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68-qa-ocrf297 - 2010 Edition Business Objectives 2...

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Unformatted text preview: 2010 Edition Business Objectives............................................... 2 Shareholder.................................................. 22 Aims and Objectives.................................... 2 Gearing........................................................... 23 Strategic management .................................... 2 Mission.............................................................. 2 Strategy and tactics ..................................... 3 Corporate planning...................................... 3 Liquidity ........................................................ 22 Financial efficiency ................................... 23 Investment appraisal.................................... 24 Budgets............................................................... 25 Planning ................................................................ 5 External influences............................................. 27 Risk and reward ................................................ 8 Economic cycle................................................ 29 SWOT Analysis .............................................. 6 Stakeholder objectives.................................... 7 Business analysis ................................................... 8 Market analysis.................................................. 8 Forecasting ............................................................... 9 Time series analysis......................................... 9 Data analysis .................................................... 11 Decision making .................................................. 12 Decision making process ............................ 12 Management information systems ......... 14 Decision trees .................................................. 15 Critical path analysis .................................... 16 International decision-making ................. 18 Measures of business performance............. 19 What is performance .................................... 19 Ratios .................................................................. 20 Market Failure ................................................. 27 Economic growth ........................................... 28 Labour Markets............................................... 30 Unemployment................................................ 31 Inflation and deflation.................................. 32 Government macro objectives.................. 33 International competitiveness.................. 34 Interest rates.................................................... 35 Exchange rates ................................................ 36 Taxation.............................................................. 37 Legal issues....................................................... 38 Political issues ................................................. 40 Social issues...................................................... 41 Technological factors.................................... 41 Environmental issues ................................... 42 Moral and ethical issues:............................. 43 Profitability ratios..................................... 20 Change ..................................................................... 44 Liquidity ratios........................................... 20 Industrial relations ................................... 46 Shareholder ratios .................................... 20 Return on investment.............................. 20 Efficiency ratios ......................................... 20 Gearing ratios ............................................. 20 Profitability.................................................. 21 Communication............................................... 44 Change management..................................... 45 Location.............................................................. 47 A2 Strategy Glossary.......................................... 48 1st Edition. First published 2010 © Richard Young. All rights reserved. | Strategic management 1 Planning is the management process of establishing objectives and selecting strategies and tactics required to achieve them. Planning prepares a course of action to achieve stated objectives given the internal resources of the business and its external environment. A plan is a written document detailing future business activities. The planning process makes managers to look ahead rather than focus on present problems. The planning process helps the business assess its current position and identify appropriate future actions required to meet stated objectives There is no one agreed method. Generalising, senior managers carry out a of their internal and external environment. They use results of the audit to clarify , and and to formulate a most likely to deliver objectives given the firm’s internal resources and external context. Junior managers then decide . Monitoring involves regularly measuring progress against forecasts and taking corrective action given . of performance in meeting objectives informs planning for the next cycle. internal and external environment A situational analysis is an assessment of the firm’s The external environment is the circumstances in which the organisation operates. External factors such as the state of the economy, legal constraints, and social trends are beyond the control of the business. capabilities of an organisation. . The internal environment is the resources and An audit is an investigation into an area of business activity. In assessing the current internal and external environment a business can use a variety of tools including PEST analysis Competitor analysis SWOT analysis Factors outside the control of the business may limit the ability of the organisation to meet its objectives. A PEST analysis is an audit of the political, economic social and technological factors in the firm’s external environment A PEST analysis identifies and assesses the likely impact of external factors beyond the control of the firm which may constrain its business activities. Competitor analysis is an assessment of the strengths and weaknesses of current and potential rivals. | Planning 5 . Time series analysis is a technique for identifying a pattern in data. If a pattern exists, a trend can be predicted. A trend is a persistent long term movement in data . In the diagram there is a persistent upward movement in sales over time Time series data is a set of values observed at regular intervals eg annually, quarterly, daily, etc. Time series data has four components : overall, persistent, long-term movement : regular periodic fluctuations, within a 12-month period : Repeating swings or movements over more than one year : Erratic random fluctuations Trends are found by removing seasonal and cyclical factors A moving average is a technique for smoothing a data series to reveal trends by removing seasonal or cyclical fluctuations. The average of £98 is recalculated on the latest data points to £120, hence the term moving average. . Forecasts are based on past data trends. A sudden unexpected change in economic conditions or consumer taste may invalidate future trends. Firms operate in a dynamic market and must respond to external forces beyond their control. An unexpected economic downturn or new competitor may frustrate well researched forecasts 10 Time series analysis | LFT shows the latest time an activity can finish without delaying the entire project. LFTs are calculated by working from right to left. Eg the LFT for node 5 = 62 – 5 = The critical path is the longest-path in the diagram. Any delay in activities A B or H hold up the entire project. Critical activities lying have no float time Float time is the spare time available for a given activity. Any non-critical activity has float time. Free float is the amount of time any one individual activity can be delayed without affecting the EST of the next task. Free float is calculated using the equation: Free float = EST of next activity – duration of this activity – EST of this activity Total float time shows how long an activity can over run without delaying the whole project. Total float is calculated using the equation: Total float time = LFT of this activity – duration of this activity – EST of this activity CPA works best for those projects start to finish times for individual activities are easily estimated CPA is an analytical tool that helps managers plan, control and monitor complex projects. identify the most efficient path for completing a project identify those activities whose delay holds up the entire project allocate resources efficiently – resources arrive just-in-time when needed. Eg using CPA and JIT stock control minimises waste and improves cash flow As with any quantitative tool, CPA relies upon accurate estimations of data eg activity duration. Managers are under pressure to complete activity on time – quality may be compromised. CPA ties up management resources | Critical path analysis 17 how well an organisation is using its resources Financial efficiency or measure . Stakeholders use asset turnover, stock turnover, debtor days and creditor days to assess the performance of an organisation’s operations. The turnover ratio shows how efficiently an organisation uses its assets to generate sales revenue. The higher the asset turnover ratio, the greater the efficiency of the firm in generating sales revenues from assets. An economic slowdown reduces total output income and employment in the economy. Sales fall damaging asset turnover By improving capacity utilisation; closing down (selling off) underperforming areas of the business; increasing sales, eg, through better marketing. Downsizing releases resources to areas that generate more sales revenue. Usually, a high stock turnover ratio suggests the business is efficient and selling goods quickly to customers. hold less stock or increase sales. The stock turnover ratio improves if a firm Switching to just-in-time production methods reduces stock holdings and so increases the stock turnover ratio. The debtor day ratio shows the average amount of time taken to collect debts from customers sold items on credit. The lower the ratio, the more efficient the firm’s credit control system is in improving cash flow and working capital. By improving credit control eg chasing late payers and reducing credit terms. Less generous credit terms may impact negatively on sales Delaying payment of debt improves cash flow but risks supplier relations. Suppliers may respond by insisting on payment in cash. is the types of long term finance used by an organisation to finance its operations and growth. The two main sources of long term finance: borrowing (debt or loans) and equity (shares, shareholder funds or equity capital). Gearing is the proportion of long term finance made up of debt rather than shareholder funds. The drawback of debt is loans must eventually be repaid (or continually rolled over) and interest payments maintained. A debenture is a type of long-term loan (bond). Usually debentures pay a fixed rate of interest, are secured against an asset of the business and are redeemed (bought back) within 15 years of issue. Issuing bonds to finance operations and growth increases debt. The gearing ratio measures the long term financial health of an organisation ie its reliance on debt to finance its operations and growth. Gearing measures the firm’s reliance on long term debt in its capital structure to finance its operations and growth . A highly geared business has a gearing ratio above 50% suggesting excessive borrowing. Maintaining interest and debt repayments may be challenge. . Firms that are highly dependent on loans are often vulnerable to interest rates rises. Can the firm still meet | Ratios 23 Optional eg EU wide metric measurements; through adoption of a single currency - the euro. UK firms have free trade access to a market of 500 million citizens and can freely recruit EU nationals Increasing sales may cause economies of scale hence lower unit costs Increasing competition from EU firms who have free trade access to UK markets to comply with EU laws and regulations which increase costs and distract managers The Eurozone consists of 16 EU members who have opted for by adopting the euro as a common currency. Each country has discarded its own currency international trade as A common currency reduces the cost of Commission for buying and selling euros is avoided. The uncertainty associated with unpredictable future exchange rates is removed and firms no longer have to insure against unfavourable currency movements ? The UK has decided to stay outside the Eurozone for now. This means businesses trading in Europe need to trade sterling (£) and euros. The €/£ rate of exchange is volatile and uncertain – a source of increased risk and a barrier to planning The major drawback of membership of the euro zone is that interest rate decisions are made by the European Central bank. Interest is the amount paid by a debtor to a lender for the use of money. The interest rate is both the cost of borrowing and the reward for saving. The interest rate is the sum charged for borrowing money, expressed as a percentage. Eg but 18% annual interest rate means £18 is paid for every £100 borrowed. In the UK, the official interest rates or base rate is set monthly by the Bank of England’s Monetary Policy Committee. High Street banks use the official interest rate as the base for setting their own charges for overdrafts and loans and savings rates. The Bank of England increases interest rates to encourage savings and discourage borrowing and so dampen demand. Less demand reduces inflationary pressure but may result in more cyclical unemployment. : the cost servicing variable rate loans such as overdrafts increase. There is less incentive to borrow funds to finance investment. Capital projects may be delayed : households with net debts now paying more interest and so have less disposable income. Demand falls, particularly for products with a high income elasticity of demand. The overall impact on individual firms depends on the size of changes. A 0.5% change has less impact than a 2% change. the amount of variable rate borrowing used by the firm. Evidence: gearing the individual context of the firm eg its gearing and product portfolio ? The impact on costs depends on . Businesses that use equity financing face less impact on costs than organisations that depend on overdrafts. Interest rate charges on overdrafts are usually linked to Bank of England’s base rate. | Interest rates 35 . Communication is the transfer of information between individuals Internal communication is the exchange of information within the organisation. External communication is the exchange of information between individuals and groups outside the organisation. . A sender encodes (chooses words & images) and sends a message (a memo) via a medium (email) that is decoded (interpreted) by the receiver who then responds (feedback). Communication aims to influence behaviour. In successful communication, the receiver decodes, understands and acts on a message as intended by the sender. or email or shared in face-to-face meetings. Messages can be sent by letter, fax, memo, report Formal channels are the official network of communications shown by an organisation chart. Informal unofficial communication channels are set up by staff (the ) and may counter formal channels. Effective communication improves business performance . Staff share similar attitudes beliefs and behaviours : individuals and departments work towards corporate objectives : staff understand their delegated role and function in the strategic plan staff, departments and stakeholders become aware of issues . The need for change is explained and then understood eg meetings to resolve an industrial dispute excluding staff from the flow of appropriate information is demotivating ? Miscommunication is a misunderstood message and can be caused by poor communication skills, interference (noise) or information overload. . Poor industrial relations and motivation. eg staff using jargon, the wrong tone of voice or body language, or inappropriate medium eg email for a confidential message. eg staff are located in different buildings or regions eg sending too many messages and memos . In formal, bureaucratic organisations with many levels of hierarchy, communications is generally top down, and slow. . Consultation a discussion to assess views on a particular issue Downward communication occurs when messages are transmitted down the organisational chart and is associated with autocratic leadership styles . In two-way communication feedback from receivers is valued and is associated with democratic leadership styles and consultation 44 Communication | staff missing work without good reason An independent organisation that aims to prevent and resolve industrial disputes the process of holding individuals or institutions answerable for their responsibilities, actions and decisions. an investment appraisal method that estimates annual profit from a project as a percentage of the initial investment Compares current assets excluding stock with current liabilities. A measure of liquidity one business buys ownership and control of another firm. A takeover an annual General meeting where shareholders received reports and elect directors the main objective of the business eg survive, make a profit, or grow a framework for identifying four strategic options for growth in terms of markets and products an evaluation of staff performance over a given period of time usually against stated objectives firms markets products that (a) match customers want and (b) match their own strengths items of value owned by a business eg cash, equipment and stock an investigation into an area of business activity the power managers have to direct subordinates and make decisions. a leadership style with the leader retains control and makes major decisions with minimum consultation the cost of making one item ie unit cost a statement showing the assets and liabilities of an organisation on a particular date the obstacles that restrict firms breaking into a market and competing with established firms. the official rate of interest set by the monetary policy committee of the Bank of England assessing the performance of a business against those achieved by rivals eg comparing productivity levels or labour turnover £ billion denotes £1,000 million ie £1,000,000,000 individuals elected by the shareholders of a company to manage the business. Directors control the business the value of total assets less the value of total liabilities on the date given in the balance sheet. any factor that causes normal business activity to be delayed or stopped a named product customers distinguish from other products eg McDonalds the process of creating a distinctive image for a product that sets it apart from its rivals the minimum level of units sold for revenue to cover all costs - the business is making neither a profit or loss The process of monitoring actual and forecasted performance over time to identify variance the use of established rules and regulations as a way of running an organisation, any organisation that uses resources to create products for its customers the process of turning inputs such as raw materials into outputs ie goods and services shared attitudes, values and behaviours within an organisation. fluctuations in the level of economic activity over time causing booms and slumps. Also called the economic cycle. the activities of different departments in an organisation the way in which staff roles and responsibilities are arranged within a firm a report stating the nature of the business, research findings, cash flow and sales forecasts, and an action plan for future business activity BRP is a fundamental redesign of business procedures usually requiring substantial investment in new capital a number value of the chance of bad outcome from a decision. Eg a 75% or 75:25 chance of a new business surviving its first year. willingness to take business risks and organise production funds provided by owners of a business ie shareholders in return for shares when firms try to do the ‘right thing’ principles considered fair, honest and morally correct the price of one currency in terms of another currencies $2/£ means the price of one UK £ pound is two US$ dollars domestically made products sold overseas a set of actions which aim to maintain sales of products in the maturity phase of the product life cycle or revive sales of declining products the costs imposed on others by consumers and producers. Eg new night time deliveries impose noise costs local residents the context in which firms operate and over which it has no control and includes the economy, the action of rivals, the law and social trends. finance raised from outside the business eg bank loan an increase in the size of a firm as a result of mergers or acquisition funds raised by an organisation an organisation that hires and organises resources to make products the use of government spending and taxation to change the level of total demand in the economy an organisational structure where there are relatively few levels of hierarchy the workforce is organised to be multiskilled and able to work variable hours to respond the changing demand the process of becoming a plc by offering new shares for sale to members of the general public. an attempt to estimate the future value of a variable eg sales one business (the franchisor) grants another business (the franchisee) a licence to sell its products and use its name a business that uses the business idea, process, product or brand name owned by another, the franchisor the firm that grants a franchisee the legal right to use its business idea, process, product or brand name when a business organises itself into departments eg marketing and operations no business is yet providing a product with a combination of features customers may need eg medium quality low priced fashion clothing The proportion of capital employed financed through borrowing rather than equity or reserves the process of ever increasing business activity taking place across national boundaries creating worldwide markets and interdependence sales revenue less cost of sales (direct costs or variable costs) the proportion of a product's selling price that is gross profit. Overheads are ignored. an increase in production levels. Expansion management levels within an organisation ie the ‘pecking order’ the debts of a company are high in relation to equity capital staff who work for an organisation, both employees and managers. perceptions of a product, brand or organisation held by others domestic purchase of goods and services produced overseas a government charge on individual's earnings. Gross income less income tax is disposable income the legal process that gives a firm its own legal status separate from that of tits owners. expenses of production such as rent that are independent of the level of output. Overheads a charge imposed by the government on the sale of goods or services. Staff activities eg overtime bans and strikes that disrupt production putting pressure on managers to make concessions conflict between management and employees that can lead to industrial action all those firms producing the same product products whose sales fall as incomes rise. Items with a negative income elasticity of demand | Location 51 ...
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This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.

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