Analysis Of JB Hi-Fi’s Profit Downgrade Decision Making Using Classical Political Economy Theory And Managerial Branch Of Stakeholder Theory

Classical Political Economy Theory and JB Hi-Fi’s Profit Downgrade

1.The classical political economy theory initiates in the analysis of the manufacturing, distributing, and exchanging the goods and the services in the societies of market. According to the classical thinkers the economic growth has determinants that consists of is human skill, labour specialization, trade expansion of markets and various techniques for improvements of the productivity (Onions, 2017). It can be assumed that more markets means more trade = which would lead to more growth which can give rise to opportunities. The Classical political economy theory was initially primarily by Karl Marx in the first edition of Das Kapital, that describes the British and Scottish economists that in order to explain the ‘internal framework’ of the “bourgeoise mode of production”. There is confirmation this is true or not is not (Wagner, 2016). However in the case of JB hifi the chief executive has anticipated a fall in the profit or the year by 2.9%.With the help of the classical economic theory it can be said that the main reason for the anticipation is competition that has been taking place in the home appliance industry in Australian addition to tis the  Institutional Theory  that Provides an explanation about why organisations tend to take on similar characteristics and form that might be adopted in order to bring legitimacy to the organisation –‘Organisations conform because they are rewarded for doing so through increased legitimacy, resources and survival capabilities’(Marx, 2015). The JB hifi company of who had anticipated that the profit would $235 million and $240 million in 2017 and 2018 respectively has undergone a fall in the profit reduced the same to $230 million. The challenging conditions in the home appliance market of Jb hifi are expected to impact performance in the short term of the company, therefore the shares dropped $2.29 that is 9%.The Institutional theory stresses more on deeper and more resilient social structure aspect and considers the processes by which structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behaviour (Hull, 2017). The main rational for lowering the annual profit forecast can be also depicted with the Good Guys driving shares down by almost 10% low since late November. Moreover, the electronics retailer reduced its overall profit outlook to $ 230 which was previously expected to be ranging between $ 235-$240. According to the institutional theory, in several instances business corporations tackle the decreasing earnings by avoiding additional payment of tax. In this particular situation, the statutory reports clearly showed that the company earned more amount of profit after tax however in the consolidated report it reduced down by $ 5 to $ 10 million so that it can survive in the challenging competitive environment by paying less amount of taxes in compared to other companies. Some of the other evidence of challenges to the company can be depicted with performance of Good Guys whose profit will be sent to be impacted by unfavourable price competition. Therefore, as the overall market for the experiencing a drop-in sale it was more feasible for companies like JB hi-fi to release its profit to downgrade so that it did not have to pay the additional amount of tax in a legitimate manner and still stay in the competition.Therefore, it can be identified in the given case study the company of Jb hifi in order to adapt with the social authoritative norms has taken the decisions. The chief executive of the JB hifi along with the board is committed to conduct ethically according to the high standards of the governance principle has considered in the institutional theory and has taken the decision of downgrading the profits for the year in order to safeguard its stakeholders.

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Impact of Institutional Theory on JB Hi-Fi’s Decision-making Process

2. The Managerial branch of Stakeholder Theory can be examined with the various empirical observation which is different from the normative ethical branch, it particularly takes in hand the various stakeholder groups within the society and provides knowledge on how they should managed in the most efficient and effective way. The theory does not consider the society as a whole like Legitimacy Theory (Fernando & Lawrence, 2014). Therefore, it can be said that Managerial branch of Stakeholder Theory is an decision making theory that attempts to explain when corporate management will be likely be able to meet the expectations of particular stakeholders especially who are powerful. It concentrates more on the organisation and their stakeholders who are identified. The Managerial branch of Stakeholder Theory represents the extent up to which the organisation believes to maintain and manage the relationship in interests of the organisation Here the Expectations of stakeholders considered to impact on operating and disclosure policies. In the given case it is clear that the giant company of JB hifi has adapted the managerial branch of Stakeholder Theory in their decision making process (Hossain, Bir, Tarique & Momen, A. (2016). The company has downgraded their profit. JB hifi who had expected the profit to be $235 million and $240 million in 2017/18 has reduced the same to $230 million (Deegan, 2014). Based on the particular consideration in the case of JB hi-fi it can be clearly seen that the company revised its net profit after tax as per various guidance which has been observed with the managerial branch of stakeholders. It needs to be observed that based on the guidance in the section 7.3 of the guidance note 8 published by the ASX, a company is expected to treat its variation in earnings as per the guidance equal to 5% less than being material and presume the guidance therefore does not need updating. However, JB hi-fi overlooked this consideration of optional updating and looked on the positive side of bringing into consideration that makes real effect of price or value into the entity’s security. Therefore, the application of managerial branch of stakeholder theory is evident in this case as JB hi-fi attempted to meet the expectation of expectation of particular stakeholders by taking into account the maturity aspects stated in the section 7.3 of guidance note 8 issued by ASX. In addition to this, the overall application of managerial branch of stakeholder theory is evident with several types of other considerations of managerial branch states that organisation shall not necessarily respond to all the stakeholders in an equal manner rather it will respond to only the powerful stakeholders. In this particular situation, JB hi-fi decided to act in favour of the materiality guidelines which were issued by the ASX.

The challenging conditions in the home appliance market are expected to impact performance in the short term profit of the company; therefore the value of the shares has dropped to $2.29 that is 9% less. The company considers the Managerial branch of Stakeholder Theory in this decision making process as the concentration is more on the stakeholders of the company that includes the outsiders and the investors. The share price of the company for the fell down drastically by 9% due to this as the various share holders were willing to sell off their JB hifi shares anticipating a loss. The company with this decision making process warned the shareholders before hand in order to avoid the loss (Kent & Zunker, 2017). The managerial branch of stakeholder theory is based on the principle that an organization and its stakeholders are interdependent upon one another for resources and managers are responsible for maintaining this exchange relationship for the organization’s survival. Jb hifi therefore declared the loss anticipation for their stakeholder’s survival.

Managerial Branch of Stakeholder Theory and JB Hi-Fi’s Reporting Decisions

3. The Earnings announcements are important since it determines the firm’s financial performance in terms of profits and wealth. In the present case of Jb hifi when they anticipated that the market is weak and the stock prices may react so fast that no investor can earn an above normal risk adjusted return (Cooper, Gulen & Rau, 2016). The information that they declared efficient, stock prices should reflect all information released making it impossible to earn above normal return by acting on publicly available information. However this may include such issues like changes in management, introduction of new accounting techniques. The earnings announcement refers to the official public statement that represents the profitability of company in the present case of retail business of jb hifi, for a specific time period which is generally a quarter or a year. The earnings announcement normally occurs on a specific date during earnings season and is preceded by earnings estimates that equity analysts issue. If a company has been profitable leading up to the announcement, its share price will usually increase up to and slightly after the information is released.
Stock prices move based on market expectations (Davis, Ge, Matsumoto, & Zhang, 2015). Therefore the chief executive of Jb hifi declared the profit downgrade beforehand. The 9% percent decrease in earnings may cause a stock to go up if the expectation is a much larger decline. In absence of market expectations, there is little correlation between stock prices and earnings growth results. Therefore it can be said that the share prices respond to earnings announcements in the month of earnings announcement. Shares in JB Hi-Fi sank 10 per cent after the consumer electronics giant company cut its profit forecast for financial   year 2018 at the conference, marking the stock’s biggest single-day fall since 2011. The public listed companies like Jb hifi has the duty to communicate to the shareholders on the financial performance of the firm which is usually done through earnings announcement. Managers strive to maximize shareholders wealth by making rational financial decisions (Gallo, Hann & Li, 2016). The Rationality theory argues that all investors are rational thus when new information is released to the market they adjust their estimates of stock prices in a rational manner. The declaration would provide the market glimpse on how stocks will likely be valued in the future. If the Stock prices tend to rise when earnings results exceed market expectations while disappointing earnings results tend to lower share prices (Kim, & Zhang, 2016).

4. The Lens Model is a process of thinking the gives an elaborate description of the relations between the environment and the behaviour of organisms in the environment (Boster, 2016). The fundamentals were developed by Egon Brunswik and popularized by Kenneth Hammond through research on social judgments. The process of viewing the decisions that the people make and how they go about making them is through the Lens Model of Brunswik has been discussed in the context of the investor’s decision in the company of Jb hifi. According to the model, there are the decision process to be com­posed of three essential elements, the elements includes the basic information that has been transferred for the situation of decision, then comes the actual decision that is taken by the investor and then the last step includes the correct decision that should have been taken (Chan & Park, 2015). According to the Brunswik Lens Model (Libby, 2017).

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Current Share Prices and Future Earnings Announcements

The decision of the investors depends on the factors based on the current situation. Keeping them in mind the management of the Jb hifi made the announcement beforehand regarding the downfall if the company profit. This would enable the potential investors to take the decisions accordingly. The anticipated loss would make the shareholders take the decision of selling their shares to avoid further loss (McMullen, 2015). As a result the price of the Shares in JB Hi-Fi sank 10 per cent after the giant company of consumer electronics cut its profit forecast for financial year 2018 at the conference, marking the stock’s biggest single-day fall since 2011.It can be concluded that as per the Lens Model of Brunswik the investors took their decisions after announcement after analyzing the consequences of the share value due to the profit downgrade anticipation of the company. The next step of the investors should be viewing the investment decision based on two sides of the lens model. Firstly, the investors need to make the decisions as per the cues used in the model and then compare the same with the actual outcomes. Based on the significant level of comparison of statistic modelling provided in the lens model it will be ideal for the shareholders to hold the shares of JB hi-fi and wait for future market indications to take the final decision of buying or selling of shares. The present decision taken by the company to downgrade its profit has been done in a very competitive and volatile market environment and therefore it is not suggested for the investors to buy or sell shares in such a volatile situation. In addition to this, the various depiction on the improving performance of financial aspects that investors need to wait for future market performance which may imply a completely different scenario and then the decision to sell the shares can prove to be profitable in nature.

5. The Capitalism stands for an economic order in which the instruments of production that includes the Land, Labour, Capital and entrepreneurship which are owned and controlled privately and production takes place for profit. In a capitalistic economy, the means of production are owned by private individuals or organizations and they are free to make use of them in any manner with a view to making profit (Morales & Sponem, 2017).

A capitalist economy or capitalist system is one of the main parts of whose productive resources are engaged in capitalist industries in which the material instruments of production are owned or hired by private persons and are operated at their orders with a view to selling at a profit the goods or services that they help to produce (Komori, 2015). In a capitalistic society, the production and pricing of goods and services are determined by the free market, or supply and demand, however some government regulation may occur (Davies & Horst, 2016). On the other hand, a private owner in a capitalist system can have a monopoly on the market and prevent free competition. In the present situation the company of jb hifi supports the capitalist addition to this the jb hifi has considered the capitalistic economy as the primary focus is made solely on the profit of the company. The company therefore has anticipated a fall in the profit due to rising competition in the home appliance industry resulting in the fall the share price (Wigger, 2016). The case study cannot be regarded to support the critical view of this notion as that based on the guidance in the section 7.3 of the guidance note 8 published by the ASX, a company is expected to treat its variation in earnings as per the guidance equal to 5% less than being material and presume the guidance therefore does not need updating. However, JB hi-fi overlooked this consideration of optional updating and looked on the positive side of bringing into consideration that makes real effect of price or value into the entity’s security. Moreover, the company took into consideration several aspects of safeguarding its materiality disclosures by even downgrading its profit. Some of the significant discussions of the study have been further conducive in stating that JB hi-fi has continued to work in favour of the public since its initiation in 1974. With more than 44 years of formation of the company, there has been no instance that the company has depicted capitalist interest. Therefore, based on the significant consideration of the excerpts of information given in the case study it cannot be stated that JB hi-fi accompanies with the statement of accounting profession legitimising the capitalist system.