FUNCTIONAL OBJECTIVES AND STRATEGIES• Corporate objectives - the
goals or targets of the whole
organisation usually based on
its mission or aims.
The purpose of corporate
• Informs decision making
• Provides strategic direction
• Forms the overall guiding
principles of the business
• Guides functional objectives
• Functional objectives - the goals
or targets of each functional areas
of a business, usually based on its
Functional objectives must:
• Focus on corporate objectives
• Provide strategic direction within
• Impact upon other functional
• Must be co-ordinated
UNDERSTANDING FINANCIAL OBJECTIVES
Financial Objectives - the monetary targets a business wants to achieve in a
given time period.
Cash flow targets - objectives designed to achieve a specific net cash
balance at the end of a trading period.
Examples of cash flow targets:
•Creating a more even spread of sales revenue
•Reducing the bank overdraft
•Spreading costs evenly
•Setting contingency fund levels
•Raising certain levels of cash at a particular time.
UNDERSTANDING FINANCIAL OBJECTIVES
Cost minimisation - objectives focused on actions that can be taken
to minimise fixed and variable costs.
• Tactical changes - cheaper source of raw materials
• Strategic changes - relocate production abroad
Reasons for setting financial objectives:
• Act as a focus
• Provides a point to measure performance
• Improve efficiency
• Gives co-ordination
Internal influences External influences
Corporate and functional
- achieving corporate objectives
- Influenced by other functional
- leader or follower
- - relative power of competition
- Actions and reactions
Characteristics of the firm
- capital or labour intensive
- Low cost or highly
- Changing tastes
Relationship between owners
-power of individual shareholders
-growth or decline
-optimistic or pessimistic.
- political social and
USING FINANCIAL DATA TO MEASURE
PERFORMANCEBalance sheet- a document that describes the financial position of a
company at a given point in time. It compares the businesses assets with
Elements of a balance sheet:
Purposes of a balance sheet:
- recognising the scale of a business
- Calculating net assets
- Understanding the nature of a firm
Income statement - a document that summarises a
businesses trading activities and expenses to show
whether the business has made a profit or a loss.
When analysing an income statement its important to
-Profit Utilisation (How the profit after tax is used)
-Profit Quality (The sustainability of the profit figure)
USING FINANCIAL DATA TO MEASURE
Structure of an income statement:
-Revenue and cost of sales
-Finance income and expenses
-Tax paid on the profits made.Formulae:
Gross profit = revenue - cost of sales
Operating profit = gross profit- expenses
Earnings per share= Profit for the
year__ Number of
AccountsRatio Analysis- A comparison of two or more pieces of data
taken from the financial records of a business.
Ratios are used to measure these financial indicators:
The efficiency of a business in generating
Return on capital employed:
Operating profit x 100
Total Equity + non-current liabilities
Analysis can include comparing against other
investments (E.g interest rates) and assessing branch
performance to help with strategic decisions.
A measure of a firms ability to meet short
Current Ratio =Current assets : Current
Acid Test = Liquid Assets (Current assets- inventories) : Current
Analysis can include threats to the survival and in
relation to cash flow targets.
A measure of how the internal management are utilising and controlling
the business’ financial assets.
Asset Turnover = Revenue Net
Inventory Turnover = Cost of sales
Average inventories held
Payables (Creditors) days = Payables x 365
Cost of sales
Receivables (Debtors) days =receivables x 365
(How efficiently assets are
being utilised to generate
(Measures how frequently a
business turns over it’s stock)
A measure of how long it
takes on average for the
business to pay for supplies.
A measure of how long it
takes on averages to
A measure of the debt to equity ratio within a
Gearing = non-current liabilities x100
Total equity + non-current liabilities
Lines of analysis:
-You have to pay interest on loans even if profits are low.
-Low gearing may be a sign of missed opportunitiesA high
gearing is of greater risk if interest rates are likely to increase.
Measures of the value of returns made to the shareholders.
(The return paid to
profit as a reward
for their investment)
Dividend per share = Total Dividends
Number of ordinary shares
Lines of analysis:
-Money paid in dividends reduces retained profit
-Will be influenced by financial objectives
-Works as an incentive to the board of directors to maximise profits.
Dividend Yield = Ordinary share dividend (p) x100
Current Market Price (p)
Lines of analysis:
-Market prices fluctuates
-Increase to the dividend payment = rise in share price
return on the
investment as a
Value and Limitations of the
- Provides a tool for the
interpretation of accounts
- Consider relationships
- Can compare the data
- Aids decision making (by
managers and investors)
- Possibility that accounts
have been window
- Need to consider reasons
behind the ratios. (eg
ROCE could be lower
because of an investment
programme that year)
- Quantitative information
- Based only on past
- External factors (economic
Selecting financial strategies
Internal Sources External Sources
The part of a firm’s profit that
is reinvested into the
Ordinary share capital
Money given by
shareholders , dividends are
paid at directors discretion
and no fixed repayment
Sale of Assets
Sales of the items owned by
a business, however it may
lower the firms profitability.
Money received in
agreement with an interest
rate. There is no loss of
ownership, however there is
fixed repayment terms and
interest is a finance cost on
Sale and Leaseback
Selling an asset then paying
a lease/rent on the item.
Individual sections of a business that are responsible for their own
costs, revenues and profits.
Reasons for profit centres:
-More focused study of a firms finances
-Benchmarking to improve efficiency
-The responsibility can help motivate
-By placing the responsibility with the person actually involved it,
may improve the efficiency in the finances.
Disadvantages of profit centres:
-Allocating costs (may be difficult)
-Demotivation (Extra pressure and stress)
-Diseconomies (similar tasks being carried out by managers)
External changes (make it harder to reach targets and to assess
Marketing – changes in price in the market and may need to lower
selling prices to gain market share
Operations Management – adoption of lean production
techniques such as JIT to reduce waste and lower costs.
Human Resources – might see delayering, increased spans of
control. Outsourcing could also be used to reduce labour costs
and increasing flexibility.
Capital Expenditure – money used for the purchase of non
Revenue Expenditure- money used for the day to day running
of a business.
Making investment decisions
Investment appraisal- a scientific approach to investment
decision making, which investigates the expected financial
consequences of an investment, in order to aid with decision
Calculates the length of time it takes for an investment to
pay for itself.
Step 1: calculate during which year the investment cost will
Step 2 : Calculate how many months
A longer payback period means a greater degree of risk and
uncertainty. Firms hope for as short a payback as possible.
Easy to calculate Ignores any costs that occur after
the point at which payback is
Concept is easy to understand Very hard to establish a target
Emphasises cash flow by focusing
on time taken to return the money.
Payback values future costs and
revenues ant the same time as
current costs and revenues.
Emphasises the speed of return May focus too much on the short
term instead of considering the
long term consequences.
Average Rate of Return (ARR) Calculates average
profit as a percentage of the cost of initial investment.
Average rate of return = Average annual
profit (Total net cashflow/number of years)
Can easily be compared with
the next best alternative eg
The ARR is harder and more
time consuming to calculate.
Shows the true profitability
and takes into consideration
every item of income and
Considers all income and
expenditure as equal in
Net Present Value (NPV) calculates the total return on
an investment taking into account the time value of
Step 1: Multiply net cash flow by the relevant discount
Step 2: Add up all the NPVs to calculate the total return
Only method that considers the
time value of money.
More time consuming and difficult
Reduces the importance of long
term estimates and helps make
conclusions more accurate.
More difficult to understand and
may hinder in decision making
NPV gives a precise answer. Relies on the discount rate used
which is up to judgment.
Investment Criteria – a predetermined set of
guidelines which an investment can be judged
Investment appraisal – Is used to try to
minimise risk and help inform decision making.
Qualitative factors affecting
-The aims of an organisation
-Reliability of the data
Marketing – will investment result in new products being
Operations Management – might see new machinery that will
require training for the workforce.
Human Resources – employer/employee relations could be
strained if redundancies occur.
MARKETING STRATEGIES• Marketing aims - the broad, general goals of the
marketing function within an organisation.
• Marketing objectives - the specific, focused targets of
the marketing function within an organisation.
• Marketing strategies - long term or medium term plans
devised at senior management level and designed to
achieve the firms marketing objectives.
• Marketing tactics - short term marketing measures
adopted to meet the needs of a short term threat or
Types of marketing objectives:
•Innovation/increase in product range
•Creation of brand loyalty/goodwill
Reasons for setting marketing objectives:
•To act as a focus in decision making
•To provide a point to measure against
•To improve co-ordination between departments
•To improve efficiency by examining reasons for success and failure in
Factors influencing marketing objectives
•The nature of the product
•Competitors action and
Market Analysis – the study of market conditions in
order to determine their attractiveness to the business.
-Inform decision making
-Understanding the market
-Identify sales patterns
-Realistic target setting
-Keeping up to date with market changes
-Reviewing competitors actions
-Evaluation of past actions
Moving Averages – A method of market analysis that shows whether a
trend is significant by smoothing out fluctuations in data.
-This allows for a better identification of an overall trend.
-Sufficient data is needed to give validity to the trend identified.
Extrapolation – using the previous patterns of numerical data in order
to predict values in the future.
Correlation – The identification of a relation ship between two
variables. E.g. marketing budget and sales
The use of ICT:
-Using the internet to collect consumer opinions to inform
-Wide availability of statistical data, e.g. the census
-Loyalty cards to analyse consumer buying
-Competitor profiles and investor details to inform decisions.
Qualitative forecasting- those methods of
prediction that are based on statistical information.
Qualitative forecasting – considers reasons to
why certain actions take place.
Methods of qualitative forecasting:
-The oracle technique (asking individual experts for their views)
Low cost versus differentiation
(Michael Porter’s Strategy)
Analysis of porter’s 5 forces, it’s a basic
premise that a firm should be one thing or
another and clearly focused on their choice of
strategy. Strategic advantage
Mass Market Cost
Niche Market Focused cost
Low Cost Differentiation
By pursuing a strategy of cost
leadership a firm sets out to be
the lowest cost producer in its
Having the ability to offer a
product of service that stands out
Price is a key element in the
Firms may benefit from increased
sales volume and a greater scope
to charge a higher price.
Both operational and financial
objectives focus on cost
minimisation in these firms.
The product may be better than
competition and has a USP.
Promotion may be exclusive and
promote brand loyalty.
Operation objectives will focus on
R&D and innovation.
Entering International Markets
Methods of expanding into international markets:
-Setting up a base overseas
Wider Target Market and Achieving
Cultural, social and language
Boosting profitability Greater use of intermediaries
Spreading risks Legislation
Economic variables abroad
Global branding Political factors such as advice and
help from conflicting countries suchExpertise from around the world
Developing and Implementing Marketing
Marketing plan – a statement of the
marketing activities, position and future
-A SWOT Analysis
-A marketing budget
Assessing influences on
Finance – The money available will impact on
the marketing budget. The marketing
department may have to justify this and it is
likely they will look at the correlation between
previous budgets and sales.
Operations Management – The firm will need
the ability to meet demand. If the firm has a
good record with R&D this will be incorporated
into the marketing plan as the products will
need to be promoted before they are launched.
Human Resources –Skilled marketing
employees will influence the plan with
their own ideas whilst others across all
the functions will be integral to the
successful implementation of these
-Skills and expertise
-Commitment towards the
-Matching supply to demand
Conflict within the
-Across functional areas
-A plan like any document
must have flexibility
-Key employees must be
able to monitor and respond
to the plan
-Co-ordination of all activities
is crucial if the plan is to
Issues in implementing
OPERATIONS STRATEGIESOperational objectives – The targets a business sets
in order to produce goods/service in the most effective
It will include the following areas:
-Cost (unit) and volume(capacity utilisation) targets
Internal influences on operations managements objectives:
-The nature of the product
External influences on operations managements objectives:
-Market factors (Nature of the product)
-Competitors actions and performance
Operational management aims – the general goals of
the operations management function within an
Operations management objectives- the focused
targets of the operations management function within an
Operations management strategies – long/medium
term plans designed to achieve the firms operations
Operations management tactics – short term
operations management measures adopted to meet the
needs of a short term threat or opportunity.
Economies of Scale
The advantages enjoyed by a firm as it increases the
scale of production leading to a fall in unit cost.
Methods of economies of scale:
-Purchasing (Bulk buying) economies - Buying in bulk secures
lower prices although suppliers have a lower profit margin buy have
-Technical Economies –Spending more on larger and more efficient
machinery, a lower fixed cost over a greater output.
-Specialisation Economies – Employ specialist people to focus on
particular areas who are better qualified, more experience and more
Diseconomies of scaleThe problems experienced as a firm
increases the scale of production leading to a
rise in unit cost, making the firm less
Methods of diseconomies of scale:
Communication diseconomies- as a firm grows in size it
becomes more difficult to communicate efficiently.
Coordination diseconomies–as a firm grows it becomes more
difficult to co-ordinate the increased number of personnel and
customers. (Taller structures)
Optimal mix of resources
Capital Intensive production- the use of a relatively high
proportion such as machinery in the production of a good or
Increased productivity High investment outlay
Improved quality and speed Lack of human initiative
Reduced labour costs Greater resistance to change by
workforce e.g. retraining to use
new equipmentGreater opportunities for
economies of scale
Labour Intensive Production- The use
of a relatively high proportion of labour i.e.
workers in the production of a good or
Often cheaper, especially when
produced in low wage locations.
Employer/employee relations can
be a problem. E.g. industrial
disputes and industrial action
Workforce can easily adapt to
change, especially multi-skilled.
Lack of skilled workers in some
Continuous improvement through
workforce can benefit the firm. E.g.
HRM costs can be very high e.g.
recruitment, selection and training.
Government funding often
available to protect jobs in the
The development of an idea into a new product or process.
Businesses invest time and money in order to make a
Product innovation- changing a product that already exists or developing
an invention into a brand new product.
Process innovation – changing a process of production that already exists
into practise a brand new production process.
How does a strategy of innovation influence other functional areas.
- Market led
- Effective marketing
Research and Development
The scientific investigation (research) and technical growth
(development) of a new product or process.
Factors that effect how much an organisation spends:
-The nature of the product
- Chances of success
- Efficiency of
- Company culture
Purpose and costs of
Firms can not afford to stand still
in competitive markets.
Innovation can be costly in the
R&D stage and drain on
Todays innovations are
tomorrows potential starts and
For all innovations there is an
A firm that comes up with the
right innovation can guarantee
future income if it is protected by
Few innovations see the light of
day so a firm may effectively be
Although it is expensive the
alternative risk of losing future
markets might be worse.
Benefits and risks of
Creates a USP for the product Firms can make substantial
losses if innovation fails.
Less competition due to
protecting the ideas using
Other companies are likely to
react with their own innovations.
More efficient and cost effective
Legal implications often arise
with other firms questioning
whether the product/process is
Likely to be a premium product
with opportunity for premium
Operational difficulties and the
company may suffer setbacks as
they may be in hurry to release
Making location Decisions
Main factors are technology, costs of factors of production,
resources, the market, government intervention
infrastructure and other qualitative factors.
Quantitative factors Qualitative factors
Easier to identify for a firm More difficult to identify
Investment appraisal, break even
analysis, cost minimisation and
economies of scale.
They are based on value judgments
and might include staff, expert and
Cost considerations – labour,
building, material and transport costs
Human resources – impact on
employer/employee relations and
Revenue – sales potential Can link to environmental targets
Grants that may be available to locate
in areas of low economic activity.
Consider the impact on the reputation
of the firm and its brand
Benefits of Optimal Location
Optimal location – (the best location) will depend on
an a number of factors and as location decisions are
strategic in nature, it will be decided at board room
eHigh fixed costs in
Lower labour costs
in less affluent
(access for staff and
Quality of product (are
(Harder to attract quality
When a business is operating from more than one
Retailers must be close to their customers and many large UK
organisations mass produce products where labour is cheap but
base their head quarters in the UK
-Improved market focus
-Avoidance of trade
-Increased unit costs
-Loss of control
Offshoring- where companies outsource business
activities, largely because labour and facility costs are
much cheaper there.
Outsourcing – where companies give responsibility for
some of their activities.
takes place due to lower fixed and
variable costs. Locating
internationally can reduce labour
costs and raw materials. The
UK/EU has very high land costs
compared to developing countries.
Anything that limits the free
movement of goods and services
Lean ProductionLean production – A collective term relates to
working practices derived from Japan that
focus on cutting waste whilst maintaining or
Time Based Management
The effective management of resources to ensure that unproductive
time is eliminated from the production process.
Flexibility is crucial so that firms are successful and:
-Have reduced lead times
-Less wastage through increased efficiency
-Faster development time for new products.
Just in Time (JIT production) – A technique used to minimise stock holdings at
each stage of the production process form the delivery of raw materials through
to meeting customers demand.
Kaizen – A system that concentrates on small, but frequent improvements in
every aspect of the production process.
This requires a highly motivated and committed workforce and is a
vital component of Total Quality Management in order to improve
the quality of the production process.
Less costs in holding stock Little room for error
Less working capital required Very reliant on suppliers
Less obsolete/ruined stock Unexpected orders are hard to meet
Lower associated costs e.g. security
High initial set up costs
Complex systems have to be put in
placeAvoids having unsold stock Possible loss of purchasing
Critical Path AnalysisA technique used to identify the order in which all
tasks need to be completed when planning a complex
The critical path is the set of activities that will lengthen the
duration of the project if delayed.Value of CPA Limitations of CPA
Identifies the critical activities allowing
them to be closely monitored.
Is only a starting point for a
Shortens the overall time of a project
by identifying simultaneous activities.
Relies on estimations of durations
Improves focus on project Does not take into account external
Greater productive efficiency Large projects can be too complex for
Allows for JIT
STRATEGIESHuman Resource objectives – The targets that the
HR function of a business wants to achieve in a given
period of time.
They may focus on a number of areas:
-Matching workforce skills, size and location to business needs
-Minimising labour costs
-Marking full use of workforce potential
-Maintaining good employee/employer relations
HR Objectives – Internal and External
Finance – allocating capital expenditure, cutting budgets,
implementing profit centres and increasing ROCE all effect HR.
Operations Management – whether the firm is labour or capital
intensive, An innovative firm will require expertise and high quality
Marketing– Low cost will mean lower wages whilst differentiation implies
creative thinking. Diversification may require investment for training and
-Workforce skills and availability (skills shortages – demographics)
-Technological change (Greater capital intensity make use of tech)
-Market conditions (Whether its growing or what- effects demand
for workers and consumer habits as tastes change for jobs)
-Political factors (laws e.g. Minimum wage and age discrimination)
-Social factors ( Family commitments)
Soft and Hard HR Strategies
HR Strategies – the overall way in which a
business treats its staff.
Soft HR strategy – views
employees as valuable assets,
a major source of competitive
advantage and a vital
importance in achieving
Hard HR strategy – views
employees as valuable
assets, a major source of
competitive advantage and of
vital importance in achieving
- Control mechanisms
- Centralised decision
- Tall organisation
- McGregor’s Theory X
- Greater autonomy and
- Flatter organisational
- Maslow's higher level of
Workforce plansA detailed plan of the strategies that the HR
department will undertake to ensure that future
workforce needs are met.
Strategies may include:
-Training or redeployment
-Internal promotion or external recruitment
-Relocation or restructuring
Internal and External influences of workforce
Finance – will be affected by whether the firm is following a hard
or soft approach. Soft approach may require bigger training
Operations Management – May involve new technology,
innovation and kaizen groups. Capital intensive industries may see
Marketing– An objective of increased market share will lead to an
increased demand for workers, often requiring different skills and
-Labour market and demographic trends
-The state of the economy and government
Issues and value of using workforce
-Costs (recruitment, selection and
-Informed decision making
-Natural wastage (save future
-Respond to changing nature of
the labour market
-Sufficient staff with the right skills
to allow the business to run
Factors influencing the choice of structure:
-The size of the organisation
-The nature of the organisation
-The culture and attitudes of senior
-The skills and experience of its workforce
-The dynamic/ external environment.
The relationship between different people and
functions in an organisation.
A formal structure with clear levels of authority and
channels of communication. This may be functional or
Matrix A dynamic structure with project teams compromising of
people from different function and different levels.
Informal There is no clear hierarchal structure, creativity and an
enterprising culture is promoted.
Restructuring may look to:
-Spread work load
-Respond to changes in
-Meet new demands
Decisions made at the top of the
-few decision makers speeds up
-Maintains tight control
Decisions made at many levels
within the hierarchy.
-Delegates decision making
-Frees up management time
Taking out levels of the
-Empowers employees as less
-Expertise may be lost
-Widens span of control
Communication – the process of passing information
between interested parties to the right person, at the
right time and in a format that is understandable to the
Effective is important:
-Coordinates – motivates
– clarifies roles
-Eases the implementation
-Keeps everyone informed
Methods of communication –
must be appropriate to the
content being delivered.
Barriers of communication –
as information overload,
cultural and language
problems can damage the
performance of the workforce.
Giving a voice to employees through a recognised body that represents
Forms of employee representation:
Medium for effective two way
Opportunity cost of time
Reduces feeling for ‘them and us’ Can cause conflict due to different
Employees kept informed Slows down decision making
Employers have some
understanding of employee
Employer may not be able to
respond to employee wishes
Improved motivation Non homogeneous employees
Work councils – A group made up of managers and
representative employees who meet regularly to discuss
issues relating to the business and specifically issues
affecting the workforce.
-Pay and working conditions – Workforce plans
-Proposed or planned changes to business activities
Employee groups – A group made up of management, HR
manager and elected employees from specific areas of a
business in order to facilitate two way communication.
- Can meet to discuss specific issues affecting the workforce
Trade Unions – National organisation with a remit to protect
its members and improve their economic and working
-Securing jobs – Maximising pay
-Ensuring safe conditions and fair treatment of members by
Avoiding and Resolving
disputesIndustrial dispute – when there is a disagreement
between the employer and the employee/employer
Industrial action – when the employees take actions
to try and impose pressure on the employer.
These actions might include:
-Work to rule – Demonstration
-Lobbying - Strike
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