Using Classical Political Economy Theory And Managerial Stakeholder Theory To Analyze JB Hi-Fi’s Decision Making

Classical Political Economy Theory and JB Hi-Fi‘s Decision Making

1). Classical economist adheres to the ideology that there should be extensive freedom of market. However, they still particularly acknowledge the role of the state in providing for the common good. In the same perspective, the theory also argues that it in some circumstances, the market does not act as the best platform to serve the common interest. Likewise, JB Hi-Fi from its remarks points out that it is more inclined towards competition as opposed to monopoly. Political economy therefore can be understood as a model of an Economic System (O’brien & Williams, 2016). The model has a number of certain strengths stretching from a multifaceted view of the economic as well as the ontology of connectivity. In attempts to expound further on this topic, research show the need to rely more on explanations that touch on the economic rationality of accounting policy-makers (Marx, 2015). Anglo-Saxon accounting policies can be used as the most profound logical guide for ideal countries because they are more concerned about reducing the cost of capital, promotion of efficient allocation of economic resources as well as high rates of economic growth.

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The same is reflected by the operations of JB Hi-Fi and hence this points out a very significant adherent to the main elements of the classical political economy theory (Keynes, 2017). Relatively, there also exists the threat of traditional accounting systems which in the long run bring about incompatibility with the changing business environment. At the end, this also poses a very significant threat to the goal of economic development. The most profound solution for this challenge therefore is accounting policymakers making more rational decisions. Additionally, the most important precondition for reform in this case is the existence of policymakers who are capable of overcoming obstacles such as cultural obstacles. In summary, the main point presented have illustrated the importance of the ideology that there should be extensive freedom of market, just as expressed in the operations and day to day running of JB Hi-Fi.   

Institutional theory on the other end lays more focus on the role that an institutional environment can play in the development of formal structures of the organisation. Market pressures, in this case, are not the primary determinant of the development of the said formal structures. JB Hi-Fi has equally embraced innovative structures that aim at improving technical efficiency legitimized in the environment (Hull, 2017). The main argument here is the fact that firms are influenced most of the time by what can be referred to as normative pressure that arises from external sources like the state and in other cases pressures from within the company itself.

Under such conditions, it is notable that the institution will end up being governed by what can be termed as legitimate elements. The legitimate elements, in this case, include standard operating procedures, professional certification and even state requirements. In the long run, this often has a profound effect on task performance because it ends up diverting the needed attention. JB H-Fi, just as any other giant companies in Australia, has acknowledged the fact that adoption of the said legitimate elements, increases the probability of survival and competitiveness (Deegan, 2014).

Institutional Theory and JB Hi-Fi’s Operational Structures

2). JB Hi-Fi can be considered one of the most successful home entertainment retailers in Australia and across the globe. Several operational aspects make the company a highly sort after firm and this has through the years aided it in retaining its relevancy. The company has an extensive market distribution and approximately 185 retailer stores scattered across New Zealand and Australia. JB Hi-Fi has been known to traditionally embed its operations more towards the price mix which is dominantly the major component involved in the marketing strategy of the firm. However, being successful has not particularly shielded JB Hi-Fi from the constant changing and capricious microenvironment. The influences have either been positive or negative but all in all, even successful companies like JB Hi-Fi have been forced to come up with strategies through which they can effectively mitigate through the changes (Rashid, 2015). This section will therefore expound on the managerial branch of the Stakeholder Theory so as to explain JB Hi-Fi’s reporting decisions in detail.

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The Managerial branch of Stakeholder Theory just as its name suggests that corporate management is most likely to attend to the expectations of its most powerful stakeholders (Fernando & Lawrence, 2014). The theory also advocates for a more organization centred operation and hence believes that relationships between the company and its stakeholders needs to be managed in the best interest of the organization. The concept of stakeholder power in this case is very relevant. Consequently, JB Hi-Fi in its decision chose not to respond to all stakeholders equally but rather, respond favourably to the most powerful stakeholders. Relatively, stakeholder power is dictated or determined by the stakeholder’s degree of control over resources that are required by the organization (Hossain, Alam, Islam & Hecimovic, 2015).

In this case, the resources can range from finance, labour, influential media, ability to legislate as well as the power to influence consumption of the goods and services produced by the company, that is, its target market. The role of information in the managerial branch of Stakeholder Theory is one that cannot also be overlooked. It is quite evident that JB Hi-Fi acknowledges this fact and evidently, the company laid out some of its most sensitive details in its reporting. Subsequently, this goes out a long way to show that the company adheres by the rules of the theory. Information, like financial accounting as well as social performance information acts as vital elements employed in managing stakeholders. JB Hi-Fi in this case used the information they presented to gain support or even approval of its stakeholders (Hossain, Bir, Tarique & Momen, 2016). Additionally, the firm used it to distract their opposition which was quite a unique strategy. In summary of this main point, it has been determined that the managerial branch of stakeholder theory expounds on how corporate management attends to the expectations of stakeholders who are considered technically more powerful. The power in this case is determined by how much influence one has over the resources that controls the company’s operations. One of the best features about this theory as reflected by the case study is the fact that the theory specifically considers different stakeholder groups and also examines how best the different stakeholders should be managed. On the other hand, however, just like other managerial theories, the theory too has its downsides.  

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

3). The relationship between the company earnings of JB Hi-Fi and its stock price is quite complicated. Most of the time, as the firm suggests, high profits does not automatically result in high stock price. On the other hand, big losses do not always mean that the stock price should be low. However, the central fact remains that without appropriate earnings, it can be difficult for companies to stay in active business for long. Simply put, two of the most dominant factors that influence stock price include: current earnings as well as the promise of future earnings. Generally, the very first step in understanding the link between the price of a stock as well as its earnings is to examine the concept of Earnings per share (EPS). Earnings per share examines how much income the firm generated for each share of stock (Brooks, 2015).

A relevant example includes: if JB Hi-Fi has approximately $10,000 in earnings and at the same time $1,000 in terms of shares, the EPS would be $10,000 divided by $10 or 1,000. On the other hand, price to earnings ratio is the direct relationship between the price of the stock and its earnings. PE is calculated by dividing the stock price by the already established EPS (Dechow, Sloan & Zha, 2014). Subsequently, this is where the aspect of earnings vs. projects joins the conversation. One of the ways through which earnings impact the price of stocks can be examined from how well the company performs against expectations. Prior to most companies reporting their quarterly financial results, analysts ensure that they access the performance of the company and hence use this to predict the EPS for the quarter based on the firm’s guidance. For JB Hi-Fi, the fact that the company has had a very profitable quarter but still if it makes less than what was projected, then it is most likely that the stock price will go down (Cooper, Gulen, & Rau, 2016).

Simply put, there is a direct correlation between impact of earnings on stock price. For JB Hi-Fi, the company has through the years produced consistent earnings growth, and hence its investors have technically found it relatively hard sell its stock and in general sending its price lower. From an analysis of the company’s operation, a lack of earnings over a long period of time will most of likely drive a stock price down (Deegan, 2014). In the long run, this will potentially drive the company out of business. In summary, it has been determined that the relationship between stock dividend announcements and the value of the firm remains a puzzle that needs extensive research to appropriately address. Miller and Modigliani (1961) argue that the value of a firm is not directly impacted by the dividend policy of the company (Even-Tov, 2017). In relation, investors can offset dividend policy effect without necessarily having to change the value of the company. It is however particularly important to point out that converse to the presented theoretical assumption, empirical studies points out that the impact of stocks dividends on share prices show that significant price reactions are presented on the announcement day. The signalling hypothesis has been traditionally used to explain the nature of the share price and volume reaction to stock dividend announcements.

Current Share Prices and Future Earnings Announcements

4). Making accurate judgements is an important aspect in everyday life. The lens model provides a useful framework through which relevant components of judgment can be achieved. The model also creates useful tools that can be used by decision-makers to like investors to reach better judgments. Several models for individual decision making differ in terms of their complexity and their emphasis (Lusardi & Mitchell, 2014). The Brunswick model can be used as an effective example of decision making models. The model is divided into three phases. Each phrase is inter-dependent and play active roles in the process of decision making.

The three essential elements include: the basic information presented to analysis the situation, the actual decision made by the decision maker, and finally the optimal or correct decision that ought to have been made (Libby, 2017). Each phrase is relatively important and are directly inter-related. In terms of basic information, the investor is presented with a couple of information which act as the cues or indicators for his decision. However, the investor may choose to use or not to use the information at his disposal. Generally, there is obviously a wide range of decision variables that can be potentially used to make conclusive decisions. Under the second phase, the observed decision, it is safe to argue that any decision process ends with a response. In relation, making of a decision will always involve a choice of action making the decision behaviour and the choice behaviour quite indistinguishable phenomena. The correct decision marks the ultimate stage for a decision maker.

The optimal decision in this case is a representation of the best possible choice of action that could have been made by the investor if he or she was to invest in JB Hi-Fi. Simply put, it is a representation of the ultimate criterion against which the made decision should have been evaluated (Deegan, 2014). In terms of dynamics of the model, the definition that has already been presented makes it easy to examine the interrelationships between the listed elements. The interrelationship provides the needed indication of the complexity as well as dynamics needed in decision making. The concept of the true cue validity represents the power that the cue holds. Simply put, the correlation that exist between the cue and the true validity can be considered as the index that represents the predictive power involved. Consequently, the general idea here is that there a number of cues that the investor is expected to weigh and then come to a conclusive decision (Orquin, 2014). For example, he or she will gather information from sources such as stock exchange and financial credibility of the company before investing in it. These cues will act as a foundation for the decision-making process. Through determining these cues by multiple regression analysis of the previous presented situations, the investor will get the optimal weights from the situation that is being accessed. Just as any other decision-making model however, the Brunswick model has its own fair share of downsides. One of the most influential downside is that the model becomes more complex when there are more alternative decisions.

The Brunswik Lens Model and Investor Decision Making

5). Accounting traditionally has been understood as an unbiased observer as well as the objective reproducer of some aspects of independent economic reality that can be considered very significant for the target users. The accounting profession is therefore presented as a fundamental aspect that should provide rational and independent market participants with the needed economic information to make competent decisions. In relation, this means that the profession plays an integral role as a vital facet of the society (Suddaby, 2015). Subsequently, its role cuts across both the state and the corporate sector. Despite the fact that its primary role should be to serve the public interest, new trends suggest that there is a specific portion of the public that receive extensive support from accountants. From a third-party perspective, it is true and justified to argue that indeed the accounting profession acts to legitimise the capitalist system. Relatively, this means that the haves in the society relatively have the upper hand against the have-nots because they receive legal support from professions that should, on the contrary, be neutral in their operations (Mosco, 2014).

The case study also supports this ideology as expressed by the management segment of the stakeholders’ theory. Contemporary acts have been manipulated to legislate bias so that accounting standards show particular interest in the needs of the capital holders, in this case the haves. From the case study, one can also easily identify that there is a prevailing assumption that capital markets act as surrogate for the public interest. Consequently, this is despite the fact that this ideology is highly contested. It has also been determined that through the years, the accounting profession has been streamlined to follow national objectives in its support of capital markets. Consequently, this has undermined its active role in serving the society in general (Suddaby, 2015). When serving the public in general, it is relatively imperative for professions to demonstrate a systematic as well as elite knowledge in its specific area of interests. Additionally, an important aspect of any profession is that they will tend to have an ascribed or privileged position in regards to how the society treats them. In relation, the privileged position gives the profession a legitimate authority, most specifically the authority for self-regulation.

The accounting profession therefore has breached its code of conduct that expects it to ensure that they operate under professional integrity. Professional integrity in this perspective ensures that the performance is directed towards the public good rather than a specified group. Additionally, one of the other most important aspect of the profession aspect is the concept of service ethic. Subsequently, this should be reflected in the operational codes of conduct as well as knowledge that emanates from accounting standards, professional guidelines and legal requirements (Deegan, 2014). Consequently, in summary of this main point, it has been determined that the accounting profession uses its advantaged position to legitimise more support for the haves as compared to the have-nots. It has been noted that this can be extensively supported through the channel of economic markets, and not just the state or the community. The central point therefore remains that the accounting profession is facilitated and also a facilitator of a nexus between the state, economic markets as well as community forces.

References:

Deegan, C. M. (2014). Financial Accounting Theory (4 ed.). North Ryde, NSW.: McGraw Hill Education (Australia) Pty Ltd.

Hull, G. (2017). A treatise on political economy. Routledge.

Keynes, J. N. (2017). The scope and method of political economy. Routledge.

Marx, K. (2015). Capital: a critique of political economy, Volume 1. Arsalan Ahmed. 

O’brien, R., & Williams, M. (2016). Global political economy: Evolution and dynamics. Palgrave Macmillan.