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Business objectives and strategic decisions flashcards

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1.1 Different stakeholder and business objectives

The hierarchy of objectives, from top to bottom: Organisational aim (broad purpose) → corporate objective (measurable target for the whole business) → strategic objective (how the corporate objective will be met) → tactical objective (a department's target) → operational objective (a day-to-day target).
Aim vs objective: An aim is a broad purpose and may have no number. An objective is a target and should be measurable.
SMART objectives (standard form): Specific, Measurable, Achievable, Realistic, Time-bound. Some courses read A and R differently ("agreed", "relevant"); use one wording consistently.
Typical objectives of the private, public and third sectors: Private: profit, return to owners, growth, survival. Public: service quality, access, value for money, budget control. Third: social purpose, with any surplus reinvested.
Why might objectives need to change?: Recession or a demand shift; a new competitor or technology; growth or change of ownership; missed targets; new laws or public attitudes; a crisis or survival threat.
A firm earning £2.0m seeks 15% growth in revenue. Target?: Target = current revenue × (1 + growth rate) = £2.0m × 1.15 = £2.3m, an increase of £0.3m.

1.2 Stakeholders

Stakeholder; internal and external examples: Any person or group that has a stake in what a business does or is affected by it. Internal: owners and shareholders, directors, managers, employees. External: customers, suppliers, lenders, competitors, community, government, pressure groups, media.
What do lenders, suppliers and the community want from a business?: Lenders: repayment and low risk. Suppliers: regular orders and prompt payment. Community: jobs, low disruption and a clean environment.
Why do stakeholder objectives conflict?: Different goals; limited resources; short-term against long-term views; different power and information.
Ways to deal with stakeholder conflict: Prioritise by power and interest, compromise, consult early, compensate or phase the change, or change the decision.
Influence vs interest: Interest is how much a group cares about or is affected by a decision; influence is its power to change it. A group can have great interest yet little influence.

1.3 Mission statement

Mission statement: definition and nature: A short public statement of what the business is for: what it does, for whom, and often how or why. Brief, memorable, general, forward-looking and not a numerical target.
Purposes of a mission statement: Gives direction, guides decisions, unites staff, and signals values to customers, investors, suppliers and the community.
Disadvantages of a mission statement: It can be vague or generic; it may be ignored, causing cynicism; it can limit flexibility; it costs time to write and communicate; stakeholders may read it differently.
Mission statement vs objective vs slogan: The mission says why the business exists; an objective is a measurable target that helps deliver it. A slogan is marketing wording; a mission should guide decisions inside the business.
Evaluating a mission statement: the key test: A statement is only worth having if behaviour matches the words. Changing one brings short-run costs (rebranding, training) while benefits take longer.

1.4 Corporate social responsibility (CSR)

Corporate social responsibility (CSR): The idea that a business should consider the effects of its decisions on society, the community and the environment, and act ethically towards all stakeholders, beyond what the law requires.
CSR policy vs CSR profile: The policy is the written commitments the business makes and how it will deliver and report them. The profile is how responsible stakeholders judge it to be.
How can CSR conflict with other objectives?: Profit (higher costs, lower margins), growth (turning down suppliers or contracts that fail standards), cost leadership, market share (higher prices) and short-term targets (slow payback).
A CSR change adds £0.03 a unit on 600,000 units; operating profit is £150,000. Effect?: Extra cost = 0.03 × 600,000 = £18,000, which is 12% of operating profit, leaving £132,000 if nothing else changes.
Advantages and disadvantages of a strong CSR profile: For: stronger brand and loyalty, possible price premium, motivated staff, goodwill, lower risk of scandal. Against: higher costs, lower short-run profit, failures magnified, benefits hard to measure, risk of accusations of exaggerated claims.
CSR vs the law; CSR vs charity: CSR means doing more than legal compliance, usually by choice. Donations are only one possible part of a CSR policy, not the whole of it.

1.5 Strategy and implementation

Objective, strategy and tactics: Objective: the target ("where?"). Strategy: the long-term plan for reaching it ("which route?"), costly to reverse, set by senior managers. Tactics: shorter-term actions that put the strategy into practice.
Implementation strategy: The plan for carrying out a strategy: resources, timing, responsibility, communication and milestones.
Why plan the implementation of a strategy?: Resources are ready when needed; steps happen in order; someone owns each task; staff know what is changing and why; milestones show early if the plan is off course; risks are spotted and fallbacks prepared.
Possible causes and costs of changing strategy: Causes: falling sales, a new competitor, changing tastes, new technology, a cash shortage, poor review results. Costs: retraining, lost spending, disruption, confused customers, damaged credibility.
Plan-Do-Review vs strategic review: Plan-Do-Review: a repeating cycle of setting a plan, carrying it out and comparing results with it. Strategic review: a wider, less frequent check on whether the strategy itself still suits the business and its environment.

1.6 Business plan

Business plan: definition and purposes: A written document setting out what the business will do, how, and the expected results. Purposes: test whether the idea can work, win finance, guide managers and set targets, provide a benchmark.
Main contents of a business plan: Executive summary; description, aims and objectives; market research and target market; marketing plan; operations and staffing; financial forecasts; finance needed and sources; risks and contingencies.
Advantages and disadvantages of a business plan: For: forces research and clear thinking, helps raise finance, sets targets, improves coordination, shows weaknesses early. Against: takes time and skill, forecasts can be wrong, it dates, may make managers rigid.
A plan forecasts 1,500 loaves a month; break-even is 1,334. Margin of safety?: 1,500 − 1,334 = 166 loaves, or 166 ÷ 1,500 × 100 = 11.1% of forecast sales. A lender would want evidence for the 1,500 figure.
How does a business plan affect lenders and suppliers?: Lenders and investors use it to decide whether to lend and on what terms. Suppliers may use it to judge whether to give credit.

1.7 Risk and uncertainty

Risk vs uncertainty: Risk: the possibility that a decision ends worse than hoped, which can often be measured. Uncertainty: not knowing what will happen, or being unable to give reliable probabilities.
Quantifiable vs unquantifiable risk: Quantifiable: likelihood or loss can be given a number from data (bad debts, machine breakdowns). Unquantifiable: no reliable basis for a number (a rival's unknown technology, a fashion shift).
A hit gives +£50,000 (p = 0.6), a flop −£20,000 (p = 0.4). Expected value?: 0.6 × 50,000 + 0.4 × (−20,000) = 30,000 − 8,000 = £22,000. The worst case is a £20,000 loss, so ask whether the business could bear it.
Ways to reduce risk: Research and forecasting; spreading across markets, suppliers and products; phasing or piloting; insurance; contracts; financial prudence; contingency plans.
Risks faced by an entrepreneur: Loss of savings; personal assets at risk if liability is unlimited; no guaranteed income; the opportunity cost of salary and security given up; business failure.
The five business activities uncertainty affects: Aims and objectives, planning, decision making, business analysis, and forecasting.

1.8 Opportunity cost

Opportunity cost: What the second-best use of the same resources was worth, lost by choosing another use.
Opportunity cost: method: List the realistic alternatives for the same resource, value each, rank them. The opportunity cost is the next best alternative only, not the total of all those rejected.
£40,000: a kiln earns £5,200 a year, training £4,600, a deposit £800. Opportunity cost of the kiln?: £4,600 a year (the training, the next best). The kiln wins by £600 a year on these figures.
Impact of opportunity cost on decision making: It forces comparison of options, shows that a positive return can still be a poor choice, applies to time as well as money, interacts with risk (the next best may be safer), and relies on estimates.

1.9 Contingency planning and crisis management

Contingency plan: A set of actions prepared in advance for an unexpected event that could disrupt the business. Standard definition.
Crisis: A serious, usually sudden event that threatens survival, reputation or normal running and needs urgent decisions. Standard definition.
Crisis management: How a business responds during and after a crisis.
Contingency planning vs crisis management: Contingency planning happens before the event: predicting, preparing, rehearsing. Crisis management happens during and after: deciding, communicating, containing, recovering. A good plan speeds the response; lessons feed back into the plan.
Expected loss: 5% chance a year of a £120,000 loss; a £2,500 plan cuts it to £30,000: Expected loss = probability × loss: £6,000 before, £1,500 after. Saving £4,500 − plan cost £2,500 = £2,000 net benefit a year.
Communication in a crisis: media and the public: One spokesperson, factual statements, no guessing about causes.

1.10 Models of strategic choice

Porter's Five Forces: Rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers. A strong force reduces profit by pushing prices down or costs up.
When is buyer power strong, and the threat of entry weak?: Buyer power is strong with few large buyers, easy switching and standard products. Entry threat is weak with high start-up costs, incumbents' scale economies, strong brand loyalty, hard access to distribution and patents.
Porter's generic strategies: Lower cost across the whole market: cost leadership. Differentiation across the whole market: differentiation. In a narrow segment: cost focus or differentiation focus.
Competitive advantage: definition and when it lasts: Something a business does better than rivals that earns more customers, higher margins or both. It lasts when customers notice it and rivals cannot copy it quickly (brand, patent, location, skills), not when it is a price cut rivals can match.
Limits of Five Forces and of the generic strategies: Five Forces: a snapshot, industry-level not firm-level, judging each force is subjective, it does not say what to do. Generic strategies: real firms often combine strategies, four boxes oversimplify, they do not show if a market is profitable.
Exam trap: cost leadership: Low price is not the same as cost leadership. Cost leadership is about having the lowest costs. Focus is about scope (a narrow segment), not the size of the firm.

1.11 Measures of performance: financial and non-financial

Financial vs non-financial measures of performance: Financial: final accounts, ratio analysis, gearing, cash flow, budgets, variance analysis; precise but backward-looking. Non-financial: market share, resource utilisation, environmental impact, quality, customer satisfaction; early warning but hard to compare.
Interest cover and gearing: Interest cover = operating profit ÷ finance costs (£30,000 ÷ £4,000 = 7.5 times). Gearing = non-current liabilities ÷ capital employed × 100 (£75,000 ÷ £250,000 = 30%).
Stock turnover and debtor days: Stock turnover = cost of sales ÷ inventory (£120,000 ÷ £25,000 = 4.8 times). Debtor days = receivables ÷ sales revenue × 365 (£20,000 ÷ £200,000 × 365 = 36.5 days).
Current ratio vs acid test: which is stricter?: The acid test, because it excludes inventory, which is slower to turn into cash. Example: current assets £50,000, inventory £25,000, current liabilities £30,000: current ratio 1.67, acid test 0.83.
Why are published accounts an incomplete measure of performance?: They report the past; omit quality, morale, loyalty and environmental harm; depend on judgements about depreciation and valuation; rarely show market position; a year-end snapshot can hide seasonal swings.
Cash-flow forecast vs cash-flow statement: A forecast looks ahead and plans; a statement records what happened.

1.12 Forecasting

Forecast: definition and purposes: An informed estimate of a future variable (sales, costs, profit, cash flow, demand). Purposes: reduce uncertainty; plan output, staffing, stock and finance; set targets; support funding requests.
Structured and unstructured qualitative forecasting methods: Structured: Delphi technique (experts give views separately and revise over anonymous rounds) and expert opinion. Unstructured: brainstorming and intuition.
Seasonal vs cyclical variation: Seasonal: within a year, caused by weather, holidays or the calendar; repeats predictably. Cyclical: over several years, caused by the economic or industry cycle; irregular in length and size.
Three-year moving average and cyclical variation: Moving average = (previous + current + next) ÷ 3, written against the middle year. Cyclical variation = actual − trend. Example: sales 50, 56, 53 → average 53.0 for the middle year.
Evaluating time series analysis: For: objective, cheap, smooths random fluctuation, shows direction. Against: assumes the past continues; no trend value for the latest year; cannot foresee shocks; needs enough reliable data.
Correlation and extrapolation in forecasting: Correlation can be positive or negative, strong or weak, but is not causation. Extrapolating beyond the range of the data is less reliable than reading within it.

1.13 Decision making

Decision making: nature and purpose: Choosing between alternative courses of action, by identifying the issue, gathering information, comparing options and choosing, so as to move the business towards its aims and objectives.
Strategic, tactical and operational decisions: Strategic: senior managers, whole business, costly and hard to reverse. Tactical: middle managers, one function, serves the strategy. Operational: supervisors and teams, routine and short-term.
The five factors the specification says must be taken into account: Level of risk, nature of risk, accuracy of forecasts, volatility, and potential for bias.
Quantitative vs qualitative decision-making tools: Quantitative: figures and calculations; objective and comparable but ignore what cannot be measured. Qualitative: opinion and context; capture reputation, morale and ethics but are subjective.
How do you judge the extent of a decision's success?: Compare results with objectives, previous years, competitors and each stakeholder's view. Reach a judgement of degree: successful in some respects, not in others.

1.14 Decision trees

Decision tree conventions: Square: decision node (the business chooses). Circle: chance node (probability decides). Probabilities at each chance node total 1. Build left to right; calculate right to left.
Expected value and net gain: EV = Σ(probability × payoff). Net gain of an option = EV − cost of the option. Compare options, including doing nothing (net gain nil).
35% chance of £80,000 and 65% chance of £20,000; cost £30,000. EV and net gain?: EV = 28,000 + 13,000 = £41,000. Net gain = 41,000 − 30,000 = £11,000.
Strengths and limits of decision trees: Strengths: clear, show assumptions, compare options, handle sequences of decisions. Limits: estimates, subjective probabilities, ignore qualitative factors and the timing of cash flows, false precision.
Why is a decision tree poor when risks are unquantifiable?: Probabilities cannot be attached, so the EV has no sound basis and the numbers give false precision.

1.15 Ansoff's matrix

Ansoff's matrix: the four quadrants: Existing product, existing market: market penetration. New product, existing market: product development. Existing product, new market: market development. New product, new market: diversification.
Why does risk rise across Ansoff's matrix?: Each step away from current products and customers adds uncertainty and usually cost. Penetration is lowest risk; diversification combines both uncertainties and is highest.
Examples of market penetration and market development strategies: Penetration: promotion, price cuts, loyalty schemes, buying a rival. Development: a new region, new customer segment, new use, exporting.
Usefulness of Ansoff's matrix: Strengths: simple, shows every growth option, links strategy to risk. Limits: no financial figures, ignores the size of reward, resources and competitors' reactions; real strategies mix quadrants. A framework for risk, not return.

1.16 Conflicts in business decision making

Why can different decision tools give conflicting results?: They measure different things (speed, average profit, value of cash); treat time differently (payback and ARR do not discount, NPV does); depend on estimates; leave out qualitative factors; cover different time horizons.
Cost £60,000; inflows £20,000, £25,000, £30,000. Payback and ARR?: Payback: £45,000 after two years; £15,000 of year 3's £30,000 needed → 2.5 years. ARR: profit £15,000 ÷ 3 = £5,000 a year ÷ £60,000 = 8.3%. It passes a 3-year payback target but fails a 10% ARR target.
Payback, ARR and NPV: one weakness each: Payback: ignores cash after payback and timing. ARR: ignores the timing of cash. NPV: needs a discount rate, which is itself a judgement.
Why might a project with a positive NPV still be rejected?: A poor fit with the mission, damage to reputation, lack of skills, an unreliable forecast, or a better use of the money.
Reasons for business success or failure: Success: strategy fits market and resources, sound cash flow, decisions tested with several tools, risks managed, ability to adapt. Failure: over-optimistic forecasts, weak cash flow, reliance on one tool or intuition, ignored warnings.