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2010 Edition

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2/10| Strategic management 1

Business Objectives............................................... 2

Strategic management.................................... 2

Mission.............................................................. 2

Aims and Objectives....................................2

Strategy and tactics..................................... 3

Corporate planning...................................... 3

Planning................................................................ 5

SWOT Analysis.............................................. 6

Stakeholder objectives....................................7Risk and reward ................................................ 8

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............. 19What is performance.................................... 19

Ratios .................................................................. 20

Profitability ratios..................................... 20

Shareholder ratios .................................... 20

Return on investment.............................. 20

Liquidity ratios........................................... 20

Efficiency ratios ......................................... 20

Gearing ratios ............................................. 20

Profitability.................................................. 21

Shareholder..................................................22

Liquidity........................................................ 22

Financial efficiency................................... 23

Gearing........................................................... 23

Investment appraisal.................................... 24

Budgets............................................................... 25

External influences............................................. 27

Market Failure................................................. 27

Economic growth ........................................... 28Economic cycle................................................ 29

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....................................41Environmental issues................................... 42

Moral and ethical issues:............................. 43

Change..................................................................... 44

Communication............................................... 44

Change management..................................... 45

Industrial relations................................... 46

Location.............................................................. 47

A2 Strategy Glossary.......................................... 48

1st Edition. First published 2010© Richard Young. All rights reserved.

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3/10| Planning 5

Planning is the management process of establishing objectives and selectingstrategies and tactics required to achieve them. Planning prepares a course of action to achievestated 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 thanfocus on present problems. The planning process helps the business assess its current positionand identify appropriate future actions required to meet stated objectives

There is

no one agreed method.

Generalising, seniormanagers carry out a

of their internal and

external environment.They use results of theaudit to clarify ,

and andto formulate a most likely to deliver objectives given the firm’s internal resources andexternal context. Junior managers then decide . Monitoring involves regularly measuringprogress against forecasts and taking corrective action given . of performance in meeting objectives informs planning for the next cycle.

A situational analysis is an assessment of the firm’sinternal and external environment

The external environment is the circumstances inwhich the organisation operates. External factors such as the state of the economy, legalconstraints, and social trends are beyond the control of the business.

. The internal environment is the resources andcapabilities of an organisation.

An audit is an investigation into an area of business activity.

In assessing the current internaland external environment a business can use a variety of tools including

PEST analysisCompetitor analysisSWOT analysis

Factors outside the control of thebusiness 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.

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4/1010 Time series analysis |

. Time series analysis is a technique for

identifying a pattern in data. If a pattern exists, a trendcan be predicted.

A trend is a persistent long termmovement in data

. In thediagram there is a persistent upward movement in sales over time

Time series data is a set of values observed at regular intervals egannually, 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 toreveal trends by removing seasonal or cyclical fluctuations.

The average of £98 is recalculated on the latest data points to £120, hence the term movingaverage.

.

Forecasts are based on past datatrends. A sudden unexpected changein economic conditions or consumertaste may invalidate future trends.

Firms operate in a dynamic market and must respond to external forcesbeyond their control. An unexpectedeconomic downturn or new competitor may frustrate well researched forecasts

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5/10| Critical path analysis 17

LFT shows the latest time an activity can finishwithout delaying the entire project. LFTs are calculated by working from right to left. Eg the LFTfor node 5 = 62 – 5 =

The critical path is the longest-path in the diagram. Any delay inactivities 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-criticalactivity has float time.

Free float is the amount of time any one individual activity can be delayedwithout 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 runwithout 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 easilyestimated

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 CPAand JIT stock control minimises waste and improves cash flow

As with any quantitative tool, CPA relies uponaccurate estimations of data eg activity duration. Managers are under pressure to completeactivity on time – quality may be compromised. CPA ties up management resources

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6/10| Ratios 23

Financial efficiency or measurehow well an organisation is using its resources

. Stakeholders use asset turnover, stock turnover,debtor days and creditor days to assess the performance of an organisation’s operations.

The turnover ratio shows howefficiently 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 reducestotal output income and employment in the economy. Sales fall damaging asset turnover

By improving capacity utilisation; closingdown (selling off) underperforming areas of the business; increasing sales, eg, through bettermarketing. Downsizing releases resources to areas that generate more sales revenue.

Usually, a high stock turnover ratio suggests thebusiness is efficient and selling goods quickly to customers.

The stock turnover ratio improves if a firmhold less stock or increase sales.

Switching to just-in-time production methodsreduces stock holdings and so increases the stock turnover ratio.

The debtor day ratio shows the average amount of timetaken to collect debts from customers sold items on credit. The lower the ratio, the moreefficient 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 anorganisation 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 continuallyrolled over) and interest payments maintained.

A debenture is a type of long-term loan (bond). Usually debentures paya 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 financialhealth 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 itscapital structure to finance its operations and growth

. A highly geared business has a gearing ratio above 50% suggestingexcessive borrowing. Maintaining interest and debt repayments may be challenge.

. Firms that arehighly dependent on loans are often vulnerable to interest rates rises. Can the firm still meet

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7/10| Interest rates 35

eg EU wide metric measurements;Optional 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 nationalsIncreasing sales may cause economies of scale hence lower unit costsIncreasing competition from EU firms who have free trade access to UK marketsto 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

A common currency reduces the cost of international trade as

Commission for buying and selling euros is avoided.The uncertainty associated with unpredictable future exchange rates is removed andfirms no longer have to insure against unfavourable currency movements

? The UK has decided to stay outside the Eurozone for now. Thismeans 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 zoneis that interest rate decisions are made by the European Central bank.

Interest is the amount paid by adebtor to a lender for the use of money. Theinterest rate is both the cost of borrowing and the reward for saving.

The interest rate is the sum charged for borrowing money, expressedas 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 theBank of England’s Monetary Policy Committee. High Street banks use the official interest rate asthe base for setting their own charges for overdrafts and loans and savings rates.

The Bank of England increases interest rates to encouragesavings and discourage borrowing and so dampen demand. Less demand reduces inflationarypressure but may result in more cyclical unemployment.

: the cost servicing variable rate loans such as overdrafts increase. There is lessincentive to borrow funds to finance investment. Capital projects may be delayed

: households with net debts now paying more interest and so have lessdisposable income. Demand falls, particularly for products with a high income elasticityof 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: gearingthe individual context of the firm eg its gearing and product portfolio

? The impact oncosts depends on . Businesses that use equity financing face less impact oncosts than organisations that depend on overdrafts. Interest rate charges on overdrafts areusually linked to Bankof England’s base rate.

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8/1044 Communication |

. Communication is the transferof information between individuals

Internal communication is theexchange of information within the organisation. External communication is the exchange of information between individuals and groups outside the organisation.

. A sender encodes (chooseswords & images) and sends a message (a memo) via a medium(email) that is decoded (interpreted) by the receiver who thenresponds (feedback).

Communication aims toinfluence behaviour. In successful communication, the receiverdecodes, understands and acts on a message as intended by thesender.

Messages can be sent by letter, fax, memo, report or email or shared in face-to-face meetings.

Formal channels arethe official network of communications shownby an organisation chart. Informal unofficialcommunicationchannels areset 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 becaused by poor communication skills, interference (noise) or information overload.

. Poor industrial relations and motivation.

eg staff using jargon, the wrong tone of voice or bodylanguage, 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 aretransmitted down the organisational chart and is associated with autocratic leadership styles

. In two-way communication feedback from receivers isvalued and is associated with democratic leadership styles and consultation

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staff missing work without good reason An independent organisation that aims to prevent and resolve industrialdisputes

the process of holdingindividuals or institutions answerable fortheir responsibilities, actions anddecisions. aninvestment appraisal method that estimates annual profit from a project as apercentage of the initial investment Compares current assetsexcluding stock with current liabilities. Ameasure of liquidity one business buys ownershipand control of another firm. A takeover an annual General meeting whereshareholders received reports and elect directors the main objective of the businesseg survive, make a profit, or grow a framework foridentifying four strategic options forgrowth in terms of markets and products an evaluation of staff performance over a given period of timeusually against stated objectives firms markets products that (a)match customers want and (b) match theirown strengths items of value owned by abusiness eg cash, equipment and stock an investigation into an area of business activity the power managers have todirect subordinates and make decisions. a leadership stylewith the leader retains control and makesmajor decisions with minimumconsultation the cost of making one itemie unit cost

a statement showing theassets and liabilities of an organisation ona particular date

the obstacles that restrict firms breaking into a market andcompeting with established firms.

the official rate of interest set by the monetary policy committee of theBank of England

assessing theperformance of a business against those

achieved by rivals eg comparingproductivity levels or labour turnover

£ billion denotes £1,000 million ie£1,000,000,000

individuals elected bythe shareholders of a company to managethe business. Directors control thebusiness

the value of total assets lessthe value of total liabilities on the dategiven in the balance sheet.

any factor that causes normalbusiness activity to be delayed or stopped

a named product customersdistinguish from other products egMcDonalds

the process of creating adistinctive image for a product that sets it apart from its rivals

the minimum level of unitssold for revenue to cover all costs - thebusiness is making neither a profit or loss

The process of monitoring actual and forecastedperformance over time to identify variance

the use of established rulesand regulations as a way of running anorganisation,

any organisation that usesresources to create products for its

customers the process of turninginputs such as raw materials into outputsie goods and services

shared attitudes, valuesand behaviours within an organisation.

fluctuations in the level of economic activity over time causing boomsand slumps. Also called the economiccycle.

the activities of

different departments in an organisation the way in whichstaff roles and responsibilities arearranged within a firm

a report stating the natureof the business, research findings, cashflow and sales forecasts, and an action planfor future business activity

BRP isa fundamental redesign of businessprocedures usually requiring substantialinvestment in new capital

a number value of thechance of bad outcome from a decision. Ega 75% or 75:25 chance of a new businesssurviving its first year.

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10/10| Location 51

willingness to take businessrisks and organise production

funds provided by ownersof a business ie shareholders in return forshares

when firms try to dothe ‘right thing’

principles considered fair, honest

and morally correct the price of one currencyin terms of another currencies $2/£ meansthe price of one UK £ pound is two US$dollars

domestically made products soldoverseas

a set of actions whichaim to maintain sales of products in thematurity phase of the product life cycle orrevive sales of declining products

the costs imposed onothers by consumers and producers. Egnew night time deliveries impose noisecosts local residents

the context inwhich firms operate and over which it hasno control and includes the economy, theaction of rivals, the law and social trends.

finance raised fromoutside the business eg bank loan

an increase in the size of

a firm as a result of mergers or acquisitionfunds raised by an organisationan organisation that hires and

organises resources to make products the use of government

spending and taxation to change the levelof total demand in the economy

an organisationalstructure where there are relatively fewlevels of hierarchy

the workforce is

organised to be multiskilled and able towork variable hours to respond thechanging demand

the process of becoming a plcby offering new shares for sale tomembers of the general public.

an attempt to estimate thefuture value of a variable eg sales

one business (the franchisor)grants another business (the franchisee) alicence to sell its products and use itsname

a business that uses thebusiness idea, process, product or brandname owned by another, the franchisor

the firm that grants afranchisee the legal right to use its

business idea, process, product or brandname

when abusiness organises itself into departmentseg marketing and operations

no business is yet providing a product with a combination of features customers may need eg medium

quality low priced fashion clothingThe proportion of capitalemployed financed through borrowingrather than equity or reserves

the process of everincreasing business activity taking placeacross national boundaries creatingworldwide 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.

Expansionmanagement 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 andmanagers.

perceptions of a product, brand ororganisation held by othersdomestic purchase of goods and

services produced overseas a government charge on

individual's earnings. Gross income lessincome tax is disposable income

the legal process that gives a firm its own legal status separatefrom that of tits owners.

expenses of production

such as rent that are independent of thelevel of output. Overheads a charge imposed by the

government on the sale of goods orservices.

Staff activities egovertime bans and strikes that disrupt production putting pressure on managersto make concessions

conflict betweenmanagement and employees that can leadto industrial action

all those firms producing thesame product

products whose sales fallas incomes rise. Items with a negativeincome elasticity of demand