maanantai 31. lokakuuta 2016

Trigger 7: Accounting terminology

1. What are the main components of an income statement?

Income statement (sometimes also called the profit and loss statement or statement of operations) is one of the three major financial statements. It is used to calculate the profitability of a company. There are two kinds if income statements: Single step and Multiple step. Let's have a look at some terminology one might come across while reading an income statement. (1)

Two main categories in a single step income statement are 1. Revenues and gains, and 2. Expenses and losses. These two categories will together form net income. The formula is below:

(1)

To be more specific, there are several sorts of revenue or income, as well as expenses and losses. Let's have a look at our exemplary income statement, step by step.

NET SALES means all sales the company has made, minus discounts, damaged or missing goods, allowances and returned goods. (2)

From net sales you then deduct EXPENSES which include:
Goods and services
In a café Expenses from goods and services would mean prices and delivery of the ingredients they use for their products.
Salary related expenses:
Salaries would obviously fall under this category, but also other expenses such as sick leaves, holidays, and employees' insurance.
Depreciation
Book keeping principles require that a company reports the yearly depreciation of their assets. Depreciation of an asset means this: A company buys an equipment, and evaluates that they can use it for 5 years. They first deduct the salvage value from the purchase price, then divide the remaining value for each year they expect to use the equipment. (3)
Operating expenses
Other operating expenses include things that have little to do with the products the company sells.
For a café this could mean, for example office supplies.
Other operating income
For example renting the premises for an event.

When all of the expenses above are deducted from the net sales, what remains under the line is called OPERATING INCOME.

In addition to operating income, a company can receive other income, for example financial income, which means things like income from municipal bonds, tax returns and interest from given loans. Financial expenses generally refer to interests of company's long term dept. (4)

After the financial income/expense has been added to/deducted from the operating income, what's left is called INCOME BEFORE TAXES. Taxes are calculated for this amount. In Finland the tax percentage for organizations is 20%. (5) This amount is called INCOME TAX EXPENSE.

Once the tax has been deducted, we finally get the NET INCOME. If the amount remaining on the bottom line is negative, it is referred to as NET LOSS.

This example was a single-step income statement. One major difference with a multiple-spet, or a multi-step income statement is that it shows the GROSS PROFIT, which means net sales- cost of sold goods. Multi-step income statement also would have adressed the categories in more detail, showing what kind of expenses fall under Salary related expenses, to give one example.

2. What are the main components of balance sheet?

One of the main financial statements. The balance sheet reports the assets, liabilities, and owner's (stockholders') equity at a specific point in time, such as December 31. The balance sheet is also referred to as the Statement of Financial Position.

Here's a brief video on how balance sheet works:
http://www.investopedia.com/video/play/introduction-balance-sheet/

Assets:

Things that a company owns. Also costs that have already been paid, but the service is still ongoing.

Non-current assets (something that has been there longer than a year)

For example machinery and supplies
-Intangible assets: immaterial rights, for example, patents, copy rights and such. (6)

Current assets (something that comes and goes)

-Materials and supplies

-Accounts receivables: a sale made with credit, where invoice is yet to be paid. Potential loss, is customer does not pay on time
-Other receivables, long term: Long term assets that are too insignificant to be listed separately.
-Prepaid expenses and An asset that has already been paid for, but not yet (fully) used (7)
-Accrued income: An adjustment made to a financial statement, where the actual income has not been received yet, but is market in books as debit. (7)(8)
-Other receivables, short-term: Short term assets that are too insignificant to be listed separately.

-Cash and petty cash: Cash is balance on an account, petty cash is actual, concrete cash.
-Investments and securities: Bonds or stock that company owns

Equity:

The difference between company's assets and liabilities. (11)

-Share capital: The amount of funding a company has raised by selling stock to public investors (12)
-Retained earnings: Amount of net earnings that is not paid out as dividends, but retained by the company to pay dept or to be reinvested in the business itself (13)
-Net Income: The bottom line of an income statement

Liabilities:

An obligation payable by the company, for example wages, loans, invoices and such.

-Loans from financial institutions: Loans company has taken and has not yet (fully) paid back

-Accounts payable: Invoices for goods or services the company has yet to pay

-Other liabilities: Liabilities that are too insignificant to be listed separately

-Accrued expenses: An expense that has yet to occur, such as a salary that's due to be paid in the future. (14)

-Unearned revenue: Services or good a company has not done yet, but has already received a payment for.

Total equity and liabilities:

Same as assets.

3. How to analyze income statement and balance sheet?

Evaluating BALANCE SHEET is important for shareholders and potential buyers, as it can reveal information about working capital adequacy, asset performance and capitalization structure. These three are categories of investment-quality measurements. (15)

I will briefly explain what these measurements mean:

Capitalization structure: What different sources of funds a company uses to finance its growth and overall operations. Most important measurement in capital structure is company's dept-to-equity ratio. Company with a greater percentage of dept can pose a greater risk for investors. (16)

Asset performance: A company's ability to turn resources into subsequent returns. Following metrics can be used to evaluate asset performance:
-cash conversion cycle
-return on assets ratio
-fixed asset turnover ratio

Improvement in asset ratio means that it can now produce higher proofits with same resources or, can produce same results with lesser resources. Asset performance, and changes in asset performance are an important consideration for investors. (17)

Working capital adequacy: Measures a company's short-term financial health and its efficiency. Is calculated as follows:

Working Capital = Current Assets - Current Liabilities

If this figure is negative, a company can run into trouble paying it's bills, which can lead to short or long term financial diffuculties, or even bankruptcy. (18)

When analyzing INCOME STATEMENT, it is most important to look at the profitability calculations:

Gross margin= Gross profit/sales
This calculation gives a percentage, but the plain number does not tell whether a company's gross margin is good or bad. To evaluate this, we need to also look at other profitability ratios, such as:

Operating margin= Operating profit/ sales

Pretacx margin= Pretax income/sales

Net income margin= Net income/sales

Here's an example of mentioned calculations:

Picture from Youtube video: Income Statement Analysis - Beginners Guide (19)

For example the Net income margin in this example would mean, that for every $1000 the company generates income, they get $33 as profit.

To determine whether the calculates ratios are good, the figures need to be compared to something.

The first comparison would be with other companies' figures in the same line of business. Different lines of business have different expextations of profitability, and thus there's not much use in looking at other industries for comparison.

It is also worth looking at how the profitability is changing over time in a company. Normally these figures are looked at for the period of past three years. It is also worh following the quarterly figures. If profitability is not consistent, or is going down, then there might be reason to worry.

One can also analyse the growth rate over time. If growth is slowing down, it might not be concerning in and of itself, but it definitely gives reason to look at other figures to see if there's something wrong. If at the same time gross margin would be going down, for example, then this could be a reason for concern, especially, if the same is not happening in other companies in the industry.

What is relevant in analyzating the income statement, is that all figures are interconnected, and don't really give any real information when looked at separately. (19)

References:
1. http://www.accountingcoach.com/income-statement/explanation/1
2. http://www.accountingcoach.com/terms/N/net-sales
3. http://www.accountingcoach.com/depreciation/explanation

Trigger 7: Accounting terminology

1. What are the main components of an income statement?

2. What are the main components of balance sheet?

Here's a brief video on how balance sheet works:
http://www.investopedia.com/video/play/introduction-balance-sheet/

Assets:

Things that a company owns. Also costs that have already been paid, but the service is still ongoing.

Non-current assets (something that has been there longer than a year)

For example machinery and supplies
-Intangible assets: immaterial rights, for example, patents, copy rights and such. (6)

Current assets (something that comes and goes)

-Materials and supplies

-Cash and petty cash: Cash is balance on an account, petty cash is actual, concrete cash.
-Investments and securities: Bonds or stock that company owns

Equity:

Liabilities:

An obligation payable by the company, for example wages, loans, invoices and such.

-Loans from financial institutions: Loans company has taken and has not yet (fully) paid back

-Accounts payable: Invoices for goods or services the company has yet to pay

-Other liabilities: Liabilities that are too insignificant to be listed separately

-Accrued expenses: An expense that has yet to occur, such as a salary that's due to be paid in the future. (14)

-Unearned revenue: Services or good a company has not done yet, but has already received a payment for.

Total equity and liabilities:

Same as assets.

3. How to analyze income statement and balance sheet?

Evaluating Balance sheet is important for shareholders and potential buyers, as it can reveal information about working capital adequacy, asset performance and capitalization structure. These three are categories of investment-quality measurements. (15)

I will briefly explain what these measurements mean:

Working capital adequacy: Measures a company's short-term financial health and its efficiency. Is calculated as follows:

Working Capital = Current Assets - Current Liabilities

If this figure is negative, a company can run into trouble paying it's bills, which can lead to short or long term financial diffuculties, or even bankruptcy.

When analyzing income statement, it is most important to look at the profitability calculations:

Gross margin= Gross profit/sales
This calculation gives a percentage, but the plain number does not tell whether a company's gross margin is good or bad. To evaluate this, we need to also look at other profitability ratios, such as:

Operating margin= Operating profit/ sales

Pretacx margin= Pretax income/sales

Net income margin= Net income/sales

Here's an example of mentioned calculations:

Picture from Youtube video: Income Statement Analysis - Beginners Guide (19)

References:
1. http://www.accountingcoach.com/income-statement/explanation/1
2. http://www.accountingcoach.com/terms/N/net-sales
3. http://www.accountingcoach.com/depreciation/explanation

Trigger 6: Accounting for a start-up

1. WHAT TO CONSIDER WHEN SETTING UP A FINANCIAL PLAN?

To make a financial plan, our example entrepreneurs need to consider three things. How much money they will need to start the business up, before it starts producing money, and where they will get this money from? Then they will need to calculate how much they will need to make in order to break even, this is called profitability calculation. Third thing to do is to evaluate sales, in other words they need to make a sales calculation.

Investment calculation

For investment calculation, one should roughly estimate the amount of money they will need, and get, before the company will start producing money.

Below are some explanations of terms:

*For example in Finland registering fees vary from 110 EUR to 330 EUR depending on type of business.

**Fixed costs are categorized below in the profitability calculation.

***Investors who invest into small businesses either one-time or ongoing.

****Finnvera is a special financing company for businesses.

*****Usually for 6 months, and around EUR 705 - 1,130 per month.

Profitability calculation

After evaluating the total sales needed in order to cover all the costs, in other words, to break even, the entrepreneurs need to calculate sales prices for their products. It is done as follows:

-total costs of the product (for the entrepreneur)

+total sales margin

=sales price exc. Vat

Price+24%

=price incl vat

Reference: Https://prezi.com/hmih9mo11kgu/guide-to-entrepreneurs-in-finland-by-juan-borra/

Sales calculation

Next step is to evaluate the sales by product, calculate the margins they will be getting, and see whether they will earn enough to keep the business running.

In here they should take into consideration following things:

-product losses

-competitors and their prices

-total sales should be equal or exceed the total sales required in the profitability calculation.

2. HOW TO SET UP ACCOUNTING OF A SMALL BUSINESSES?

All companies in Finland are required to keep book of all their transactions. Investopedia defines accounting as follows: "accounting is the systematic and comprehensive recording of financial transactions pertaining to a business". (2) in Finland, company's size determines, what kind of bookkeeping they must uphold. (3) our entrepreneur's café would fall under the "micro enterprise" category.

It is the entrepreneur's duty to do daily bookkeeping, which consist of following:

-sales invoices (or receipts)

In other words, all material that is generated when dealing with other companies, customers, banks and authorities. (4)

The accounting records may be either paper or electronic records. These days, however there is an abundance of electronic financial management systems, which facilitate bookkeeping, so many entrepreneurs opt for electronic accounting. (3)

It is advisable for a small company to hire an accountant. In addition, an accounting company can help out with payrolls as well as cash flow planning. (3)

By law a company must document transactions including receivables, payments, liabilities, capital, corrections and transfer instalments. Everything must be marked as a plus or a minus. Every transaction needs to have some form of verification document, such as a receipt.

Every transaction will be registered to a balance sheet. (5)

-purchase invoices

-payslips

-bank statements (3)

3. WHAT LEGAL ASPECTS SHOULD ONE CONSIDER WHEN STARTING A SMALL BUSINESS IN FINLAND?

Being an entrepreneur differs from being an employee. For example, the legal responsibilities of an entrepreneur are quite different. Let’s have a quick look at what type of laws are applied to an entrepreneur:

Accounting:

We already looked at accounting before. There are, however several legal aspects to consider. The decree 1753/2015 defines these aspects. (6)

For a micro enterprise there's no need to make an annual report, a financial statement, however is necessary.

Pension:

An entrepreneur is justified to start their employment at the same age as an employee, but with a 0,4 percents lower for each month they brought their pension forward from that, allowed in the entrepreneur law. 72/2016

Unemployment:

An entrepreneur is not equal to an employee in case of unemployment benefits, if the business goes down. An entrepreneur need to have an insurance to cover their possible unemployment.

Unfortunately, when dealing with an insurance company instead of Kela, the unemployment is not always covered as insurance companies tend to work more in their own interests instead of their customer's interest. For an example, see the case http://yle.fi/uutiset/3-8791666.

Hiring an employee:

When hiring an employee, the entrepreneur need to follow certain rules:

-contract of employment must be drawn

-salary needs to be in accordance with Finnish collective labour agreement

How much to pay
When to pay
What fees to pay in addition to the salary (taxes, tyel, etc.)

-insurance

-working hours

-healthcare (7)

Permits:

In finland an enterprise will need applicable permits. For a café these permits would include a permit for selling food, and possibly a permit for selling alcohol. In order to serve food or alcohol, strict set of rules has to be followed. (3)

Taxes:

Unlike an employee, an entrepreneur needs to do their own taxes. If an accounting company is hired, this task can also be allocated to them.

References:

1. Https://prezi.com/hmih9mo11kgu/guide-to-entrepreneurs-in-finland-by-juan-borra/

2. Http://www.investopedia.com/terms/a/accounting.asp

3. Https://prezi.com/hmih9mo11kgu/guide-to-entrepreneurs-in-finland-by-juan-borra/

4. Anttonen, m. Hakonen, m. 2011, Taloushallinon taitajaksi

5. Black, g. 2009, Introduction to accounting and finance

6. Http://finlex.fi/fi/laki/alkup/2015/20151753

7. Https://www.palkkaus.fi/cms/article/ensimmaisen_tyontekijan_palkkaaminen

8. Http://yle.fi/uutiset/3-8791666

sunnuntai 25. syyskuuta 2016

Trigger 5

1. How does supply and demand (S&D) affect prices?

The most important thing to keep in mind with the theory of supply and demand is that the general models cannot be applied to the real world with any certainty. There are too many variables. But in order to understand the basic guide lines I will have a look at the theoretic models.

There is a model called equilibrium analysis (1), where we can build a model based on one commodity and see how that market operates. Model formed like this can then be applied to other markets to see how they behave.

The market for a particular good is said to be in equilibrium, when the demand for the good equals the supply of the good. The equilibrium price for this good is the price per unit of the good that allows the market to “clear”; in other words, the price for which the quantity demanded of good exactly equals the quantity supplied of the good. (2)

By using equilibrium analysis it is possible to isolate one factor and see how the other factors are affected. There are two approaches to do this. One can either use algebraic approach or graphic approach. In Cliff Notes webpage algebraic approach is explained like this: "The algebraic approach to equilibrium analysis is to solve, simultaneously, the algebraic equations for demand and supply." (2)

In graphic analysis you depict S &D as curves, and you can determine the equilibrium price from the intersection. See the picture below.

Picture from https://www.cliffsnotes.com/study-guides/economics/demand-supply-and-elasticity/equilibrium-analysis

This was the equilibrium, but what happens, for example when there is oversupply of a good? The prices will have to be lowered, to enhance the demand. On the other hand, shortages in the market would normally lead to retailer being able to raise prices, and the supply will again be modified to meet the demand, in search of equilibrium. In real life, this equilibrium will never be achieved, as other factors will always keep changing the market.

How to deal with these changes then? Well Wetherly's and Otter's The business environment gives following guide lines for using Equilibrium analysis:

Assume the market's in equilibrium
Introduce change (determine if S side or D side)

S side-> supply curve will shift and move along the D curve
D side-> demand curve will shift-> move along the S curve

What will happen to price?
Compare new equilibrium. Will this affect other markets?

The case of Levi's:

In 1980 people were switching to other sorts of trousers in stead of jeans. Levi's first had a failed attempt at diversifying their products, but then ended up trying to reinforce their existing brand. In 1985 they made a commercial in UK, with Nick Kamen stripping down. The sales were estimated to have risen 800% with this advert, as the demand rose.

2. What kind of different markets exist in perspective of S&D?

First I will define price elasticity for demand, as this is quite important factor in different types of markets. This is how it's defined in invetopedia:

"If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded."

http://www.freeeconhelp.com/2011/06/market-structures-perfect-competition.html

Different types of markets can be categorized based on the number of companies on the market, and this in turn greatly affects the competition (supply side factor). Let's have a look at the different market types.

1. Perfect competition

market has many buyers and sellers
no barriers entering or exiting the market
all products are similar
no transaction costs
demand curve is perfectly elastic

picture from Boundless.com

In reality a market cannot stay perfectly competitive endlessly. If there are positive economic profits, new competitors will enter the market, supply curve will shift to the right, and equilibrium price will go down and so the economic profit will go down.

Equilibrium point for this market will occur when the demand curve (price) intersects the marginal cost (MC) curve and the minimum point of the average cost (AC) curve. (3)

2. Monopolistic competition

differentiated products
no major barriers to enter or exit
companies are price setters and profit maximisers
usually large number of independent companies on market
highly elastic demand
Majority of today's small firms exist in monopolistic competition
in short run supernormal profits possible

companies try to stay in the short sun with innovation and product differentiation

Picture: Economicsonline.co.uk

3. Oligopoly

consist of few select companies that dominate the market
even though they are competitors, these few companies tend to cooperate to some level

this can lead to higher prices
note: cartels

examples of these industries are mobile phone operating systems, car industry and airlines
heavy advertising
barriers to enter market
government regulations
Oligopoly can have following affect on prices

Price wars
level prices
collusion for higher prices

companies can strive to either increase profit or market share (5)

4. Monopoly

Definition of a monopoly is that a single company has over 25% market share
Following things can lead to a monopoly:

government regulation (for example VRin Finland)
a company has a patent over a design
a company has the ownership of scarce resource

Government regulation can prevent a monopoly from being born (two big companies cannot merge if the result company would end up with over 25% market share)

For example Kesko needed to get an approval from Finnish competition and consumer authority to buy Suomen lähikauppa (7)

3. What other factors than S&D affect prices?

-Cost of production

-Government regulations (tariffs, taxes, government owned monopolies)

-Purchasing power of customers (examples Norway-Indonesia)

-Objective

-Marketing method used (costs added to the price; brand, middlemen, couriers, after sale service etc.)

-Competition

References:

1. Wetherly, P. and Otter, D. 2008 The business environment
2. Cliff Notes: https://www.cliffsnotes.com/study-guides/economics/demand-supply-and-elasticity/equilibrium-analysis
3. Boundless.com https://www.boundless.com/economics/textbooks/boundless-economics- textbook/competitive-markets-10/perfect-competition-66/conditions-of-perfect-competition-248-12345/
4. Economics online http://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html
5. Investopedia http://www.investopedia.com/ask/answers/121514/what-are-some-current-examples-oligopolies.asp

7.Kesko stock exchange release 18.11.2015 http://www.kesko.fi/en/media/news-and-releases/stock-exchange-releases/2015/kesko-to-invest-in-finland-by-acquiring-suomen-lahikauppa--siwa-and-valintatalo-stores-return-to-finnish-ownership/

torstai 15. syyskuuta 2016

Trigger 4

1. a) What actions governments can take to affect the economy? b) What can be the consequences of government actions?

Two main regulatory macroeconomic policies are fiscal policy and monetary policy (1). Let's have a look at these policies:

Fiscal policy is basically the governments taxation and spending policy. When government wants to stimulate economic growth, it is called expansionary policy.

Main tools of expansionary policy are:

-Reduced taxation

-Increased government spending

-Increased public dept

These actions are taken in order to increase aggregate demand, and thus increase economic activity, leading to higher inflation and increased employment. Here are some possible effects of economic stimulation:

To fight inflation, a government can try to slow down economic growth. This is called contradictionary policy. Main tools for it are:

-Raising direct and indirect taxes

-Cutting government spending

Few politicians are eager to enact contradictionary fiscal policy, so this method is more commonly used by central banks.

"Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates." (2) Central banks are government owned, so in practice the government has a say in monetary policy decisions.

The goal of a monetary policy is to control interest rate or inflation rate. This is most often done by modifying the supply of currency or fixing the exchange rate of the currency, or in extreme cases, devaluation.

Like fiscal policy, there are two types of monetary policy: expansionary and contractionary. Expansionary policy is used to stimulate inflation and economic growth and contradictionary policy can be used to control high inflation. Fiscal and monetary policies can be used simultaneously to affect economy.

The effects of these policies are not simply explained, and different economic theories have their own views on possible effects of these policies.

For example Keynesian economics believe that as prices are quite rigid it follows that if government spending increases, and all other factors of spending remain the same, then output will increase, thus increasing aggregate demand.

There's also a Keynesian theory, called multiplier effect - "output increases by a multiple of the original change in spending that caused it" (3) Which would mean, for example, that a million euro increase in government expenditure would cause output to rise 1,5 million euros (1,5 multiplier).

Please note that Keynesian theories have been widely disputed.

2. What are the external factors that affect government’s economic policy?

On a basic level external factors that affect government (economic) policy can be categorized as follows:

Political factors

Monetary unions, such as EU
Wars

Economic factors

international interest rates
fluctuations of other currencies
Commodity price flutuations

Environmental factors

natural disasters

3. Why are governments subsidizing commodities?

In Merriam-Webster's dictionary the word subsidizing is defined as 'to aid or promote (as a private enterprise) with public money'. (4) This means, that for various reasons governments give out tax payers money to industries they feel need boosting. I will now have a look at some reasons why subsidizing is done.

At a basic level, governments are subsidizing commodities to avoid the share of imported commodities from rising. Another goal, especially in agriculture, is to keep the price level relatively low.

Picture from: http://subsidizinggreen.blogspot.fi/2011/11/micro-economics-role-of-government.html

http://ecopolistic.blogspot.fi/2012/10/smartphones-no-longer-want-but-need.html

Above are graphics of the supply + demand curve, and the effect of subsidies.

Country's economic structure has a lot to do with subsidizing policy. For example in poorer countries, where agriculture is the main employer, subsidizing farmers is not done as much as in more developed countries, where the population is moving to cities and abandoning farming. (5)

The benefits of subsidizing are widely argued. Some arguments against subsidizing are:

subsidies are generally used well after the wanted results have been gotten, as political are hesitant to withdraw these benefits.
It is claimed that subsidies are being directed at bigger, and already wealthier farmers and companies, and as such they do not bring out the wanted effects. (5)

References:

1. http://economictimes.indiatimes.com/definition/macroeconomic-policy

2. Investopedia http://www.investopedia.com/ask/answers/062315/what-purpose-issuing-contractionary-policy.asp

3. Blinder, A. The concise encyclopedia of economics, Keynesian economics http://www.econlib.org/library/Enc/KeynesianEconomics.html

4. http://www.merriam-webster.com/dictionary/subsidize
5. Sumner, D. The concise encyclopedia of economics. Agricultural Subsidy programs
http://www.econlib.org/library/Enc/KeynesianEconomics.html

keskiviikko 7. syyskuuta 2016

Trigger 3

1.How to develop functions as company grows?

A company can have two different kinds of functions:

1. Internal functions are part of the company itself, done by company's own employees

2. External functions are done by an outside source, such as advertising agency (1)

Picture from https://www.kent.ac.uk/careers/workin/business-functions.htm

Internal functions are all part of the Porter's Value Chain, which will be more thoroughly looked at later.

One aspect to consider about the functions of a growing business is whether to use outsourcing to facilitate growth. In other words: whether to hire another company to do the work, or to hire more employees.

A small business is more likely to have to outsource things such as accounting and marketing, compared to big corporations, which tend to have their own departments for many functions, such as legal and research. Whether outsourcing is the best solution for particular company's particular function, can depend on many factors.

Benefits and risks in outsourcing (2):

Here are some advantages of outsourcing:

Lower costs

Minimizing recruitment and operational costs

Swiftness and expertise

Outsourcing vendor will already have expertise and necessary equipment

Concentrating on core competence rather than supporting functions
Risk sharing

An outside specialist will have knowledge of possible risks and a company can also shift some of the responsibilities to outsourcing agent

And here are some of the disadvantages:

Risk of exposing confidential data to an outside agent
Time and quality

It can be more challenging to supervise the delivery times and quality of work of an outside vendor

Hidden costs

A problem that can occur especially with a foreign company

Lack of focus

An outside vendor might be more tuned to general needs of customer than the specific company's specific needs

2. What is the value chain?

The value chain is the chain of operations (and the supporting activities) that gets the product to the customer. The concept was introduced by Michael Porter in 1985, in his book Competitive Advantage: Creating and Sustaining Superior Performance.

The basic purpose of a value chain in a company is adding value to the customer on every step of the chain and thus providing a product that makes profit when sold to the customer. Here is a brief summary of each step in the value chain:

Information on the picture is from http://www.netmba.com/strategy/value-chain/

3. How size affects management of company?

In order to better understand the difference in management when company size changes, I will have a look at the standard structures of companies.

"As an organization grows in size, complexity, and product market coverage, different strategies and organization form are used." Barnad, R.

Based on Ryszad Barnad's website (4) there are five stages of company sizes:

Stage IV: Large diversified firms with several autonomous business units which report to head office

Stage III: Geographically decentralized operations
Operating units can stand alone, not strictly tied together

Stage II: Some degree of decentralization of decision making
A lot of variations, for example classic functional lines (see Porters value chain) or a vertical coordination
Different operations not as independent as stage III

Stage I: Single business enterprise managed by one person

Close, daily contact with employees

Nearly all management decisions and functions done by (and dependent on) owner

What I would conclude, is that when a company grows, management will be decentralized further and further.

References:

1. University of Kent's website: https://www.kent.ac.uk/careers/workin/business-functions.htm

2. https://www.flatworldsolutions.com/articles/advantages-disadvantages-outsourcing.php
3. http://www.netmba.com/strategy/value-chain/

4. Barnat, R., 2014, Stategy implementation, http://www.strategy-implementation.24xls.com/en333

maanantai 5. syyskuuta 2016

Trigger 2

1.How to utilize your existing resources to expand your business? (Company’s mission)

I am going to approach this learning objective in four steps:

First I will define the terms company’s mission and existing resources.

What is a mission? In business dictionary a mission is described as ‘A written declaration of an organization's core purpose and focus that normally remains unchanged over time…. a mission is something to be accomplished whereas a vision is something to be pursued for that accomplishment.’ (1)

Company’s existing resources, can be best established by finding out, what are company’s core competences. These are defined as follows: ‘core competencies, … meet these three requirements: they provide potential access to a wide variety of markets, make a contribution to the customer benefits of the product, and are difficult for competitors to imitate.’ (2) I have defined these three factors on the image below:

*producing end-products that are well aimed to target customers

A company can, of course expand within a market it has already entered. This is called Market Penetration. In a changing world it is crucial for any given company to thrive to expand to new markets as well, such as new geographic locations, a new target buyers or new industries. This is called Market expansion. In order to wisely use the company’s existing resources for expansion, the company must first analyse its competences so that it can start building its vision and strategy based on those competencies. (3)

(There are several techniques in defining company’s core competencies. One of these is domain mapping matrix (DMM) (Danilovic and Browning, 2006), which applies Steward’s (1981) dependency structure matrix (DSM). (3)

Once the core competences have been defined, a company can start building its strategy and mission on the basis of their best attributes. In 2013 Patrick Hull, the founder and CEO of GetLoaded.com, wrote an article ‘Answer 4 Questions to Get a Great Mission Statement’ to Forbes. In this article, he defines the four essential questions a mission must answer:

What do we do?
How do we do it?
Whom do we do it for?
What value are we bringing? (4)

A company with well-defined core competence should be able to answer these questions easily. Questions 1. and 2. can be answered once the core competences have been defined. Question 3. can be traced to the ‘customer focus’ aspect of core competence. The value of a company (question 4.) can be defined using the core competences as well. Especially the ‘impossible to imitate’ aspect is one way to define what the company has to offer, that other companies do not have.

As stated before, a company can expand in multiple different ways.

Looking at Ansoff’s Matrix we can deduce that there are for main ways for the company to expand:

Kuva: Ansoff's Matrix, free-management-ebooks.com

Increase existing product’s market share on existing market (Market penetration)
Develop a new product to a new market (Product development)
Bring an existing product to a new market (Market expansion or Market development)
Develop a new product to aim at a new market (Diversification)

To sum all of this up, the goal of expansion can be made much easier by having a well-defined core competence, and a mission (a red thread so to speak) closely tied to core competence.

2.How to foresee trends? (Company’s vision)

a) How do you translate this into a company’s vision

What is a business trend? Cambridge dictionary defines business trend as a general change in the way business is developing. But how can anyone know beforehand what changes will occur in the future?

In his article in Harvard Business Review Maxwell Wessel states that anyone can get better at predicting how markets will evolve if we ask ourselves three questions.

· What’s changed?

· What business assumptions become irrelevant?

· How could new models take advantage of the change?

Some examples of changes that have affects on businesses around the world are:

Climate change
Rise of internet
Wars
Financial crisis

What is a vision?

Business dictionary defines a vision as “an aspirational description of what an organization would like to achieve or accomplish in the mid-term or long-term future. It is intended to serves as a clear guide for choosing current and future courses of action.” (1)

Why is Vision important?

As a study by Rafferty and Griffin suggests “Vision and inspirational communication have a unique positive relationship with affective commitment to the organization” (6)

" Concrete performance such as profit, return on shareholder equity, employee turnover and rate of new product development improve when Visions are used as strategic tools to manage organizational cultures" Wall Street Journal 22 Sept 1994 p. A1

Various studies show the positive impact of a clear vision, when used in everyday business management as well as the company’s strategic tool.

How to form a vision?

( Kantabutra, 2008b) defines following characteristic as building blocks of a strong vision:

1. conciseness;
2. clarity;
3. future orientation;
4. stability;
5. challenge;
6. abstractness; and
7. desirability or ability to inspire.

And also in the study of Kantabutra, S. and Avery, G:

·   is brief (so that it can be remembered and repeated easily);
·         contains a prime goal to be achieved;
·         can encompass all organizational interests;
·         Is not a one-time, specific goal that can be met, and then discarded;
·         provides a source of motivation for employees to do their best by including a degree of difficulty or stretch (e.g. to achieve a national/international status);
·         offers a long-term perspective for the organization and indicates the future environment in which it will function;
·         is unlikely to be changed by market or technology changes; and
·         is viewed as desirable by employees (8)

Looking at these characteristics, it seems there’s not much space for our goal of implementing foreseeing trends into the vision. But this being said, the vision should contain something about future goals. and challenge. So depending on the type of company, the vision should say something about the variability of the industry. Couple of key words could be analysing, (product) development, proactivity, and such.

3.How to create strategy based on vision and mission? (Company’s strategy)

Definition of a strategy by the Business dictionary: A method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem.

How to wisely build a strategy?

A company’s mission and vision have value of their own. But how can they contribute towards the company’s strategy?

In order to build a strategy a company needs to have vision, mission and objectives. (9) I think that keeping things simple is the best approach, and so the objectives would naturally be conducted from vision and mission. In our goal of a growing, dynamic company in the changing world we wanted to base the mission on ‘expanding the company utilizing the existing resources’ and we based our vision (partly) on foreseeing trends.

So goals in this learning objective could be, for example, to:

Use company’s core competence to expand
Always prepare for what’s around the corner
Be innovative

And how do we build a strategy based on these objectives?

Here’s a list of pointers to building a strategy:

The following list of questions can be a guide for deciding on the most beneficial strategies for your group:

What resources and assets exist that can be used to help achieve the vision and mission? How can they be used best?
What obstacles or resistance exist that could make it difficult to achieve your vision and mission? How can you minimize or get around them?
What are potential agents of change willing to do to serve the mission?
Do you want to reduce the existing problem, or does it make more sense to try to prevent (or reduce risk for) problems before they start?
How will your potential strategies decrease the risk for experiencing the problem? How will the strategies increase protective factors? (9)

Some things a good strategy takes into consideration:

· Gives overall direction (this can be conducted from mission and/or vision)

· It fits resources (At this point it is important to know company’s core competence)

References:
(1) http://www.businessdictionary.com/definition/mission-statement.html

(2) Prahalad, C.K. and Hamel, G. (1990) "The core competence of the corporation", Harvard Business Review (v. 68, no. 3) pp. 79–91.

(3) Danilovic, M., & Leisner, P. (2007). "Analyzing core competence and core products for developing agile and adaptable corporation." In Proceedings of the 9th Dependency Structure Matrix (DSM) International Conference, 16–18 October 2007, Munich, Germany.

(4) Hull, P., 2013, Forbes:
"Answer 4 Questions to Get a Great Mission Statement". Forbes

(5) http://www.free-management-ebooks.com/dldebk-pdf/fme-ansoff-matrix.pdf

(6) Rafferty, A., Griffin, M. 2004 Dimensions of transformational leadership: Conceptual and
empirical extensions

(7) Wessel, M. 2015 Predict the Future of Your Business, Harward Business review

(8) Kantabutra, S. and Avery, G. 2010, JOURNAL OF BUSINESS STRATEGY vol 31 no. 1 The power of vision: statements that resonate

(9) http://ctb.ku.edu/en/table-of-contents/structure/strategic-planning/develop-strategies/main