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3.1.1 Corporate objectives

A) Development of corporate objectives from mission statement/corporate aims

Hierarchy of business objectives:

hierarchy of objectives

Mission statement – This is the long term objective of the business that includes the overriding goal of the business and the reason why it exists. This is a relatively brief outline of the business and is includes a relatively broad number of topics.

Corporate objectives – These are objectives that relate to the business as a whole and are set by the senior management of the business. The objectives set are often aimed at satisfying shareholder and act as a framework for setting more detailed objectives for the functional objectives.

Department/functional objectives – These objectives go into more detail of the specifics to how the corporate aims will be met. For example, an objective may be for the marketing department to increase sales by 5% each quarter. The department objectives should flow from the corporate objectives.

SMART objectives:

Specific – The objectives set need to be clear as to what they plan to do e.g. a specific number or percentage.

Measurable – The objectives need to be able to be measured so the business can see how it’s progressing and where it is in relation to its objectives.

Achievable – The objectives need to be achievable, but at the same time it needs to stretch the business so that it is difficult to achieve. Therefore the business has to work hard in order to achieve the objective.

Realistic – The objectives set should be sensible thus allowing the business to achieve it.

Timed –The business needs to set a date for when the objective should be achieved e.g. in a month or a year.

 

B) Critical appraisal of mission statements/corporate objectives:

  • Purpose – The purpose of the mission statement is to set out the overall aim of the business and what it’s long term objectives are either for the business or also external to the business.
  • Intended audience – The mission statement is written for the stakeholders of the business.
  • Relation of corporate strategy to the mission statement – The corporate strategy should flow from the mission statement and outline the businesses objectives.
  • Uses of the mission statement:
  • Track progress – The mission statement helps to track the progress of the business and how it is doing compared to its overall objective. This can be used in order to make sure that the business is heading in its intended direction.
  • Public relations – A mission statement can help inform the public and other stakeholders of the purpose of the business and what it plans to achieve. This can help with public relations as they can see what the aim of the business is.
  • Strategic planning – The mission statement gives and outline of what the business wants to achieve. As a result of this, it is a good starting point for the business in helping them set their corporate objectives. This makes sure that the corporate objectives match the overall aims of the business so that they’re heading in the right direction.

Limitations of the mission statement:

  • Not always supported by business actions – Sometimes the actually actions of the business will not be supportive of their mission statement. This can result in the mission statement being less beneficial to the business as they’re making no effort to achieve the mission statement set.
  • Too vague – The mission statement often lacks detail and doesn’t say how the business will actually meet the aims that it has set.
  • Viewed as public relations stunt – Mission statements are often viewed as an attempt to enhance public relations rather than as a useful business tool for the business. This can often result in the mission statement being viewed cynically.
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2.5.3 The competitive environment

A) Impact of competition from other businesses:

Nature of ownership – If there is an increase in competition then other businesses may try and change their nature of ownership if they have unlimited liability to either a LTD or a PLC. This is due to the fact that the increase in competition is likely to increase the number of businesses that fail. Furthermore they may do this in order to expand so that they are able to retain their market share.

Product range – Businesses may try and increase their product range as competition increases in order to spread risk. Therefore if one product was to fail then the business is able to rely on others in order for them to remain profitable.

Pricing policies – As competition increases businesses are likely to adopt lower prices in order to remain competitive. This may result in businesses using a competitive or predatory pricing strategy.

Marketing methods – Businesses may try to increase their spending on marketing such as advertising as competition increases in order to maintain their market share.

Market size – This is the number of buyers and sellers in a particular market.

It is important that businesses launching a new product/service to know what its market size is. For example, if it has a large market size then the demand for the product is likely to be higher. However, this may also result in large amounts of competition in the market. This means that although the sales volume may be high, the sales turnover is likely to be relatively low. Successful entrepreneurs need to do their research in order to understand their target markets, identify a customer base and weigh up the competition.

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2.5.2 Legislation

A) The effects on businesses of:

Consumer protection – Businesses have to comply with a range of legislation that protects consumers such as the consumer protection act and the data protection act. This is likely to increase costs for businesses due to the fact that they need to put in place measures to make sure their goods are of satisfactory quality. However, by doing so it is likely to keep customers happy and as a result of this help to build businesses reputation.

Employee protection – The main legislation that will have the biggest impact on businesses is the national minimum wage act. This will cause an increase in the cost of wages for those businesses hiring low skilled employees. However, it may help to motivate employees thus increasing their productivity. Therefore, the minimum wage could lower costs to some extent.

Environmental protection – This is likely to increase the costs that businesses face due to the fact that they will have to dispose of wastage properly. This can often be a long and expensive process and may force some businesses to change their production process entirely.

Competition policy – This is legislation that’s designed in order to prevent monopolies and collusion. This may restrict businesses that are trying to grow inorganically or those that grow organically but are a monopoly. 

Health and safety –This is likely to increase the businesses costs due to the fact that they will have to provide all employees with the basic safety equipment. However, it will also reduce the amount of accidents that take place at work which is likely to reduce the risk of damaged reputation as well as long term employee absenteeism. 

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2.5.1 Economic influences

A) The effect on businesses

Inflation – This is an increase in the general price level of goods/services within an economy. A decrease in the inflation rate is likely to result in a reduction in businesses goods/services. This is likely to result in an increase in consumer’s purchasing power and as a result of this an increase in the demand for businesses goods/services. In addition to this, it will also increase the competitiveness of exporting businesses due to the decrease in domestic goods/services relative to other countries.

Exchange rates – This is the value of one currency expressed in terms of another currency. A depreciation in the domestic country’s currency will result in a decrease in the price of exports and an increase in the price of imports. This is likely to result in an increase in the demand for exporting businesses goods/services. However, it will also result in an increase in the price of raw materials for those businesses that import them. As a result of this, it is likely to increase the costs of production for businesses which may then be passed onto consumers in the form of higher prices. An appreciation in the currency will have the opposite effect.

Interest rates – This is the reward for saving and the cost of borrowing. The interest rates are set by the bank of England. A lower interest rate will reduce the cost of borrowing as well as reduce the reward for savings. As a result of this, businesses are much more likely to borrow money when interest rates are low. Furthermore, it will mean that the amount of money that consumers are paying on loans such as mortgages will be reduced. As a result of this, consumers will have more disposable income resulting in increased consumer consumption. This will cause the demand for businesses goods/services to increase. An increase in the interest rates will have the opposite effect.

Taxation and government spending – Taxation is money paid to the government on various forms of income. The main type of tax affecting businesses is corporation tax. An increase in corporation tax will result in a reduction in businesses profit. Corporation tax is a certain amount of money that is taken away from a business’s profits. Furthermore, if income tax increases then consumers will be left with less disposable income. As a result of this, consumer consumption is likely to decrease. This will result in a reduction in the demand for businesses goods/services.

The business cycle – The business cycle is a measurement of the fluctuations in real GDP in an economy. During a boom there is likely to be high employment, high consumer confidence and high disposable incomes. As a result of this, there is likely to be a high demand for businesses goods/services resulting in high profits. This is in contrast to a recession where there is likely to be a lack of demand for a business’s goods/services.

 

B) The effect of economic uncertainty on the business environment

Uncertainty about the future of the economy can have a big impact on businesses behaviour. In times of uncertainty businesses are likely to reduce their spending. Contingency planning can also help to reduce the risk of uncertainty.

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2.4.4 Quality management

A) Quality

Quality control – A process that ensures product quality is maintained or improved through the reduction in mistakes. This is done through checking products after they have been made. This can be done through actions such as inspection, sampling or testing. This helps to detect faulty products.

Quality assurance – This is a process by which quality is built into every stage of the production process. This is in contrast to quality control where it is left until the end. Quality assurance is reliant on workers self-checking their work in order to make sure there are no mistakes. The aim is to ensure that no mistakes are made. This is referred to as a zero defect policy.

Quality circles – This is when a group of people meet on a daily basis in order to suggest improvements to the production process or solve any current problems. Quality circles often include employees as they are likely to have the most knowledge of what could be improved. By allowing employees to suggest improvements it is likely to result in increased motivation.

Total quality management – This is a quality management approach that put quality at the heart of everything in the business. A total quality management system will involve features such as quality circles, zero defect policy and quality circles.

Quality is important for business as it is needed in order for the long term success of the business. This is due to the fact that it ensures that customers remain happy and therefore the business is likely to experience repeat sales. In addition to this, it helps to make sure that the business has a good reputation. Although this is the case, the extent to which quality is important for businesses is mainly dependent on where they place themselves in the market. For example, if they are trying to compete in the high end of the market then quality is going to be extremely important in enabling them to compete against other high quality businesses. 

 

B) Continuous improvement (Kaizen)

Kaizen (continual improvement) – This is the process of constantly introducing small incremental changes in order to improve the production process of the business.  

 

C) Competitive advantage from quality management

Quality management can allow businesses to gain a competitive advantage over their competitors. This is due to the fact that by using quality management it means that the business is likely to produce products that are of better quality than its competitors. As a result of this, customers are likely to see the product as being superior of rivals. This is likely to increase the demand for the businesses products. Furthermore, as a result of the high quality, it is likely to result in customers being more happy with the final product that they receive. As a result of this, the business is likely to experience repeat sales. This will increase the businesses overall sales and therefore help them to gain a greater market share. Furthermore, buy producing higher quality goods they’re more likely to appeal to a price inelastic group of customers. This means that the business will be able to charge higher prices for its goods thus increasing the overall profit that the business makes.

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2.4.3 Stock control

A) Interpretation of stock control diagram

Stock control

Lead time – This is the difference between the stock being reordered and it arriving.

Minimum stock level – This is the minimum amount of stock that a business will hold.

Re-order level – This is the point at which they order more stock.

 

B) Buffer stocks

Buffer stock – This is a certain amount of stock that is held in case of unexpected events or orders meaning that they can still be met without a delay.

The main benefit to a business having a buffer stock is so that they are able to reduce the risk of not being able to meet customer demand. This is due to the fact that the buffer stock will allow the business to meet any unexpected changes in demand. However, one of the costs of this is due to the fact that the business will have to spend lots of money storing these stocks and as a result of this may experience an increase in their average costs. This is especially detrimental due to the fact that the stock is unlikely to be used and therefore money could be wasted keeping a hold of buffer stock.

 

C) Implications of poor stock control:

  • Increased costs – By having poor stock control it is likely to result in excess stock. Money will then have to be spent storing this or potentially getting rid of it if it has an expiry date. This will result in an unnecessary increase in the business’s costs. Furthermore, it will mean that money is tied up in stock when it could have been invested instead.
  • Unable to meet demand – Poor stock control may result in the business not having enough stock in order to meet their demand. As a result of this, it is likely to result in a loss of customers who may be unhappy with the poor service. This is likely to damage the business’s reputation.
  • Cash flow problems – By having money tied up in stocks it may mean that the business does not have enough cash to meet its current liabilities and therefore can lead to liquidity issues with the business. This will be shown by the business’s acid test ratio.

 

D) Just in time (JIT) management stock

Just in time system – A just in time system is a system where supplies are received as soon as they’re needed. Therefore there is no need for a business to hold any stock.

Just in time system benefits:

  • Minimises wastes – Due to the fact that supplies are received when they’re needed there is no wastage. This is because it negates the problem of a business having too much or too little stock. This is likely to result in a reduction in the businesses average costs.
  • Cost saving – As supplies are received when they’re needed it means that the business does not have to spend money holding onto stock. Therefore this will negate the need for the business to have storage facilities. This space could then be used in order to increase the output of the business e.g. another production line.
  • Less capital tied up in stock – By incorporating a just in time system into a business it means that they do not have to have unnecessary amounts of stock. As a result of this, they will not have any capital tied up in stocks meaning that they can use it for better purpose e.g. investment which is likely to give them a rate of return on the money used.

Just in time system drawbacks:

  • Difficult to incorporate – A just in time system can be very difficult to incorporate in some businesses due to the bi change business processes that it results in. Furthermore there are some industries where it cannot be implemented such as the food industry.
  • High cost – There can be an extremely high cost of implementing the just in time system. This is due to the massive changes in production that will be required in order for the system to work. Furthermore, the suppliers will need to be located close to the business and therefore a lot of land is likely to be required.
  • Risk of running out of stock – By using a just in time system the business runs the risk of running out of stock. This is especially the case if the business and suppliers do not have a good relationship. For example, if the supplier is not ready with the stock then it may result in the production process being brought to a halt which can be very costly to a business due to the loss of output it will result in.

 

E) Waste minimisation

Waste minimisation helps to reduce unit costs of production through improvements in efficiency.

 

F) Competitive advantage from lean production

Lean production is a management approach focusing on cutting wastage whilst making sure that products remain of sufficient quality. This helps to increase the efficiency of the business thus increasing the business’s profit margins. This will allow them to be more competitive either through lower prices or increased profit.

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2.4.2 Capacity utilisation

A) Capacity utilisation

Capacity utilisation – measures the extent to which the productive capacity of a business is being exploited.

Capacity utilisation = Current output/Maximum possible output x 100

 

B) Implications of under and over utilisation of capacity

Implications of over utilisation of capacity:

  • Maintenance – By working at over capacity it will mean that there will not be enough time for the machines to be properly maintained. As a result of this, there it may result in the businesses machines breaking down on a regular basis. This is likely to impact the business negatively, for example, they may have to delay orders while they are fixing the machines. This may lead to a loss of reputation.
  • Inflexibility – By working at over capacity it means that the business has no room in order to increase output further with their current factors of production. As a result of this, they are likely to be unable to meet any new or unexpected orders. This may result in customers being unhappy and therefore a loss of reputation.
  • Staff – By working at over capacity staff are likely to be put under excessive pressure. This is likely to cause an increase in the amount of mistakes that staff make as well as them becoming unhappy. As a result of this, the business is likely to suffer high absenteeism rates as well as high labour turnover.
  • Costs – In order to work at over capacity, businesses are likely to have to pay for staff to work overtime to meet orders made. This is likely to cause costs to increase thus reducing their profit margins.

Implications of underutilisation of capacity:

  • Inefficiency – By not producing at maximum capacity it may mean that the business is unable to full exploit economies of scale. As a result of this, the business is likely to experience an increase in their average costs.
  • Flexibility – By not producing at full capacity it allows the business some slack. This means that if new or unexpected orders were to be demanded the business would be able to increase their current output and match the increase in demand.
  • Loss of market share – If the business is operating at less than full capacity then it is likely to result in a reduction in the sales of the business. As a result of this, their percentage market share is likely to decrease.

Ways of increasing capacity utilisation

  • Increase workforce hours – Staff could be encourage to work overtime or temporary staff could be employed thus increasing the businesses current output.
  • Outsource some of production – by outsourcing some of the production process it allows the business to increase its current output.
  • Reduce machine maintenance – This will reduce the time at which machines are not producing goods. Therefore, although it may be unsustainable, in the short run output will increase.

 

C) Ways of improving capacity utilisation:

  • Competitors exiting the market – This is likely to result in an increase in demand for the current business’s goods/ services. This is because customers of competitors that have exited the market will switch over to businesses that are still in the market. This will allow the business to increase its current output in order to match the increase in demand. As a result of this it is likely to improve their percentage of capacity utilisation,
  • Balancing seasonal demand – Businesses could balance their seasonal demand by reducing their inputs e.g. staff in periods of low demand then increasing them again when demand increases. This will cause potential output to fall as current output does (low demand) and potential output to increase as current output does (high demand). This will allow the business to work at a higher percentage of capacity utilisation throughout the year.
  • Improved marketing – By increasing marketing when in periods of low demand, it is likely to result in an increase in demand. This will help to increase current output thus increasing the percentage of capacity that is being utilised.
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2.4.1 Production, productivity and efficiency

A) Methods of production:

Job – This involves making individual goods either by a single worker or a group of workers e.g. ship builders.

Batch – This is when a group of similar products are made together e.g. different colours of paint

Flow – This involves the use of production lines where products flow around the factory in a continuous process until they’re finished e.g. car manufacturing

Cell – This is when the production of items are organised into teams/cells. Each cell is responsible for making different parts of the product. This allows for job rotation due to the number of skills that workers have as well as allowing for teamwork.

 

B) Productivity

Productivity – Output (how much is produced) per unit of input (one worker) per hour.

Factors influencing productivity:

  • Quality of inputs – If a business has high quality/skilled labour or high quality machinery then productivity is likely to be very high. This is due to the fact that high skilled staff are much more trained and therefore can do their work much faster than untrained workers. However, this may result in an increase in costs due to the fact that skilled labour is likely to be much more expensive than low skilled labour.
  • Motivation – If motivation of the labour workforce is high, then they’re much more likely to be productive. This is due to the fact that they will be driven to producing much more quality products and in a faster amount of time. However, highly motivated staff may be more expensive. Furthermore, their motivation may be financially driven and therefore motivation will drop again once workers get used to their increased pay level.
  • Technology – Changes in technology may result in the productivity of the production increasing. This may be as a result of the production process being mechanised due to the fact that robots are able to work 24/7 which is in contrast to workers. However, this is likely to result in high levels of unemployment which may damage the reputation of the business.
  • By increasing the productivity of the inputs of a business’s then it is likely to reduce average costs. This is due to the fact that costs will be spread over a larger output as productivity increases. This is likely to result in businesses becoming more competitive due to the fact that their profit margins are likely to increase. This will allow the businesses to gain an increased amount of profit or they could use the cost saving to lower their price which is likely to result in increased demand for their product and therefore an increase in their market share.

 

C) Efficiency

The production at minimum average cost occurs when economies of scale are fully exploited. This is called the minimum efficient scale.

Factors influencing efficiency:

  • Quality of inputs – If a business has high quality inputs such as skilled staff then they’re likely to be better at their job. This will reduce the amount of waste produced as fewer mistakes are made. Furthermore, the quantity of goods produced is also likely to increase due to the fact that skilled labour can make goods faster as they know what they’re doing. This will result in an increase in efficiency.
  • Production – If the business has a lean production approach to management then it will help to reduce unnecessary wastage. This will help to reduce the business’s cost caused by wastage and therefore increase the efficiency of the business.
  • Management of staff – If staff are better organised then it is likely to result in an improvement in the co-ordination of the business. As a result of this, less time is likely to be wasted resulting in a reduction in costs and therefore increased efficiency.

Labour intensive production is where the production process involves a lot of labour. In businesses where production is labour intensive, labour are likely to take up a high percentage of total costs e.g. agriculture. This is in contrast to capital intensive production where the majority of production is mechanised e.g. car manufacturing. In capital intensive production few workers are involved in the production process and those who are likely to be maintaining the machinery.

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2.3.3 Business failure

A) Internal and external causes of business failure

Internal causes of business failure:

  • Inefficiency – If the business is inefficient then it is likely to result in a reduction in the profit that the business makes. As a result of this, there is likely to be a lack of working capital which may result in the business being able to pay current liabilities and therefore causing the business to fail.
  • Poor market research – Poor market research can cause the business to enter a market where there is a lack of demand for their goods/services. This will result in a lack of revenue which may mean that the business is not profitable and therefore will fail.
  • Failure to innovate – This can result in falling revenues which may eventually result in a shortage of working capital thus causing the business to fail.
  • Poor cash flow management – This may result in businesses experiencing a lack of cash and therefore resulting in them being unable to pay their current liabilities. The risk of this occurring can be reduced through cash flow forecasts to identify and solve months in which there may be shortages of cash.
  • Lack of capital leading to excessive borrowing – If the business is unable to pay its current liabilities then it may need to loan money. This may lead to excessive borrowing resulting in the business failing in the long term.

 

External causes of business failure:

  • Strong pound – A strong pound will result in an increase in the price of domestic exports. This will reduce the competitiveness of domestic goods/services being sold abroad. As a result of this, exporting businesses will see a decrease in the demand for their goods/services. This will result in a reduction in revenue which could cause the business fail.
  • Competition – The business may fail due to actions from competitors. For example, if one of the main competitors decided to adopt a predatory pricing strategy then it could force the business out of the market.
  • Government policies – Policies set by the government such as a big increase in the corporation tax could increase businesses costs of production massively. This may result in the most inefficient businesses being forced out of the market.
  • Recession – A change in economic conditions such as a long term fall in economic growth may result in a significant reduction in demand. As a result of this, some businesses may struggle to remain profitable and therefore close.
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2.3.2 Liquidity

A) Statement of financial position (Balance sheet)

Current assets – These are assets which the business is able to turn into cash quickly. The most liquid asset that a business has is cash.

Current liabilities – These are short term debts/obligations which the business will need to pay in the short term e.g. bills.

Non-current assets – These are assets which cannot easily be turned into cash e.g. property.

Non-current liabilities – These are debts/obligations which the business will have to pay in the long term (not the short term) e.g. long term loans.

Liquidity – The ease at which a business can turn its assets into cash immediately in order to pay its current liabilities.

Balance sheet – This is a document showing a snapchat of the assets and liabilities of a business giving an insight into the liquidity of the business.

Measures of liquidity

  • Current ratio = Current assets/Current liabilities
  • Acid test ratio = Current assets – Stock/Current liabilities

The current account ratio shows how able a business is to pay off its current liabilities. The higher the current ratio figure, the more able a business is to pay off their current liabilities. The acid test ratio is a more strict measure of liquidity. This is due to the fact that it does not make the assumption that all stock/inventory will be sold which is in contrast to the current ratio. As a result of this, a business’s acid test ratio is likely to be much lower than their current ratio.

Ways to improve liquidity:

Reduce credit period offered – By doing this it means that the business will be able to increase its short term assets.

Pay suppliers later – By doing this it will reduce the amount of current liabilities that the business has. Through delaying the payment it will result in it becoming a non-current liability thus improving the short term liquidity of the business.

Increase long term borrowing – Although this will increase non-current liabilities, it will help to clear short term debts thus reducing current liabilities and therefore improve the liquidity of the business.

 

B) Working capital and its management

Working capital – This is the money that the business has available to meet its day to day activities.

Working capital = Current assets – Current liabilities

Cycle of working capital = Stocks ordered form supplier – production turns stocks into products (outflow of cash paid to suppliers) – products held until a customer is found – products sold to customers – customers pay for their purchase (inflow of cash paid by customers).

If the business’s current assets are less than their current liabilities then they will have trouble paying their short term debts due to a lack of cash. Therefore the business is at risk of failing and going bankrupt. It is important that businesses mange the amount of working capital that they have in order to prevent shortages of cash.