Theme 3 (Business decisions and strategy)

• Mission statement


  Outlines the overriding purpose of a business and the reason for its existence
• Corporate objectives


  What the company is specifically aiming to achieve over a fixed time period
• Uses of a mission statement


  • Guide employee behaviours
  • Communicate to stakeholders
• Limitations of a mission statement


  • Not always supported by actions
  • Often too vague and misinterpreted
• Ansoff's Matrix is a diagram
• Porter's Strategic Matrix is a diagram
• Uses of portfolio analysis (Boston Matrix)


  • Explore new product development opportunities
  • See which products no longer contribute - divest
• Limitations of portfolio analysis (Boston Matrix)


  • Markets are subject to change
  • Some product can be reinvigorated
• Ways of achieving a competitive advantage through distinctive capabilities


  • Innovate – new products and/or processes
  • Architecture – build relationships within and with suppliers and customers
• Strategic decisions


  More long-term and affect the whole organization
• Tactical decisions


  More short to medium-term and might affect departments or business units, made to support the strategic decisions
• Effect of strategic and tactical decisions on

  • Human resources
  • Physical resources
  • Financial resources
• Ways in which the changing competitive environment can affect businesses

  • Economic downturns might lead to lower demand resulting in a more competitive marketplace
  • Social factors such as trends and patterns in buying are forcing businesses to review distribution channels
• SWOT


  Strengths, Weaknesses, Opportunities, Threats
• Elements of Porter's Five Forces

  • Threat of new entrants
  • Intensity of rivalry
  • Threat of substitutes
  • Bargaining power of buyers
  • Bargaining power of suppliers
• Objectives of growth

  • Increased market power
  • Exploit economies of scale
  • Increase profitability
• Problems arising from growth

  • Diseconomies of scale
  • Overtrading
  • Lack of control
• Economies of scale


  Reduction in the average unit cost as production output increases
• Diseconomies of scale


  Higher average unit cost once a business goes beyond the optimal production level
• Reasons for mergers and takeovers

  • Reduce competition
  • Acquire patent/intellectual property
• Mergers

  Creation of new firm when two individual businesses join together, usually on equal terms
• Takeovers


  One business acquires 50% or more of another business and thereby takes control over it
• Examples of growth


  • Supermarket buys a wholesaler (vertical backwards)
  • DIY chain buys another DIY chain (horizontal)
  • Brewing company purchases a chain of pubs (vertical forwards)
• Financial risks of mergers and takeovers

  • Original purchase cost
  • Cost to make changes including redundancies
• Financial rewards of mergers and takeovers

  • Immediate increase in revenues
  • Economies of scale leading to reducing unit costs
• Problems of rapid growth


  • Diseconomies of scale resulting from communication problems
  • Loss of strategic direction and loss of focus on core competency
• Inorganic growth


  Involves another business taking over or merging with it
• Organic growth


  Does not involve another business taking over or merging with it
• Methods of organic growth

  • New product launches
  • Opening new stores
• Benefits of organic growth


  • Less expense in the short term
  • Less risky due to increased control of the variables
• Drawbacks of organic growth

  • Much slower form of growth
  • Limits business's ability to react to the growth of competitors
• Reasons for a business staying small

  • Achieve higher profit margins
  • More cost efficient
• Methods a small business can employ to survive in competitive markets


  • Product differentiation and USPs
  • Flexibility in responding to customers needs
  • Customer service
  • e-commerce
• Moving averages


  A succession of averages derived from successive segments (typically of constant size and overlapping) of a series of values
• Scatter graph


  A graph showing the performance of one variable against another independent variable on a variety of occasions; used to show whether a correlation exists between the variables
• Extrapolation


  The use of trends established by historical data to make predictions about future values
• Limitations of quantitative sales forecasting techniques


  • Changes in consumer trends
  • Changes in economic variables
  • Actions of competitors
• Benefits of payback method of investment appraisal


  • Simple and easy to calculate
  • Focuses on cash flows
• Limitations of payback method of investment appraisal


  • Ignores cash flows beyond payback date
  • Ignores the time value of money
• Benefits of average (accounting) rate of return (ARR) method of investment appraisal


  • Focuses on overall profitability
  • Easy to compare with other rates of return