescoresanddecidewhetherthechangeisreasonable7. Considerwayswhichcanstrengthenthedrivingforces&reducethe
restrainingforces
Limitation
Inexperiencedmanagerscouldfailtoidentifyallrelevantforcesinvolved Theallocationofnumericalvaluesissubjective,2managersmaycomeupwith
differentvaluesfortheforces
Therefore,proposeverydifferentdecisionsbasedontheirassessments
Decisiontrees
Adiagramthatsetsouttheoptionsconnectedwithadecisionandtheoutcomesand
monetaryreturnsthatmayresult
Expectedvaluethelikelyfinancialresultofanoutcomeobtainedbymultiplyingthe
probabilityofaneventoccurringbytheforecasteconomicreturnifitdoesoccurand
subtractcostofoperating
Decisiontreemeasurestheriskinrelationtopossiblelevelofreward Drawntovisuallyaidthedecision-makingprocess ForcesmanagerstoconsiderALLoptionsavailable Simpletofollow
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Byusingprobabilities,thereisanattempttocalculatethelevelofriskHOWEVER:
Inrealityitisnoteasytocalculateprobabilities,themodelcanbeinaccurate Estimatereturnscanbedifficulttopredictfornewprojects Decisiontreesmayaiddecisionmaking,butotherqualitativefactorsneedtobe
consideredaswell(e.g.environment,workforceattitude)
Itdoesnoteliminatetherisksinvolved
6AL.4Strategicimplementation
Businessplan
Awrittendocumentthatdescribesabusiness,itsobjectivesanditsstrategies,the
marketitisinanditsfinancialforecasts Summaryofthestrategies Descriptionofthebusinessopportunity Marketing&salesstrategyhowtoselltheproductstocustomers? Managementteamwhomtorecruitorworkwith? Operationspremises,facilities,ITsystems Financialforecastsofsalesprofitandcashflow
Businessesneedtoprovideplaninordertoobtainstart-upfinance Plangivessenseofpurposeanddirectionandaidsresourceallocation Helpsmotivatestafftoworktowardstargets Progresscanbereviewedagainstobjectives
Corporateculture
Thevalues,attitudesandbeliefsofthepeopleworkinginanorganisationthat
controlthewaytheyinteractwitheachotherandwithexternalstakeholdergroups
thewaywedothingsaroundhere.Corporateculturewillaffectanydecisionsof
individualsinthebusiness,itdefineswhatisconsiderednormalanorganisation.It
willbeinfluencedbythevaluesandexpectationsofmanagersandemployees,the
firmsobjectivesandthetypeofmarketitoperatesin.Differentdepartmentshave
differentcorporateculture
Powercultureconcentratingpoweramongjustafewpeoplesimilartoautocraticleadership.Fewpeopleareinvolvedindecisionmaking
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Rolecultureeachmemberofstaffhasaclearlydefinedjobtitleandrolesimilartobureaucraticorganisations.Well-definedstructure,clearroles&
responsibilities.Peopleworkwithinstrictrulesandshowlittlecreativity
Taskculturebasedonco-operationandteamworkcommunicationsimilartomatrixstructure.Groupsareempoweredtotakedecisionsandareencouragedto
becreative
Personculturewhenindividualsaregiventhefreedomtoexpressthemselvesfullyandmakedecisionsforthemselvesthemostcreativeculturebutmaycause
conflictbetweenindividualgoalsandthoseofthewholeorganisation
Entrepreneurialcultureencouragesmanagementandworkerstotakerisks,tocomeupwithnewideasandtestoutnewbusinessventures.Successcanbe
rewardingwhensomedegreeofriskistaken
Techniquesforimplementingandmanagingchange
1. Understandwhatchangemeanschangeistheadaptionofbusinessstrategiesandstructuresinresponsetochanginginternal&externalforces
2. Recognisethemajorcausesofchange Technologicaladvancesleadingtonewproductsandprocesses(staff
trainingandnewequipmentneeded)
Macro-economicchangespolicies,businesscycleetc. Legalchanges Competitorsactionshighercompetitiveness
3. Understandthestagesofthechangeprocess Wherearewenowandwhyischangenecessary? Newvisionsandobjectivesestablishedexplainedtothosepeopleinvolved Allocatesufficientresourcestoenablechange Givewarningstopeopletoavoidresistancetochange Providetrainingtostaff Checkonhowindividualsarecopingwiththechangeandsupportthem
4. Leadchange,notjustmanageit Takeactionsthatleadfirmawayfromresistancetochange Motivatingstaffatalllevels
Resistancetostrategicchange
Fearoftheunknownincreaseduncertaintycanleadtoanxietyforsomepeople
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Fearoffailurechangesmayrequirenewskillsthatmaybebeyondaworkerscapabilities
Lackoftrustworkersmaynotbelieveinthereasonsgiventothem
ContingencyplanningandcrisismanagementContingencyplanplanningforunforeseenevents(fire,floods,damagetostock,
illnessofkeystaff,IT-systemfailureoraccidentsonthebusinesspremisesetc.)also
knownasbusinesscontinuityplanning
1. Identifythepotentialdisastersthatcouldaffectthebusiness2. Assessthelikelihoodoftheseoccurring(itiseasiertoplanforthemostcommon
disastersbutmanagersalsoneedtothinkabouttheunlikelyonesbecausethey
canhavegreaterrisktothebusiness)
3. Minimisethepotentialimpactofcriseswhentheyhappen(stafftrainingandpracticedrills,tellingthetruthandindicatingdetailsofcausesandsolutionsto
protectthereputation)
4. Planforcontinuedoperationsofthebusiness(thesoonerthebusinesscanbegintradingagain,thelessimpactislikelytobeoncustomerrelationships
Finalevaluation:
CostofCPneedstobebalancedagainstthepotentialcostsofnotdoingit Howmuchtimeisspentonpreparingandtestingcontingencyplans? Inthiscaseitseemstohavebeeneffectivebutitmightbemoreimportantto
focusonqualityissuesthemselves,ratherthantryingtorespondtoaproblem
onceithasarisen