Business Studies Notes PDF

BUSINESS STUDIES “I grow old; I grow old; I shall wear the bottom of my trousers rolled” - Prufrock SYLLABUS OPERATIONS ROLES..................................................................................................................................... 10 Strategic Role of Operations................................................................................................... 10 Cost Leadership............................................................................................................................................10 Product Differentiation.................................................................................................................................11 Goods/Services in Different Industries.................................................................................... 12 Interdependence between KBFs............................................................................................. 13 INFLUENCES........................................................................................................................ 14 Globalisation......................................................................................................................... 14 Technology............................................................................................................................ 15 Quality Expectations.............................................................................................................. 16 Cost-Based Competition......................................................................................................... 17 Government Policies.............................................................................................................. 18 Legal Regulations................................................................................................................... 19 CSR (Corporate Social Responsibility)..................................................................................... 20 Legal Compliance vs. Ethical Responsibility.................................................................................................20 Environmental Sustainability.................................................................................................. 21 PROCESSES........................................................................................................................... 22 Inputs.................................................................................................................................... 22 Transformed Resources................................................................................................................................22 Transforming Resources...............................................................................................................................23 Transformation Process......................................................................................................... 24 Volume, Variety, Variation, Visibility............................................................................................................24 Sequencing and Scheduling..........................................................................................................................25 Technology...................................................................................................................................................26 Task Design...................................................................................................................................................26 Process Layout..............................................................................................................................................27 Monitoring, Control and Improvement........................................................................................................28 Outputs................................................................................................................................. 29 Customer Service..........................................................................................................................................29 Warranties....................................................................................................................................................29 STRATEGIES......................................................................................................................... 30 Performance Objectives......................................................................................................... 30 Product/service design and development............................................................................... 32 Supply Chain Management (SCM)........................................................................................... 33 Sourcing........................................................................................................................................................33 E-Commerce.................................................................................................................................................34 Logistics........................................................................................................................................................35 Outsourcing........................................................................................................................... 36 Technology............................................................................................................................ 37 Inventory Management......................................................................................................... 38 Holding Stock................................................................................................................................................38 LIFO and FIFO................................................................................................................................................38 Just in Time (JIT)...........................................................................................................................................38 Quality Management............................................................................................................. 39 Quality control..............................................................................................................................................39 Quality assurance.........................................................................................................................................39 Quality Improvement...................................................................................................................................39 Overcoming Resistance to Change.......................................................................................... 40 Financial Costs..............................................................................................................................................40 Purchasing new equipment..........................................................................................................................40 Redundancy Payments.................................................................................................................................40 Retraining.....................................................................................................................................................40 Inertia...........................................................................................................................................................40 Change Agents..............................................................................................................................................40 Global factors........................................................................................................................ 41 Global sourcing.............................................................................................................................................41 Economies of scale.......................................................................................................................................41 Scanning and learning..................................................................................................................................41 Research and development..........................................................................................................................41 FINANCE ROLES..................................................................................................................................... 43 Strategic Role of Financial Management................................................................................. 43 Objectives of Financial Management...................................................................................... 43 Profitability...................................................................................................................................................43 Growth..........................................................................................................................................................43 Efficiency.......................................................................................................................................................43 Liquidity........................................................................................................................................................44 Solvency........................................................................................................................................................44 Short-Term and Long-Term Financial Objectives.........................................................................................44 Interdependence between Key Business Functions................................................................. 45 INFLUENCES........................................................................................................................ 46 Internal Sources..................................................................................................................... 47 Owners’ Equity.............................................................................................................................................47 Retained profits............................................................................................................................................47 External Finance – Debt Finance............................................................................................. 48 External Sources - Short Term Borrowing....................................................................................................48 External Sources – Long-Term Borrowing....................................................................................................50 External Sources – Equity Finance................................................................................................................52 Financial Institutions.............................................................................................................. 54 Government Influences.......................................................................................................... 57 ASIC...............................................................................................................................................................57 Company Taxation........................................................................................................................................57 Global Market Influences....................................................................................................... 58 Global Economic Outlook.............................................................................................................................58 Availability of Funds......................................................................................................................................58 Interest rates................................................................................................................................................59 Government and Markets: Influence on Financial Management.............................................. 60 Governments................................................................................................................................................60 Global Market...............................................................................................................................................60 PROCESSES........................................................................................................................... 61 Planning and Implementing.................................................................................................... 62 Financial Needs.............................................................................................................................................62 Budgets.........................................................................................................................................................63 Record Systems............................................................................................................................................64 Financial Risks...............................................................................................................................................64 Financial Controls.........................................................................................................................................65 Debt and Equity Financing............................................................................................................................65 Monitoring and Controlling.................................................................................................... 68 Cash Flow Statement....................................................................................................................................68 Income Statements.......................................................................................................................................69 Balance Sheets..............................................................................................................................................71 Financial Ratios...................................................................................................................... 72 Liquidity........................................................................................................................................................72 Gearing (Solvency)........................................................................................................................................73 Gross Profit Ratio..........................................................................................................................................74 Net Profit Ratio.............................................................................................................................................74 Return on Equity ratio..................................................................................................................................74 Efficiency.......................................................................................................................................................74 Accounts Receivable Turnover Ratio............................................................................................................75 Limitations of Financial Reports.............................................................................................. 76 Normalised Earnings.....................................................................................................................................76 Capitalising Expenses....................................................................................................................................76 Valuing of Assets...........................................................................................................................................76 Timing issues.................................................................................................................................................77 Debt Payments.............................................................................................................................................77 Notes to the Financial Statements...............................................................................................................77 Ethical Financial Reporting..................................................................................................... 78 Audited Accounts.........................................................................................................................................78 Record Keeping.............................................................................................................................................78 Reporting Practices.......................................................................................................................................78 STRATEGIES......................................................................................................................... 79 Cash Flow Management......................................................................................................... 79 Cash Flow Statements..................................................................................................................................79 Cash Flow Management Strategies..............................................................................................................79 Working Capital Management................................................................................................ 81 Working Capital Ratio...................................................................................................................................82 Control of Current Assets.............................................................................................................................82 Control of Current Liabilities........................................................................................................................83 Strategies for Working Capital Management...............................................................................................84 Profitability Management...................................................................................................... 85 Cost Controls................................................................................................................................................85 Revenue Controls.........................................................................................................................................86 Global Financial Management................................................................................................ 87 Exchange Rates.............................................................................................................................................87 Interest Rates................................................................................................................................................88 Methods of International Payment..............................................................................................................88 Hedging.........................................................................................................................................................90 Derivatives....................................................................................................................................................91 MARKETING ROLES..................................................................................................................................... 93 Strategic Role of Marketing and Business............................................................................... 93 Interdependence with KBFs.................................................................................................... 93 Production, Selling, Marketing Approaches............................................................................. 94 Types of Markets................................................................................................................... 96 INFLUENCES........................................................................................................................ 97 Factors influencing Consumer Choice...................................................................................... 98 Psychological Influences...............................................................................................................................99 Sociocultural Influences..............................................................................................................................100 Economic Influences...................................................................................................................................101 Government Influences..............................................................................................................................101 Consumer Laws.................................................................................................................... 102 Competition and Consumer Act 2010........................................................................................................102 Deceptive and Misleading Advertising.......................................................................................................102 Price Discrimination....................................................................................................................................103 Implied Conditions......................................................................................................................................103 Warranties..................................................................................................................................................104 Ethical Influences................................................................................................................. 105 Truth and Accuracy in Advertising..............................................................................................................105 Taste in Advertising....................................................................................................................................106 Products that may damage health.............................................................................................................106 Engaging in Fair Competition.....................................................................................................................106 Sugging........................................................................................................................................................107 Marketing Code of Ethics...........................................................................................................................107 Importance of Ethical Behaviour........................................................................................... 107 Importance of Ethical Behaviour ➔ Government Regulation...................................................................107 PROCESSES......................................................................................................................... 108 Situational Analysis.............................................................................................................. 108 SWOT..........................................................................................................................................................108 Product Life Cycle.......................................................................................................................................109 Market Research.................................................................................................................. 111 Market Research Process...........................................................................................................................111 Marketing Objectives........................................................................................................... 113 Increasing Market Share.............................................................................................................................113 Expanding Product Range...........................................................................................................................113 Maximising Customer Service....................................................................................................................113 Identifying Target Markets................................................................................................... 114 Mass Marketing Approach.........................................................................................................................115 Market Segmentation Approach................................................................................................................115 Niche Market Approach.............................................................................................................................115 Developing Marketing Strategies.......................................................................................... 116 Marketing Mix (4 P’s)..................................................................................................................................116 Implementation, Monitoring, and Controlling....................................................................... 117 Developing Financial Forecast....................................................................................................................118 Comparing Actual and Planned Results......................................................................................................118 Revising the Marketing Strategy........................................................................................... 120 Changes in Marketing Mix..........................................................................................................................120 New Product Development........................................................................................................................120 Product Deletion.........................................................................................................................................120 STRATEGIES....................................................................................................................... 121 Market Segmentation.......................................................................................................... 121 Segmenting Consumer Markets.................................................................................................................121 Product/Service Differentiation and Positioning................................................................... 123 Products.............................................................................................................................. 125 Branding......................................................................................................................................................125 Branding Strategies....................................................................................................................................126 Importance to Operations + Marketing.....................................................................................................126 Price.................................................................................................................................... 127 Pricing Methods..........................................................................................................................................127 Pricing Strategies........................................................................................................................................129 Price – Quality Interaction..........................................................................................................................130 Promotion........................................................................................................................... 131 Promotion Mix............................................................................................................................................131 Communication Process.............................................................................................................................133 Place and Distribution.......................................................................................................... 134 Channel Choice...........................................................................................................................................135 Physical Distribution Issues........................................................................................................................135 People, Processes, and Physical Evidence............................................................................. 136 People.........................................................................................................................................................136 Processes....................................................................................................................................................136 Physical evidence........................................................................................................................................136 E-Marketing......................................................................................................................... 137 Global Marketing................................................................................................................. 138 Globalisation – Impact on Marketing.........................................................................................................138 Global Branding..........................................................................................................................................138 Standardisation...........................................................................................................................................138 Customisation.............................................................................................................................................139 Global Pricing..............................................................................................................................................139 Competitive Positioning.............................................................................................................................139 HUMAN RESOURCES ROLES................................................................................................................................... 141 Strategic Role of HR Management........................................................................................ 141 Interdependence with KBFs.................................................................................................. 141 Outsourcing......................................................................................................................... 142 Outsourcing HR functions..........................................................................................................................142 Contractors.................................................................................................................................................143 INFLUENCES...................................................................................................................... 145 Stakeholders in HR Management Process............................................................................. 145 Employers...................................................................................................................................................145 Employees...................................................................................................................................................145 Employer Associations................................................................................................................................146 Trade Unions...............................................................................................................................................146 Governments and Government Organisations..........................................................................................147 Statutes.......................................................................................................................................................148 Society........................................................................................................................................................149 Legal Influences................................................................................................................... 150 Employment Contract.......................................................................................................... 151 Common Law..............................................................................................................................................152 Minimum Employment Standards..............................................................................................................153 Minimum Wage Rates................................................................................................................................153 Awards........................................................................................................................................................153 Enterprise Agreements...............................................................................................................................154 Other Employment Contracts.....................................................................................................................154 Legal Influences – Work, Health, and Safety.......................................................................... 155 Worker’s Compensation....................................................................................................... 155 Anti-Discrimination.............................................................................................................. 155 Equal Employment Opportunity (EEO).................................................................................. 156 Economic Influences............................................................................................................ 157 Social Influences.................................................................................................................. 158 Changing Work Patterns.............................................................................................................................158 Living standards..........................................................................................................................................158 Ethics and CSR..................................................................................................................... 159 PROCESSES......................................................................................................................... 160 Acquisition.......................................................................................................................... 160 Recruitment, Selection, and Placement......................................................................................................160 Development....................................................................................................................... 161 Induction.....................................................................................................................................................161 Training......................................................................................................................................................161 Organisational Development......................................................................................................................162 Mentoring and Coaching............................................................................................................................162 Performance Appraisal...............................................................................................................................162 Maintenance....................................................................................................................... 163 Communication and Workplace Culture....................................................................................................163 Employee Participation..............................................................................................................................163 Benefits.......................................................................................................................................................164 Flexible and Family-Friendly Work Arrangements...................................................................................164 Legal Compliance + Corporate Social Responsibility...............................................................................165 Separation........................................................................................................................... 166 Dismissal....................................................................................................................................................166 Unfair Dismissal.........................................................................................................................................167 STRATEGIES....................................................................................................................... 168 Introduction........................................................................................................................ 168 Leadership Styles................................................................................................................. 168 Autocratic/Authoritarian Leadership..........................................................................................................168 Participative/Democratic Leadership.........................................................................................................169 Uses for Different Leadership Styles..........................................................................................................169 Job Design........................................................................................................................... 170 Recruitment......................................................................................................................... 171 Internal or External Recruitment................................................................................................................171 General or Specific Skills...........................................................................................................................172 Training or Development...................................................................................................... 173 Performance Management................................................................................................... 174 Developmental............................................................................................................................................174 Administrative............................................................................................................................................174 Benefits of Effective Performance Management........................................................................................175 Rewards.............................................................................................................................. 176 Individual + Group Rewards......................................................................................................................177 Performance Related Pay...........................................................................................................................177 Global Strategies.................................................................................................................. 178 Workplace Disputes............................................................................................................. 179 Resolution of Disputes...............................................................................................................................179 EFFECTIVENESS INDICATORS..................................................................................... 181 Introduction........................................................................................................................ 181 Indicators............................................................................................................................ 182 Corporate Culture................................................................................................................ 183 Benchmarking Key Variables................................................................................................ 184 Human Resource Audits.............................................................................................................................184 Changes in Staff Turnover.................................................................................................... 185 Absenteeism........................................................................................................................ 185 Accidents............................................................................................................................. 185 Levels of Disputation............................................................................................................ 186 Worker Satisfaction....................................................................................................................................186 OPERATIONS ROLES Strategic Role of Operations ❖ Profit maximisation – the business’s overarching strategic goal that guides all KBFs. ❖ For the operations function to achieve this goal, the production process must be: Efficient – Expense minimisation Effective – Revenue maximisation ❖ Strategic role of operations ➔ divided into two main goals: Cost Leadership → maximising revenue and minimising expenses Good/service differentiation → characteristics that distinguish the business from its competitor Cost Leadership ❖ Aiming to be the most price-competitive within the market by trading with the lowest costs, whilst maintaining profits with the lowest expenses. ❖ Achieved in ensuring efficiency = expense minimisation ❖ Achieved through low profit margins, whilst maintaining high volumes of sales Low profit margins – selling price isn’t higher than your costs/expenses Issues with Cost Leadership ❖ Competitors use same strategies. ❖ Technology changes consumer preferences. Focus on costs rather than quality/features – decrease in customer attraction Decrease in sales ❖ Heavy discounting by competitors ❖ Quality of output impacted negatively if business focusses on just cost leadership. Cost Leadership → Standardisation ❖ No variation = mass production ➔ economies of scale can be achieved. Low profit margins + boost of sales and a decrease in expenses, maximising profits Balance between Cost and Quality ❖ As cost of materials, labour and production process rise quality rises, BUT COSTS RISE AS WELL ❖ Balance between cost leadership and quality management Types of Costs ❖ Operations costs include: Input costs (construction of business, planning, Geotechnical surveys) Labour costs (Wages/Salaries) Processing costs (Machinery maintenance) Inventory costs (maintenance) Quality management costs (sampling) Economies of Scale ❖ Cost advantages created due to an increase in scale of business operations ❖ Cost savings derive from abilities to purchase lower costs per unit of input ❖ Efficiencies created from improved use of technology and machinery Product Standardisation ❖ Production of identical products compared to those within the market. Pens, water bottles, paper ❖ Involves mass production of items in high volume, and with no variety, usually at lower costs per unit ➔ linked to economies of scale ❖ Operation’s strategy ➔ good in expense minimisation, but no variety Profit centres ❖ Aspects of the business that derive revenue and subsequently profit Finance – direct revenue/profit through the minimisation of expenses + acquirement of necessary funding to drive the business Marketing – direct revenue by increasing the business’s market share and sales ▪ Increase inflow of cash Cost centres ❖ Aspects of the business that, while deriving revenue, mainly incur cost Operations – main driver of expenses through the production process. ▪ Indirectly contributes to revenue through cost leadership + product differentiation etc ▪ Still directly incurs expenses (purchasing of material) Human Resources – hiring of new employees + salaries ▪ Indirectly contributing to business revenue through efficiencies in workforce ▪ Still incurs expenses directly (labour costs, recruitment, training and development) Product Differentiation ❖ Distinguishment of products based on features that separate them from its competitors. Differentiation in goods ❖ Variation of product features ➔ varying features that distinguish it from the market. ❖ Variation of product quality ➔ making lower quality models that are more affordable, whilst also making higher quality ones. ❖ Variation of augmented features ➔add ons or additional benefits. Differentiation in services ❖ Varying time spent on service ❖ Varying levels of expertise ➔ Higher levels of expertise = more specialised service. ❖ Varying quality of materials/technology Goods/Services in Different Industries ❖ Standardised goods Production of items in high volume No variation, often using economies of scale to reduce expenses. ❖ Customised goods Goods that are varied according to the needs of customers Produced with a market focus rather than a production focus ❖ Perishable goods Goods that have a short life span and must be consumed quickly Bought on a regular basis, such as food. ❖ Non-perishable goods Goods that are more durable, thus issues of quality and inventory management arise. Operational processes will need to: ▪ Manage all aspects of quality in the process ▪ Implement effective inventory management strategies ❖ Intermediate goods: Goods that are processed more than once. ▪ Converting steel into screws, then processed into microwaves (value-adding) Interdependence between KBFs ❖ KBFs must work interdependently in order to achieve the business’s strategic goals (profit maximisation) Interdependence with Finance ❖ Concerned with producing financial reports detailing financial transactions, allowing for interpretation. ❖ Interdependence in: Finance provides reports regarding their expenses and efficiency Allows the function to revise their strategies to improve profitability ➔ reduces the costs of production. Interdependence with Marketing ❖ Marketing ➔ provides the designs and feedback produced from a consumer’s desires towards operations Allows them to fulfil their wants and needs. Interdependence with Human Resources ❖ HR ➔ provides staffing and employment to the operations function Involved in developing, maintaining, and motivating staff. Outsourcing ❖ Contracting out business functions using third-party organisations ❖ Advantages Outsourced companies more experienced in the field Allows the business to focus on core operations. ❖ Disadvantages Organisations lack an understanding of the business’s key goals Miscommunication between the two parties. INFLUENCES Globalisation ❖ The removal of barriers of trade between nations. ❖ Market opportunities to businesses from one nation to another ❖ Factories in different countries ➔ take advantage of local supplies ❖ Supply chain management: managing the web of operations around the world to ensure the production of proper products Allows businesses to access new and better-quality suppliers, often at a cheaper cost Helps with speed and flexibility Some costs and complicated supply chains need to undergo ‘supply chain rationalisation’ to ensure there aren’t double-ups or wastage. Advantages Disadvantages Allows businesses to access marketing opportunities in Increased competition from local businesses in foreign different countries nations Removal of barriers between nations Different government regulations, culture, and language Source of marketing opportunities for business Language and cultural barriers Factories in nations provide access to local supplies Managing web of operations worldwide, known as supply chain management Technology ❖ Design, construction, or application of devices and methods upon the operations process. ❖ Assists with organisation, planning, decision making, and control of operational processes ❖ Processing level, they are used in: Manufacturing (increasing production speed and efficiency) Logistics (improving supply processes and movements) Distribution (decreasing travel times and increasing product spread) Quality management (lower risk of defects) Supply Chain Management (increases efficiency of supply management) Sourcing (acquires supplies easier) Advantages Disadvantages Helps people to communicate more easily and organise Expensive to acquire, decreasing the profitability of a businesses processes more efficiently business in the short term as Research and Development incurs more costs, impacting cost leadership Assists with organisation, planning, decision making, Competitors with a technological advantage increase their and control of operations processes. Improves cost leadership and product distinguishment through efficiency. efficient production process and higher quality products → higher competition and a potential loss of market share Quality Expectations ❖ How well designed, made, and functional the products are ❖ Companies that ‘product differentiate’ on quality Maintenance of high quality of goods and services at all times Follow their strategic role as a KBF. ❖ Consumers determine a company’s quality expectations. Quality Expectations – Within Operations Management ❖ Informs all processes ❖ Heavy influence in a business’s product/service design, creation, and delivery to customers Must follow minimum standards or levels of excellence ➔ meets the expectations of customers. Done through quality management strategies Summarising Quality Expectations ❖ For goods: Quality of design → ability of product in satisfying customer’s needs and expectations, nature of materials used, innovation in design Fitness for purpose → ability of product to function what its designed to do Durability → reliability and long-lastingness ▪ Can see use of after-sales services, such as warranty and service calls (strategies) ❖ For services Professionalism of service provider → courtesy of staff and care taken in interactions Reliability of service → efficiency of service and overall competency Levels of customisation → ability of service provider to fulfil the needs of customers, through application of expertise and experience. ▪ Caters to all customers Advantages Disadvantages Products with a good quality of design, fitness for Expensive to meet the expectations of customers, purpose, and durability (i.e., meets the consumer’s interrupts the production process as a whole quality expectations) tend to generate higher sales, also product differentiating from its competition to increase market share If quality expectations are not met, sales will decrease and thus the business’s cost leadership. Needs to be aware of changing quality expectations Cost-Based Competition ❖ Focus on competitor pricing and the competition in markets with who has the lowest costs ❖ Reducing expenses → maximising profits → allows business to reduce costs to be cost-competitive. Cost-Based Competition ➔ Within Operations Management ❖ Cost leadership → focusing on minimising costs and maintaining/amplifying profit margins ❖ Can be analysed from several perspectives (e.g. labour, input, processing, inventory) ❖ Divided into fixed or variable costs Fixed costs (not dependent on level of production) ▪ whether a business increases/decreases or maintains production, costs remain unchanged (e.g., raw resources) Variable costs (direct relationship with level of output) ▪ Relationship with levels of production (e.g., such as labour and energy costs) Cost-Leadership ❖ Cost-competitive businesses ➔ reduce costs as a way of maximising profits: Ensuring production process stability Efficient use of resources Streamlining production process (less steps involved) Technology → improves efficiency Training and development ❖ Cost-based competition influences businesses to reduce expenses → cost leadership Advantages Disadvantages Creates cost advantages through eliminating waste, Smaller business more difficult to be cost-competitive standardised products for standardised markets, compared to bigger ones economies of scale → cost leadership Lower production costs → better competitive stance in Bigger competition in the market results in pressure on market the operations function to be more cost competitive and cost leaders. Government Policies ❖ Political decisions affect the rules and regulations for businesses, in turn, affecting the management of numerous KBFs. ❖ Methods used by governments to encourage businesses to be more competitive and innovative. ❖ Policies change overtime (due to change in government or social expectations) → notable source of change and influence upon operations management Government Policies ➔ Within Operations Management ❖ Policies impact the operations process, such as: Taxation rates Work Health and Safety (WHS) Environmental policies ❖ Policies inform laws → influencing the economy → influencing business opportunities Monetary Policy → influences demand and supply of money (interest rates) ▪ Economic growth influences business productivity and lowers export costs Fiscal Policy → controls economy, involves government spending, taxation (budget) ▪ Higher taxes influence consumer spending as less disposable income – less demand Advantages Disadvantages Monetary Policy can influence business economic Government policies can impact the efficiency of a productivity and growth, lower export costs and business in meeting the demands of the law, impacting increase demand cost leadership Legal Regulations ❖ Fange of laws in which businesses are to comply to – ‘compliance’ ❖ Law shapes business practices ❖ Expenses associated with compliance – compliance costs Legal Regulations ➔ Within Operations Management ❖ Transformation and value-adding process (technology, finance, machinery, etc) must follow the relevant laws that relate to them. WHS: use of machinery and overall conditions of work environment. Safe conditions require appropriate safety training, protective equipment ▪ Work Health and Safety (WHS) Act 2012 (Cwlth) Training and development: in the use of technology and methods in working effectively Fair work and discrimination: employees be treated with respect ▪ Fair Work Act 2009 (Cwlth) ▪ Disability Discrimination Act 1992 (Cwlth) ▪ Age Discrimination Act 2004 (Cwlth) ▪ Anti-Discrimination Act 1977 (NSW) Environmental protection: minimising pollution, eliminating toxic residues ▪ Environment Protection and Biodiversity Conservation Act (1999) (Cwlth) Rules related to public health: fair trading rules, influence product safety standards and fitness for purpose of products Advantages Disadvantages Loosening legal regulations can help the business in Increasing compliance costs will detriment the efficiency reducing compliance costs, improving cost leadership of the business in meeting regulations, limiting cost leadership Strategic goal of profit maximisation is inhibited by legal compliance, where businesses often choose for the lowest level of compliance permissible, incurring less compliance costs. CSR (Corporate Social Responsibility) ❖ CSR: relationship between the business and society – business actions based on respect for society ❖ Refers to open and accountable business actions based on respect for people/society. ❖ More than a business’s compliance with legal regulations ❖ Triple Bottom Line Financial returns Social responsibility Environmental sustainability ❖ Reflects community concerns and social expectations – triple bottom line refers to the three influential aspects within CSR CSR ➔ Within operations management ❖ Involves processes of transformation that draw from a range of inputs, to make the final products ❖ Principle of CSR require businesses to manage effects of activities on society/community and the environment ❖ Requires business to understand where/how inputs are sourced ❖ Shape their processes as to minimise environmental damage and waste Legal Compliance vs. Ethical Responsibility ❖ Legal Compliance – requires business to follow the law Includes mandatory areas like labour laws, taxation Compliance costs may be significant ❖ Ethical Responsibility – business meets all legal requirements, but goes beyond the law to address broader social concerns unspoken laws of society that go further than the minimum requirements set under the law ❖ Differences Legal requirements ➔ entice businesses to follow the exact letter of the law with no variation Ethical responsibility ➔ going beyond legal requirements, following the intention/purpose and ‘spirit’ of the law ❖ Compliance costs are derived from legislation, and to engage in ethical responsibilities – increase in expenses ❖ Legal responsibility displays that a business values something more than maximising profits. Environmental Sustainability ❖ Sustainable business operations that maintain access to resources for future generations ❖ Businesses should undertake in actions that is likely to cause minimal environmental impact Environmental Sustainability ➔ Within Operations Management ❖ Rise in climate change awareness ❖ Must integrate long-term views of resource management into business planning ❖ Businesses should strive to reduce their carbon footprint ❖ Environmental expectations influence businesses, where in order to satisfy society’s expectations, they must adopt sustainable practices that display their altruism. Advantages Disadvantages Displaying ideals of environmental sustainability Increasing compliance costs will detriment the efficiency provides a strong and healthy reputation and image of of the business in meeting regulations, limiting cost the business to society, potentially increasing market leadership share as society looks for environmental reforms. Overall, influences will impact on the process of operations and the strategies a business will use to achieve their roles GTG LE CoQ + CSR Globalisation Technology Government Policies Legal Regulations Environmental Sustainability Cost-based competition Quality Expectations Corporate social responsibility PROCESSES Inputs ❖ Resources used in the transformation process Transformed resources (Materials, Information, Customers) Transforming resources (Human Resources, Facilities) Direct Inputs ❖ Four common direct inputs: Labour ▪ Maintenance, production, logistics, inventory management Energy ▪ Form of value adding ➔ more ‘electricity’ expended, the higher value the product Raw materials ▪ Minerals, wood, water, etc. Machinery and technology ▪ Used to process raw materials Transformed Resources ❖ Inputs that are changed or converted in the operations process Materials Information Consumers Materials ❖ Elements used in the production process Raw materials – substances in unprocessed form (e.g. iron ore, carrots, uranium) Intermediate goods – manufactured goods re-entering production process (e.g. screws, steel) Information ❖ Knowledge from internal or external research and investigation – increased understanding of production process. Internal information – reports and analysis from within the business (e.g. financial reports, customer feedback, KPIs) ▪ Informs processes which creates improvements – improves production process. External information – information from outside world (e.g. government statistics, statistics from industry reports) ▪ Allows business to monitor changes in external environment, keep up with market trends. Customers ❖ Customer choice shapes inputs for process ❖ Customer relation management (CRM): helps businesses shape inputs in production process Understand preferences of customers Allows business to be more responsive to changing consumer demands and quality expectation Transforming Resources ❖ Resources that add value to existing raw materials Human resources Facilities Human Resources ❖ Influences higher productivity and efficiency ❖ Employee effectiveness with tasks determines the transformation process’ success Value adding ❖ Professional development to improve employee effectiveness Facilities ❖ Refer to the factories/plant and machinery used in the operations process ❖ Design layout, their location and quantity of facilities ➔ significant business decisions to be made ❖ Further: Impact of zoning and restrictions upon facility location/size Particular conditions, such as energy and water availability Efficiency Optimum process layout → arrangement of people and machinery within a facility ❖ Determines the nature of the operations process Enables productivity and efficiency of production process Transformation Process ❖ Conversion of inputs into outputs or products Volume, Variety, Variation, Visibility ❖ Key aspect of transformation process → influencing production decision making Volume of inputs processed (how much to make) Variety of products that are produced (range in products offered) Variation in demand (ability of business to respond to changes in demand) Visibility and how much customer + business contact (role + influence on business) Volume ❖ How much of a product is made ❖ Volume flexibility: the speed of the production process to handle changes in demand Responding to changes effective in managing lead times (time to deliver a product to consumer) Lack of volume flexibility = surplus or shortages in stock ❖ Over-production → increased wastage and inventory costs ❖ Shortages → lost sales and loss of market share as customers to competition businesses Variety ❖ Mix of products made, or services delivered (mix flexibility) ❖ Derived through the information process ❖ Product range or variety of choice → influences transformation process More variety → operations process has more components Variation in Demand ❖ Influence of changing levels of demand upon the business’s transformation process ❖ Influence of Demand Increase in demand → increased inputs, human resources, energy, etc Decrease in demand → staff hours reduced; production slowed to prevent inventory build-up ❖ Lack of flexibility = businesses cannot satisfy customers or take advantage of increasing demands Reduces potential profits and subsequent profit maximisation ❖ Prediction on demand levels can prevent these issues through research Visibility (customer contact) ❖ Feedback directly affects transformation processes ❖ Customers preferences shape a business’s products. ❖ Feedback can be: Direct → surveys, interviews, warranty claims, letters, blogs, verbal contact Indirect → sales data, market share, observation of peoples’ decisions, consumer reviews ❖ Maximises sales and profit Sequencing and Scheduling ❖ Sequencing: the order in which activities in the operations process occur ❖ Scheduling: the length of time activities take within the operations process ❖ Two main scheduling tools include Gantt charts and critical path analysis (CPA) Gantt chart ❖ Outlines the activities that: Need to be performed The order in which they are performed How long each activity should take ❖ Used for processes that have several steps ❖ Used for scheduling simple routine tasks, or scheduling work activities of employees or teams ❖ Advantages Allows managers to plan the steps needed for task completion Specifies time required for each task Easier to monitor actual progress against planned activities Critical Path Analysis ❖ Shows: What tasks needed to be done How long they take The order is necessary to complete the tasks ❖ Critical path ➔ shortest length of time required to complete all necessary tasks. ❖ Some tasks performed simultaneously alongside critical tasks (e.g. designing circuitry). ❖ Each activity on the schedule must be completed Critical path ➔ PATH process which ensures all tasks have been completed ❖ Scheduling ➔ enables managers to see what needs to be done + allocate appropriate timings and resources to each task ❖ Enables tasks to be done at the same time ❖ Gives direction and organisation to the operations process ➔ INCREASES EFFICIENCY Technology ❖ Applying science and knowledge to enable businesses to perform established tasks in more efficient ways ❖ Acquiring up-to-date technology to compete effectively ❖ Shortens production processes and increasing efficiency → improves cost leadership ❖ Decisions on purchasing or leasing technology due to its high initial costs (FINANCE) ❖ Installation, maintenance, and training for employees = INCREASED COSTS Manufacturing Technology ❖ Robotics High quality, high standard, efficient and minimise waste. Quick in production Eliminates mistakes due to consistency, unlike human labour Disadvantage: very high initial costs for small-medium scale manufacturers ❖ Computer aided design (CAD) Material usage can be calculated Designing sequence of steps needed to complete the product (improves lead times and efficiency) ❖ Computer-aided manufacturing (CAM) Allows manufacturing process to be computer controlled Linked to CAD to allow for instantaneous manufacturing Task Design ❖ Classifying activities in ways that make it easier for employees to perform and complete ❖ Overlaps employment relations functions of: Job analysis Description Person specification ❖ Breaks down the work into a series of jobs Contributes to the final goal ❖ Formalises task design process where jobs can be analysed for efficiency ➔ improves productivity ❖ Skills audit Process used to determine the present level of skilling, rather than hiring new people If lacking skills ➔ can be acquired through recruitment or training Process Layout ❖ Arrangement of workspaces so that machines and equipment are grouped together by the function they perform Intermittent production layout (process production) ❖ High variety and low volume production (exclusive products, high customisation) ❖ Each product has a different sequence of production ❖ Production is intermittent (irregular) ❖ Machinery and workspaces are arranged according to this irregular sequence Parts manufactured in small quantities due to its low volume ❖ Used by: Small to medium-sized manufacturers Service businesses whose customers have different, unique needs (GPs, banks) ❖ Cellular/team-based work arrangements ➔ create combinations of machinery/equipment to produce a single product Product layout (product production) ❖ Low variety, high volume production (standardised products) ❖ Also known as mass production ➔ high standardisation ❖ Aims to achieve best possible combination of personnel and machine use ❖ Ensures efficiency and lowest lead times. ❖ Assembly line ➔ example of product layout, maximises worker-task allocation, and efficiency ❖ Emphasis on sequence of flow from one work cell to another Fixed position layout (project production) ❖ Product remains in one location due to its weight or bulk ❖ Deals with layout requirements for large-scale, bulky activities For example, for ships or buildings Office Layout ❖ Enable work to be performed efficiently. ❖ Office space is organised around discrete workstations. ❖ Tailored to meet the needs of a business ❖ Designed in a way to allow for smooth workflow ❖ Provide spaces that enable employees to take a break from the work environment Monitoring, Control and Improvement ❖ Operations process should be monitored for effectiveness → leads to improvements as there is a focus on quality + standards Monitoring ❖ Process of measuring actual performance against planned performance ❖ Measures all aspects of operations, from supply chain management (SCM) to the transformation processes ❖ Measures key performance indicators (KPIs) → predetermined variables measured to enable the appropriate controls to be implemented upon the transformation process Enables insights into business performance vs planned levels of performance ❖ KPIs include Lead times Inventory turnover rates Maintenance costs Volume rates Defect rates Cost analysis Process flow rates Control ❖ KPIs assessed against predetermined targets ➔ corrective action is taken if targets are not met ❖ Controlling compares what was planned vs actual performance ❖ Performance targets ➔ enables this control over the transformation process → performance is then compared and measured to them ❖ Corrective action if targets are not met Pursuing better technology Redesigning process layout Improvement ❖ Reduction of inefficiencies and wastage, poor work processes and elimination of bottlenecks. ❖ Improvement is sought in: Time: minimisation of bottlenecks, lead times Quality: measurement of product standards, warranty claims Cost: cost per unit of production, fixed and variable expenses Process flows: smoothness of transitions between transformation processes Efficiency: reduction of waste and creation of greater output per input ❖ Improves cost leadership in minimising expenses and maximising profits Outputs ❖ End result of business efforts – the good or service delivered to the customer Must be responsive to customer demands Customer service Warranties Customer Service ❖ How well a business meets and exceeds the expectations of customers in all aspects of operations ❖ Customer dissatisfaction derives from: Defects Longer lead times Product returns Warranty claims ❖ Businesses with good customer service can achieve: Faster growth Retainment of existing customers, attraction of new ones Increased market share Charging more for products ❖ Attitude that should be adopted in developing long-term customer relationships. Warranties ❖ Guarantees made by business to correct any defects in goods they deliver ❖ Another way to assess the effectiveness of operations processes → measure the number of warranty claims ❖ Trace the source of the fault in manufacturing and rectify it. ❖ Thus, warranty claims lead the business to improve their processes STRATEGIES Performance Objectives ❖ Goals that relate to particular aspects of the transformation process ❖ Ensures efficiency, productivity, and profitability ❖ 6 Key Performance Indicators: Quality Flexibility Customisation Speed Dependability Cost Quality ❖ Determined by consumer expectations ➔ informs the production standards of the business ❖ Includes 3 quality performance objectives: Quality of design ▪ How well a good is made, or service is delivered ▪ Understanding of consumer preferences ▪ Determines the inputs + arrangement of transformation processes ▪ Well-designed goods = high prices Quality of conformance ▪ how a good/service meets the standard of a prescribed design with definite specifications. ▪ Overall quality standards and regulations e.g., helmets Quality of service: ▪ Reliability ▪ Meeting consumer needs ▪ Service delivery responsive to customer expectations. Speed ❖ Time taken for the production and operations process to respond to variations in market demand ❖ Requires changes in input/processing times to align with consumer expectations ❖ Aims to satisfy customer demand ❖ Overall goals (KPIS) Reduced wait times Shorter lead times Faster processing times ❖ Requires a reduction in bottlenecks and smooth internal communications Procedure bottlenecks: a work stage that gets more work requests than it can process Technical bottlenecks: point of congestion in a production system that occurs when workloads arrive too quickly Dependability ❖ Consistency and reliability of a business’s products In services ➔ consistency of service standards, and reliability ❖ Warranty claims ASSESSES dependability ❖ Highly durable products are dependable ❖ Perishable products can also be dependable if they have consistent and predictable standards. ❖ How different is one product or service from the previous one Flexibility ❖ How quickly operations process can adjust to market changes ❖ Changes in market demand → pressures on capacity ❖ Best achieved by increasing capacity of production + efficient use of plant and machinery Purchasing new technology to increase its flexibility and capacity Customisation ❖ Creation of individualised products to meet needs of customers ❖ Customer orientation ➔ influences businesses towards customisation. ❖ Mass customisation ➔ Standard, mass produced item to be personally modified to specific customer requirements (e.g. iPhone, Nike) Cost ❖ Minimisation of expenses such that operations processes are conducted cheaply ❖ Efficient use of inputs and strategies → reduces production costs ❖ Inventory management to minimise warehousing and finding efficient distribution processes Balance of KPIs ❖ KPIs have relative effects on each other Increasing speed = decreases quality and dependability Increasing flexibility = increases speed Product/service design and development ❖ Creation, design, and development of strategies toward the operations processes Enables businesses to grow and attain competitive advantages + product differentiation ❖ Different approaches: Specific to product development ▪ Market research determining preferences and desires of customers ➔ determines product design + development Innovations in technology ▪ New technology = appealing products due to their advanced tech and high functionality ❖ Considerations when designing and developing products: Quality ▪ Customers demand particular qualities, attributes, and features Supply chain management ▪ Products draw from suppliers + extend the range of supplies sought, the timing, and the volume Capacity management ▪ New products increase the use or range of resources + require new technology or machinery Cost ▪ Amount of inputs, time, and energy = more costs ▪ Also includes the customer’s perception of product utility (usefulness and value a product has from a consumers POV) Service – Design and Development ❖ Service design ➔ customised in nature ❖ Takes the position of the customer as the starting point in design ❖ Designing services ➔ requires knowledge of what it will be: Explicit service: tangible aspect of the service, such as the application of time, expertise, skill and effort Implicit service: based on feeling and is intangible, based on psychological wellbeing Supply Chain Management (SCM) ❖ Integrating and managing the flow of supplies throughout the inputs, transformation processes, and outputs, in order to meet the needs of customers ❖ Involves aspects such as: Global sourcing E-commerce Logistics ❖ Product supply chains ➔ all the processes that add value. ❖ Supply chains include: Raw material suppliers Energy Labour Distribution Sources Sourcing ❖ The purchasing of inputs for the transformation processes ❖ Determining which sources to use requires: Assessing consumer demand Determining quality of inputs to match quality of products Assessing how responsive and timely suppliers are with respect to demand Evaluating cost of suppliers compared to other suppliers ❖ Sourcing strategy is influenced by: Consumer demand Quality of inputs Flexibility and speed of supply Costs of supplier Global Sourcing ❖ Purchasing supplies or services without being constrained by location. ❖ SCM ➔ buying or sourcing from wherever if the suppliers meet the sourcing requirements ❖ Benefits Access to new technologies and resources Cost and expertise advantages inaccessible in domestic region ❖ Challenges Relocation of aspects of operations Increased cost of logistics, storage, distribution Management of different regulations in nations Complexity of overall operations in diverse locations E-Commerce ❖ Buying and selling of goods via internet ❖ SCM through electronic ordering ➔ manages supply and allow suppliers access to the business’s level of supplies Business sourcing and e-commerce ❖ Use of online systems to manage supply, which allows suppliers direct access to the business’s level of supplies ❖ Business to business (B2B) arrangements Direct access from the supplier to another the business (both businesses) Allows suppliers to assess and fulfil the needs of buyers ❖ Replacement of stock occurs without a formal request from buyers when stock falls below a point E-Commerce and Consumers ❖ Businesses to Consumers (B2C) ➔ the selling of product to consumers over the internet ❖ Stock levels must be managed well, and information exchanged efficiently ➔ accurate stock levels are communicated to customers Logistics ❖ Broadly refers to distribution, but also involves Transportation Use of storage Materials handling and packaging Distribution ❖ Method of delivering goods and services to the customer ❖ Type of product and cost of transportation ➔ determines the mode of transportation selected. ❖ Product nature also influences this: E.g. transporting radioactive waste will require specialised transport Storage, warehousing, and distribution centres ❖ Finding secure places to hold stock until it is required ❖ Storage ➔ needed when demand is variable and needs responsive supply chains Can be very expensive if it isn’t essential for businesses ❖ Alternative inventory options to be discussed Warehousing ❖ Use of facility for storage, protection, and distribution of stock ❖ Costs associated with warehousing includes: The premises Insurance Movement of stock Excess or redundant stock Shrinkage and depletion costs from losses Damage costs ❖ Storage is useful for durable items that need to be transported with little notice ❖ Lean production reduces inventories if inventory costs are too high Outsourcing ❖ Use of external providers to perform business activities If performed by providers specialised in a particular function, it will do so at a lower cost and greater effectiveness ❖ Different methods of outsourcing Shared services centres ▪ Creation of an in-house outsourcing option that performs work for businesses Fee for service ▪ Allows businesses to test the outsourcing market prior to making changes Joint ventures ▪ Engages outsourcing services, but outsourcer can outsource their services to other businesses in same industry ▪ Ticketing systems for airliners Build-operate-transfer ▪ Offshore outsourcing where services are relocated to another location, and then transferred to independent vendors. Advantages Disadvantages Simplification - Reducing number of activities Communication and language performed in businesses, allows business to focus on core activities Efficiency and cost-savings Loss of control Access to skills and resources High levels of change and organisational design Increased process capability - Improved technologies and skilled labour improves the means of producing goods/services Increased accountability – contracted outsourcers to KPIs Technology ❖ Classified on whether it: Improves operations process Makes managerial and administrative functions smoother Leading edge technology ❖ Most advanced or innovative tech at any point ❖ Used to distinguish their operations processes from any other business ❖ Reduces waste, improves quality and efficiency ❖ Disadvantages Higher maintenance and training costs, and since not very established, very little knowledge on how to repair or use it Established technology ❖ Developed and widely used technology, used without question. For example, computers ❖ Functionally sound and establish basic standards of productivity and speed Inventory Management ❖ The amount of raw materials, work in progress, and finished goods, a business has on hand at any time. Holding Stock Advantages Disadvantages Consumer demand met when stock is available Warehousing costs Reduces lead times Spoilage Customer Service Making in bulk reduces cost Accounts for unexpected circumstances LIFO and FIFO ❖ LIFO (Last in first out) The last products to come into storage are the first ones out Good for perishables ❖ FIFO (First in first out) The first products to enter storage are the first ones to come out Just in Time (JIT) ❖ Overcomes the problem of end-of-period stock valuation ❖ Inventory management approach ➔ the exact amount of material inputs will arrive only as they are needed in the operations process ❖ Allows retailers to display a wider range of products as they store less Can order in response to consumer demand ❖ Saves money as there’s no holding expenses and insurance costs ❖ Advantages Shrinkage costs and losses due to obsolescence (wastage and expiry) are also minimised ❖ Difficulties Requires flexible operations function with flexibly processing Requires high ability to respond to changes in market demand Quality Management ❖ The processes a business undertakes to ensure consistency, reliability, safety, and fitness of purpose of product ❖ Divided into three approaches Quality control Quality assurance Quality improvement ▪ Total quality management ▪ Continuous improvement Quality control ❖ Reduces problems and defects in the product by using inspections at various points in the production process ❖ Needs to have defined quality standards Quality assurance ❖ Involves the use of a system to ensure that set standards are achieved in production ❖ International standards such as the ISO 9000 (international organisation for standardisation) ➔ used to define quality assurance standards ❖ Pro-active approach to quality rather than a reactive one. Quality Improvement ❖ Total quality management Holistic approach to quality management, where quality becomes a commitment and a responsibility Emphasis on employee involvement in the prevention of quality problems ❖ Continuous improvement Belief that over time, processes will be made more efficient and effective An ongoing commitment to improving a business’s goods or services Managing the total business to deliver quality to customers Overcoming Resistance to Change ❖ Resistance arises from: Financial Psychological bases Financial Costs ❖ Resistance to change to costs associated with: Purchasing new equipment Redundancies Retraining employees Structural reorganisation of business Purchasing new equipment ❖ Purchase costs are usually high but generally recouped through use ❖ While initial purchase of new equipment is significant ➔ market advantages from making these investments can allow business to achieve its goals Improves flexibility and speed of production process Consistency in production Higher quality in processing Reduced waste and loss from equipment failure Redundancy Payments ❖ Defined as a loss of work arising from job skills no longer relevant to the business ❖ Significant cost associated with redundancies ❖ Payouts are high because of the value of the payout, depending on factors related to: Length of time the employee has had with the business Worker’s existing wage Amount of unused leave employee has accrued Outstanding wages employee is owed Retraining ❖ Cost arises from change, causing reorganisation of the business internal hierarchy or in the acquisition of technology ❖ Job roles can change, employees need new skills. Inertia ❖ Psychological resistance to change ❖ Uncertainty and fear of the unknown Change Agents ❖ Mediates a business’s changing structure or ideals ❖ Enables a smooth, problem-less transition to ensure all parties are satisfied Global factors ❖ Such factors can present opportunities when assessing a business’s operations strategies ❖ Overall aims to achieve COST ADVANTAGES Global sourcing ❖ Purchase of supplies or services without being constrained by location ❖ Undertaking business decisions that lead to cost advantages Global sourcing ➔ seeks to obtain benefits ❖ Outsourcing decision is exposed to global market Decision made on cost, efficiency and productivity + ability to operate for longer periods in the day ❖ Challenges Relocation of aspects of operations Increased cost of logistics, storage, and distribution Different legal systems Increased complexities of overall operations ▪ Financial concerns Risks associated with exchange rate fluctuations ▪ Contractual concerns Language and cultural variations Economies of scale Cost advantages gained by increasing size or scale of production ▪ Lowering per unit input costs Global factor ➔ businesses needing to respond to increases in demand and volume that necessitate making higher product volumes Expanding into global markets ➔ sourcing globally Selling globally ➔ decision based on scale advantages ▪ Scale of production increases = cost per unit falls = increasing profitability Scanning and learning Businesses benefit from scanning the global environment Learning from the best practice of businesses around the world Research and development Improve the company’s technology Create leading edge technologies to create innovative products ➔ meets consumer demands = consumer satisfaction FINANCE ROLES Strategic Role of Financial Management ❖ Securing financial objectives and ensuring the business is able to achieve these goals ❖ Sourcing finance ❖ Preparing budgets and forecasting future finances ❖ Preparing financial statements ❖ Maintaining sufficient cash flow ❖ Distributing funds to other parts of the business Strategic planning of financial resources ensures a business’s success and growth. Objectives of Financial Management ❖ To achieve longer-term goals ➔ short-term, specific objectives ❖ Objectives of financial management: Profitability Growth Efficiency Liquidity Solvency Profitability ❖ Ability of a business to maximise its profits. ❖ Profits satisfy owners or shareholders in the short term ❖ Important for long term sustainability of a firm ❖ To ensure profit maximisation, businesses must monitor: Revenue and pricing policies Cost and expenses Inventory levels Levels of assets. Growth ❖ Ability to increase its size in the longer term ❖ Growth depends on a business’s ability to develop and use its asset structure to increase sales, profits and market share ❖ Important financial objective as it ensures business sustainability into the future Efficiency ❖ Ability of a business to minimise expenses and manage assets, in order to maximise profits with the lowest possible level of assets ▪ Relates to the operations or revenue-producing activities of the business ❖ Requires control measures in place to monitor assets ➔ achieves efficiency ❖ Businesses that aim for efficiency ➔ monitor the levels of inventories and cash, and the collection of receivables Liquidity ❖ Extent to which a business can achieve its financial commitments in the short term (less than 12 months) ❖ Businesses must have sufficient cash flow to meet its financial obligations, Be able to convert current assets into cash quickly ❖ Controls over cash flow in and out of the business ➔ ensuring business has supplies of cash when needed ❖ Cash shortfalls and excess/idle cash ➔ loss of profitability Solvency ❖ Extent to which the business can meet its financial commitments in the longer term (more than 12 months) ❖ Important to owners, shareholders, and creditors of a business → indicator of the risks to their investment ❖ Indicates whether a business will be able to repay amounts borrowed for investments in capital E.g. equipment, machinery, or land ❖ Gearing Ratio ➔ measures solvency Measures the percentage of the assets of the business funded by external sources (business’s reliance on outside finance) Short-Term and Long-Term Financial Objectives ❖ Based on the goals of its strategic plan ➔ translated into both the short and long term ❖ Short term financial objectives: Tactical (one to two years) and operational (day-day) plans of a business. Reviewed regularly to see if: ▪ targets are being met ▪ resources are being used efficiently and to the best advantage To achieve increases in profit for the next 10 years, tactical plans consist of: ▪ Purchasing new machinery and equipment optimise their production processes ▪ Expanding into new markets ▪ Expanding their business capabilities by offering new products ❖ Long term financial objectives: Strategic plans of a business, generally more than 5 years The broad goals of a business (increasing profit or market share) Reviews progress annually to determine if changes need to be implemented Conflicts ❖ Potential conflicts can arise between the short-term/long-term financial objectives Long-term objective of GROWTH: ▪ Expansion will often result in increased costs and gearing (ratio of a company’s debt-to-equity, ▪ Decrease in overall PROFITS in the short term + decrease in LIQUIDITY ▪ Long term ➔ expansion will be praised as it increases the value of the business In

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