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Business Operations and Company Strategy

Question:

Discuss about the Risk Assessment and Decision in Business.

Flight Centre is was founded in 1981 and is headquartered on Queen Street in Brisbane. The company is an air travel company and it is the largest retail travel outlet in Australia. The company’s business operations include hiring consultants in major cities around the world to organize flight holidays, travel insurance, visas, car hires, cruises and more to its clients(Lipczynski, 2008)..  Flight Centre operates a 24 hours call center that attends to clients all over the world. The company’s new strategy which is dubbed click and mortar approach, entails augmenting a growing online presence into its physical shop fronts in a bid to offer multi-channel services.  This creates a high level of efficiency for the company that enables it to increase its bottom line.

The company’s has invested a lot in setting up its online system together with building shops in other cities around the world. the company has launched an investment vehicle known as Little Argas that will be used to scale innovative travel tech and other travel related start ups. The company has put a lot of funds to fund research in ideas and building new products for the company(Montgomery, 2013). In 2015, the company used 114 million Australian dollars in investing activities while in 2016, the company used 290 million Australian dollars for the same purpose of investments. This is a significant increase, that should translate to more profits in the future.

Flight center used up 166 million dollars in 2015 as stated in the financing part of the cash flow.  In 2016, however, the figure decreased to 110 million dollars for the purposes of financing. This means that the company did not take up a lot of loans in 2016 which is not a good sign  to the shareholders. The company’s use international financial reporting standards when preparing its financial statements being that it’s a listed company it must adhere to these rules.

Flight Centre Travel Group operates in the travel industry. The size of the industry is relatively big but a majority of the industry is controlled by FTCG and another company. However, as the largest retail travel outlet in Australia, FCTG, has been able to dominate and control the industry while expanding to other destinations outside Australia like New Zealand. The industry size is worth more than $ 80 billion Australian dollars and it is still expanding owing to the increased number of people preferring to take flights to their destination(Montgomery, 2013).

Investments and Financial Performance

The industry growth has been doing well lately although a slump in the Australian economy during the economic down turns of late 2000. As the industry matures and grows more and more people are willing to take flights and therefore by tickets through Flight Centre retail and online shops. Its worldwide appearance has also been enhanced with outlet shops in Australia, New Zealand, USA, UK, South Africa, India, China and Mexico. The industry is at an upward growth trajectory(Ricchiute, 2006).

The supply chain in the industry involves ticketing. It starts with a client placing an order ticket then buying. Flight Center then Issues the client with the ticket and a directive on how to use the ticket.  The supply chain ends upon use of the ticket.

Major players in the industry include the flight companies who use FCTG outlet shops to distribute and sell their tickets, the government as a major stakeholder and industry regulator, the people who use the shops and other competitors. The market shares of the industry players is not evenly distributed, in fact, Flight Center uses controls almost the entire market share leaving small room for other competitors(Chesnick, n.d.). It is the dominant player in the industry(Wong & Ho, 2006).

The critical success factors are plan processes, contingency strategy in the company, people working for the company and the power that the company has(Wong & Ho, 2006). The major threats in the company include rising competition, global terrorism threat and decreased purchasing power.

Relevant regulatory factors include the regulatory environment.  The regulatory environment encompasses, among other matters, the applicable financial reporting framework and the legal and political environment(Koller, 2005).  

Australia, like most countries under the flight travel model, did not institute a regulatory framework favoring the movement of foreign investment flows into the country. Some governments considered that flight investment generated gain of country sovereignty and unequal competition for domestic firms. Within the framework of the flight travel model, a highly restrictive policy against foreign investment was introduced, extending in general terms.

Among the elements that predominated are: prohibition of new investment in key sectors such as the travel sector. The country also provided for removal of discriminatory treatment of foreign companies that were able to establish themselves in the country, since they did not have access to the liberal taxation system and was subject, among other things, to limitations on the remittance of profits(Cleary & Malleret, 2007).

Through the mechanism of prior authorizations, the State intervened in operations with the objective of forcing the participation of national capital in investment projects, avoiding the acquisition of existing companies and the participation of foreign companies in sectors in which it was created competition in national companies or in sectors where the State does not consider it necessary.. Transnational corporations were forced to become joint ventures after a deadline and were conditioned on the transfer of technology and the price of the royalties they received; in the same way they were imposed a restrictive control to the internal credit, having access only to credit of short term, in agreement with the conditions set by the Commission of the Agreement. This should have influenced the low flow of productive investment received by the country in that period. In a way, existing regulations had to have encouraged private external borrowing(Cleary & Malleret, 2007).

Australia's Travel Industry and Flight Centre's Dominance

The national government issued, establishing the general exchange-rate principles applicable to foreign investment and the guidelines of which should have been designed by the International Investment Statute. The legal framework has been complemented by the adoption of international agreements that allow minimizing the political risk for the investor. On the one hand, there are insurance mechanisms against non-commercial risks such as expropriation, currency inconvertibility and damages caused by increased risks. In sectors related to public services, prior authorization is required; and in sectors such as telecommunications and air and maritime transport there is a restriction on shareholding(Moore, n.d.). Return to A tax stability contract guarantees that the agreed rates - two percentage points higher than the current income and complementary tax rate - between legal entities and the State are not subject to increases after the execution of the contract and during the validity of the contract. In addition, companies benefit from subsequent tax cuts and can renounce the special regime, losing the possibility of re-subscribing(Moore, n.d.).

The company is faced with many challenges in because of the ever changing legal environment and regulations. There is a rise in terrorism that has also affected the business.  There is continued liberisation and the open skies policies.

Due to the effect of a shrinking economy that has affected a lot of parts of the world there has been a significant decrease in air travel which has affected Flight Centre.  The company’s share price has been plummeting due to the fact that the shrinking economy has affected a lot of people and therefore there has been a decrease in clients. The company has been facing increased competition from low cost and smaller air ticketing companies. Flight centre has also been finding it difficult to determine demand and cost(Montgomery, 2013).

The company’s main challenge has been dealing with clients who have become more informed and sophisticated. There is also an issue with terrorism that is affecting the company.

Online ticketing has evolved in many ways with companies in this industry creating new technology to make the experience great for customers. Some of the technological advances are  mobile apps amongst other inventions(Montgomery, 2013).

Flight Centre is the biggest air ticketing company in Australia hence this being one of the biggest strengths of the company. The company has a brand name that is recognizable due to it being listed in the ASX. The company also has national and international offices and also has a lot of customers in different parts of the world (Montgomery, 2013).

Supply Chain and Major Players in the Industry

The company faces a problem of vulnerability to pricing.  It has been having an inability to compete with smaller air ticketing companies. There is also the lack of competitive pricing within the industry.

The company plans to open offices in major cities that have a lot of travelers.  The company can also enter into agreements with major airlines to be booking customers on their behalf.

The company faces a threat of prolonged slow economy that has continued to affect the business.

There is new and advanced technology that is always threatening the air ticketing companies  by making the current technology redundant(Montgomery, 2013).

There has been a lot of competition in the industry from smaller air ticketing companies that have been eating up Flight Centre’s market share.  There are numerous other competitors who offer equivalent services and products. If the customers are unable to get a suitable deal, they seek out the competitors’ products.

There is a potential threat of new entrants into the market. The company may be significantly weakened if other companies find it easy to enter the market. There is also the factor of power of customers (Reuvid, 2014). The customers may bring the prices down. Flight Centre has obviously a more powerful client base who can drive the prices down by switching to other companies.

Other factors include the ability of the company to get financing at an affordable interest rate which is possible. The company is also affected by inflation and also the economic condition has been somehow stable.

In understanding industry development, there are very many technological changes which may cause business risk in employee management and recruitment due to redundancies and staff replacement by technology. This is a business risk that is bound to happen. The entity may also lack the required expertise to deal with industry changes and technological advancement(Reuvid, 2014).

The strategy to use in this is to be innovative and technologically cleat of its peers and competitors. Product liability means that there are some products that are performing poorly therefore are a huge liability to the business. The objective is to increase profitability of the company. The business risk is that Flight Center may run into losses due to poor performing products(Reuvid, 2014).

The strategy in business expansion is to first evaluate the profit that will be received after expansion. Demand may not be accurately estimated and therefore the risk of financial loss is quite high. The market shares of the industry players is not evenly distributed, in fact, Flight Center uses controls almost the entire market share leaving small room for other competitors. It is the dominant player in the industry(Mallin, 2016).

Critical Success Factors, Threats, and Regulatory Environment

Increased costs can only be mitigated by innovation and reducing the operational costs. Flight Center can create a better strategy in risk management and to avoid improper implementation of business projects. The entity may also lack the required expertise to deal with industry changes and technological advancement.

The business has a lot of legal risks due to cancellation of flights that may cause delays especially to business people who lodge court cases against the company. The regulatory requirement requires that the company makes business strategies that reduce the business risks(Cleary & Malleret, 2007).

Loss of financing especially due to the company’s inability to meet its requirements can create a business risk of magnanimous proportions. The best strategy is to increase the company’s operational levels by increasing its shops and outlets and therefore creation more work that was meant to increase the profitability of the company.

The use of IT is fundamental to every company’s growth and development. This is more so to a company like Flight Centre that deals with online purchase of travel tickets. This is important as the objective of the business in IT implementation is to increase operationalization of the business while increasing profitability and reducing business risks(Griffin, Ebert, Starke, Dracopoulos & Lang, 2014).

Incomplete and improper implementation of business accounting requirements is a business risk. Improper accounting may lead to financial losses and in turn cause a business risk.

Liquidiy Ratio

Specific ratio

Formulae

2017(in millions)

2016(in millions)

2015

Current Ratio

Current assets/ Current Liabilities

2338//1635=1.43

2263/1567=1.44

2153/1453=1.48

Quick Asset

Current assets-inventory/ Current Liabilities

2338-1.24//1635=1.42

2263-1.72/1567=1.44

2153-1.79/1453=1.48

Ratio

Specific ratio

Formula

Year 2017

Year 2016

2015

Profitability Ratio

Net profit ratio

Profit Margin = Net Income / Net Sales (revenue)

231/2677=8.6%

245/2642=9.2%

257/2397=10.7%

Solvency Ratio

Debt to equity ratio

Debt to equity ratio= Total Liability/ Total Equity

1635/3195=0.5

1567/3003=0.52

1453/2788=0.52

The interactions with the internal and external auditors are fundamental in understanding the governance and management of the company as it were.The entity may also lack the required expertise to deal with industry changes and technological advancement(Lipczynski, 2008).

Management’s philosophy and operating style is guided by the corporate governance principles and the policies and procedures that are set out to guide the management when operating.  Being a listed company, Flight Centre is guided by rules and regulations guiding any company that is listed. The company’s personnel have always maintained a positive attitude towards financial reporting. The personnel are always ready and willing to give out information that will help out at the reporting stage.

Flight Centre uses a functional organizational structure that is used where various departments within are set up within the company to handle various tasks such as marketing , finance etc. the company has got a chain of command and hierarchy structure that starts with the board of directors to whom the chief executive officer  and management reports to. Then there are the are the ordinary mid-level managers and departmental heads who report to the management. The company has a policy on hiring, training, compensation among others (Reuvid, 2014).

Conclusion

In understanding management and governance, communication and enforcement of ethical and integrity matters is crucial.  These are the elements that are fundamentally important in administration of the company’s control. For Flight Centre, ethical values and integrity are fundamental in the management of the company(Lipczynski, 2008). There are also other issues that are important to Flight Centre; amongst them is commitment to competency which leads to good ethical background by The Company and its employees. Unethical behaviours lead to fraud and misappropriation of funds and eventually collapse of the company. There are various attributes charged with governance and they include the experience and stature of the team of management, independence from the board and management and the extent in which the information received is utilized.

References

Chesnick, D. Financial management and ratio analysis for cooperative enterprises.

Cleary, S., & Malleret, T. (2007). Global risk. Basingstoke: Palgrave Macmillan.

Griffin, R., Ebert, R., Starke, F., Dracopoulos, G., & Lang, M. (2014). Business. Toronto: Pearson Canada.

Koller, G. (2005). Risk assessment and decision making in business and industry. Boca Raton, FL: Chapman & Hall/CRC.

Lipczynski, J. (2008). Business. Chicago: Chicago Review Press.

Mallin, C. (2016). Corporate governance. Oxford: Oxford University Press.

Montgomery, R. (2013). Auditing. [Place of publication not identified]: Theclassics Us.

Moore, P. The business of risk.

Reuvid, J. (2014). Managing business risk. London: Kogan Page.

Ricchiute, D. (2006). Auditing. Mason, Ohio: South-Western/Thomson Learning.

Wong, L., & Ho, T. (2006). Auditing. Hong Kong: Hong Kong Institute of Accredited Accounting Technicians.

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