Transcript 3.4.1-Corporate

3.4.1 Corporate Timescales
Corporate timescales for what? For performance measurement – for
example when a profit (or reduced loss) may be achieved
Influences on business decisions
Timescale
for decision
making
Methodology –
evidence-based
or subjective
Ethics and
impact of
pay, CSR
DECISION MAKING
Corporate
culture
Influence of
stakeholders vs
shareholders
The “quick profit” (short term performance) vs
long term performance – timescale depends on
the size and business of the firm….
Vs.
Tactical – Flexible – Short term profit
maximisation – little investment, no
R&D, no specialisation
Strategy – R&D - Investment – Planning – Forecasting –
What if scenarios – holistic approach (CSR, Ethical
policy)
Link to Corporate Strategy
• Previously looked (mostly) at larger firms strategy to achieve
corporate goals
• Now looking at the time horizon for corporate decision making and
the effects on the firm.
Let’s look at a case from the recently appointed CEO of M&S:
http://www.telegraph.co.uk/business/2016/05/12/new-marks-spencer-boss-steve-rowe-shakes-up-management/
- Why has he “shaken up” management?
Performance Timescale
Management Activity
Research and Development (“R&D”)
Staff Training
Hire Temp Staff
Area of Business
Focus on
short term
performance
or
Mergers and Acquisitions (“M&A”)
Organic Growth
Corporate and Social Responsibility
Commitment
Firm Structure
Sole Trader
Partnership
Private Limited Company
Public Limited Company
Government Owned Corporation
Cooperative
Focus on
long term
performance
Fashion Design
Car Manufacturing
Restaurant
Steel Mill
Performance
Objective
Environmental
improvement
Maximise
Management Bonus
Growth of firm’s
assets
Maximise
Employment
Profit satisficing
Pharmaceuticals
Research
Cultural Background
USA
UK
Germany
Allocate each unit (ie Sole Trader) as being
more likely to be ST or LT focus
performance
Short vs Long Term Performance Goals Populating a table (don’t forget “context”)
Advantages of short term performance targets
Advantages of long term performance targets
Disadvantages of short term performance targets
Disadvantages of short term performance targets
Evidence-based vs Subjective Decision Making
- “Subjective” refers to personal perspectives, feelings, or opinions
entering the decision making process.
- “Evidence based” refers to the elimination of subjective perspectives
and a process that is purely based on hard facts
• Lets think about some types of decision making (Either Subj. or Evid.
based and why)
• Decision over Airport Expansion taken by UK Government
• Closure of BHS Branches
• The last music download / CD you bought
• Last family holiday
Who made the decision, how and what are the consequences?
Evidence-based vs Subjective Decision Making
• When is Evidence-based better than Subjective decision making (and
vice versa) -> Compile a list of examples
• In sections 3.3 (Decision making techniques) and 3.5 (Financial
statement analysis) we shall look further at evidence based decision
making
Homework: Essay Plan (for review next week)
Marcouse p109 “Evaluate whether the UK government should try to
tackle short termism in business?”
Obviously read the chapter (especially p106) but also see question 2(e)
– and the sample answer on p66 of the sample assessment materials
pdf – to see how to tackle a 20 pointer question. Try and structure a
level 4 answer.
#http://qualifications.pearson.com/en/qualifications/edexcel-alevels/business2015.coursematerials.html#filterQuery=category:PearsonUK:Category%2FSpecification-and-sample-assessments
Advantages of short term performance targets
Answers
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Easily and frequently measurable
Early indication that things are going well/badly
Immediate feedback to improve management decision making
Particularly good for small/medium business where survival is in doubt
(especially if making a loss)
Max ST profits
Opportunity to take advantage of ST conditions (ie other firms ‘Fire sale’ of
assets), potential takeovers, but beware reputational damage from “Asset
stripping”
Advantages of long term performance targets
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Ability to make decisions for the ultimate benefit of the firms shareholders
Ability to invest for the long term into R&D, staff development or technology.
These returns may be larger but will take longer to receive which does not help
the managers now if they're being judged.
Likely to have superior staff retention
Not swayed by short term issues (for example a publisher annoying long term
customers by stopping production to instead mass produce copies of the latest
best seller. The publisher may make short term profits but will lose long term
customers.)
Able to secure LT contracts, develop relationship with firm stakeholders
This is a more holistic approach to business strategy, incorporating aspects such
as CSR & ethics. Some argue this is not only the 'right thing to do' but also the
most commercially prudent approach.
Disadvantages of short term performance targets
Disadvantages of long term performance targets
•
• The business may not survive to have a “long term” if it isn’t able to pay its bills
in the short term
• LT performance targets without ST goals will provide no warning if performance
is not on target
• LT performance targets may make the firm unresponsive to recent developments
• The current conditions that informed the long term strategy may change – the
business could be a cab firm that didn’t anticipate Uber or a publisher that lost
out to Kindle (Or HMV losing out to music and film downloads)
Absence of incentive to invest in education, R&D, innovation as products reach
end of lifecycle
•
Managers will benefit from short term wins even if that endangers long term
objectives. Example: VW cheating on emissions tests solved a short term
problem….Managers only focus on ST.
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Have to hope that a series of short term successes equates to long term
success – selling off a valuable patent, profit making division, flattering
quarterly or end of year figures etc. simply stores up trouble for the future
(Banks now have bonus caps and can claw back ST bonuses)
• Planned Organic growth less likely than LT firm
• Danger that Products reach end of lifecycle without replacement
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Staff retention may be an issue / likely to have higher % temp workforce,
maybe more inefficient
NOTES
Evidence-based decision making
• Time and motion studies can measure performance across the firm
• Establish benchmarks and measure failure to achieve/identify efficiencies
• Use past events (ie % fall in store sales when raining) to statistically forecast the future
• Evidence provides a defence / excuse if things go wrong
• Business following a scientific method should improve result
• IT capacity enables detailed analysis of all numerical data
Fails when:
- Future unlike the past (2008 GFC)
- Correlations between variables break down (Store sales do better in heavy rain than light rain)
- Forecasting cannot be based on numerical factors but qualitative judgement
- There are issues in decision making that numerical forecast misses: ie your supermarket is built in
the best location possible thanks to extensive data analysis but in the process demolished a
popular children’s playground and local hospital and is boycotted by the community
- Information is either not available or owned by an interest group who keep it confidential