JB Hi-Fi: Analysis of Profit Downgrade and Business Theories

This article analyzes the profit downgrade of JB Hi-Fi and its relation to classical political theory, institutional theory, stakeholder theory, Brunswick lens model, and capitalism. It also discusses the implications of the downgrade on the company's future earnings and the decision-making process of investors.

Running head: JB Hi-Fi 1
JB Hi-Fi
Students Name
Institution

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JB Hi-Fi
A classical political theory explains the need for a business entity to run without government
interventions. Classical political theory insists that resources in the society can be used
efficiently without the need of the government interrupting. This is just because, under normal
circumstances, people seeking to explore resources are always pushed by the sole reason of
making profits, the big concern on benefits entirely explains the reasons why funds in the society
can be used to the top beneficial level without the government issuing directives (White &
Donald, 2004). The classical theory further explains that under this type of economic model, a
self-regulating and stable market can be created that generally looks at meeting the entire
consumer needs and in the process of the transactions, there will be a consequent increase in a
countries wealth (Lionel, 2014).
The Classical political theory also referred to as laissez fire, puts more emphasis on
creating a type of market with free trade. Also, this type of model explains the need for creation
of a competitive market, and as enshrined in the model, there must be general growth and
development for the business and the society around the company (Gerald & Chandran, 2004).
All these enlisted business activities are supposed to be as free as possible from the
government’s regulation and direction. The government on its part is supposed to ensure
enforcement of security, create the necessary infrastructure for the running of business
enterprises and most importantly the government is needed to develop and enforce a system of
justice that is supposed to offer a solution when it business conflicts arise. In this type of
business theory, the primary responsibility of the government is to create a conducive business
environment (Deegan, 2014). Classical also believed that not only business enterprise would

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benefit from the exploration of a business venture, but the society as a whole will also derive
benefits from the investigation of a business venture by a business entity (William, 2015).
A profit downgrade occurs typically when analysts figure out that the level of revenue
or outcome out of the business activities will be fall lower than the level of result realized on the
previous attempt or the revenue realized the last fiscal year. This may sometimes happen because
the current business environment may seem not favorable to the business entity. On the hand, a
stand-alone statement represents typically the financial statements of solely the business
enterprise by the scrapping of the values indicated to represent income from their subsidiary
business entities. Independent financial statements come about when a holding company and its
subsidiary are treated as entirely separate business entities.
In this case scenario, the JB Hi-Fi consumer Electronics Company indicates a profit
downgrade in their subsequent financial year forecast, the idea by JB Hi-Fi to release a profit
downgrade in its projections rather than a stand-alone statement to the stock exchange can be
explained regarding classical political economy theory. The company’s evaluation partly
influenced the move by the company to indicate the downgrade rather than the standalone
statement. As much as the current business environment stated an unfavorable business ahead,
the company still does not view it in their opinion to have their financial statements stand alone
and not show the financial statements of their subsidiaries (Greenblat 2018).
Institutional theory generally refers to the argument that majorly looks into the aspect of
the interaction between the organization and the macro- environment surrounding the
organization (Marquis & Tilcsik, 2016). It also concerns how the macro-environment affects the
functioning of the organization. The institutional theory also indicates that sometimes, the
legitimacy of an organization can be comprised, some of the reasons that can cause the

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compromise include among them; self-institutional environment. (DiMaggio, Paul, & Walter,
1983). To maintain the organizational legitimacy, the managers of these organizations tend to
choose between these threatening forces in the institutional environment to survive. Apart from
helping the organization continue its legitimacy, this move also plays a significant role in helping
the organization adapt to the environment (Kraatz, Mathew & Edward, 2003). This theory insists
on overseeing how the organization reacts and adjust to these sinister forces and much
importantly how this helps to maintain organizational theory. The new institutional approach is
however criticized for not explaining the aspect of organizational adaptation (Staffan, 2014). In
this case scenario, the unfavorable type of market poses an institutional environment threat. It is
for this reason that the JB Hi-Fi consumer electronics report a change in the forecasts for the
subsequent year. A profit downgrade is therefore displayed in the organizations following years
forecast outlook.
The Stakeholder theory is a theory that is mainly concerned with the management of an
organization and the own business ethics. Furthermore, this type of argument tackles the aspect
of overseeing the morals and values needed in the control of an Organization (Maria & Dahl,
2016). According to the traditional perspective of a company, shareholders are often the most
critical part of the company. For this reason, the company has a binding obligation always to put
the shareholder's interests on the forefront. However, the stakeholder’s theory refutes the idea by
stating that, other essential parties form part of the company and are crucial to the ensuring the
forward progress of the company (Margret, 2015). Among the parties under mention include the
general staff, communities in the business environment, financiers advancing financial support to
the company, Government bodies overseeing the smooth running of business and fairness in the
market trade associations and unions. Due to the effect, they can have on the general operation of

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the firm; sometimes competitors are also regarded as part of the relevant parties involved
regarding the process of a business entity (Robert, 2012).
However, the stakeholder theory does not only apply in matters concerning business
ethics, But It is also further used as one of the frameworks in ensuring the broad aspect of
corporate social responsibility. An example of this diversification plan includes the global
reporting initiative which among another thing dramatically involves shareholders analysis. Also,
the shareholder's theory has also greatly succeeded in outdoing other usual frameworks to push
for appreciation of the shareholder’s needs before anything else (Mathews, 2009).
In this case scenario, JB Hi-Fi electronic company has made a decision to shrink its
net profit after by 3%, with the current downgrade in profit available in the company’s
subsequent fiscal year outlook, the share in the company went down by 10%, in normal
circumstances, the profit downgrade will mean lower returns in terms of dividends to the
shareholders of the company. This will also affect the decision of an investor to invest in the
company regarding buying shares. The capital the company will, therefore, receive regarding the
purchase of shares will exhibit a significant drop. An analysis to this share situation can partially
reveal that the effect of the profit downgrade on the percentage is that it can reduce the face
value of shares (Carlos, 2015). This will, as a result, bring about lower returns to stocks basing
on the previous year’s reports. However, a downfall in the number of shares by 10% can be
sustainable for the company. The only shortcoming will be that in case the company needs to
raise their capital through the sale of shares, the capital collected on the sale of shares will be less
since there will help a small drop on the face value of the shares.

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The current share prices will have a couple of implications on the company’s future
earnings. These implications can either be positive or negative. The positive or negative
implications also majorly depend on the whether there will be positive changes regarding the
company making it out of the profit downgrade forecast period back to its midpoints
performance. An analysis on share capital also indicates that in the case of a company that relies
much on upon outside financing, a period of a drop in the in the market value can have a
tremendous impact on the company.
Due to the shrink of 10% in the shares, the effect will be a drop in the face value of
the shares. The company will have to offer their shares for sale at a considerable lower price
considering the presence of a profit downgrade in the forecasts of the following financial year.
Since the downgrade will pose a barrier to the company in case it decides against selling their
shares, the company will have to sell their share at lower rates than the previous rates before the
forecast. This will be the only alternative decision of the company in case it wants to attract
investors. Due to the reduction in the face value of the shares, the share capital realized as a
result of selling shares will, therefore, fall less than any other preceding share sales.
However, there still exists a chance of a positive side of it. Despite the
downgrade, the reduced face value of shares and the subsequent reduced share capital, a
company can still fight out of it in some other ways. Alternatively, the JB Hi-Fi consumer
electronics company can find a way to figure out the reason behind the shortfall in the
company’s earnings forecast. Since the positive share implications also majorly depend on
whether a positive change can take place in the market, an analysis of the shortfall in the
earnings displayed in the forecasts is greatly required. After the company has figured out the
cause, another analysis of a remedy plan to the respective problem is necessary in the step to help

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adapt to the business environment necessitating the possibility of presence of the deficit in the
earnings as in forecast. In the case of JB Hi-Fi Electronics Company, the market instability is the
possible cause of the fewer earnings in terms of stock sales. The company can exploit some
alternatives like selling their shares at the current price despite the low face value to acquire
more share capital, the company can invest further in a move to increase the number of
electronics production. Then can then therefore opt to reducing the prices on their final products,
the reduction of the prices will help boost the number of sales. With anticipation of increase in
sales, the company can then increase production so as to maintain the profits (Gerard, 2013).
According to the Brunswick lens Model that is majorly concerned with the matters of
decision making, This model discourages the idea of making decisions basing on a single
variable or reason, the model insists that, a decision making process should involve analysis of
not only one idea but all the factors that display any relevance to the decision that is supposed to
made. In making decisions involving uncertainties, the model proves to be a better tool in
helping out. The model involves presentations of all the factors that will affect the decision; the
analysis of the factors and their individual effect on the decision to be made is what helps in
coming to better decision and achieving good judgment in uncertain scenarios (Newmark, 2018).
There are so many uncertainties revolving around the business world, For instance
making decisions concerning matters like investment is one of the many uncertainties (Dunning,
Heath, & Suls, 2004). This because at the investment stage, an investor is not yet well conversant
with all the important aspects in the type of investment and the type of relationship that exists
between the respective aspects and investment being made. Because most factors affecting an
investment vary; like the number of customers purchasing a certain product will always vary
throughout the year. Similarly its uncertain for an investor to determine the number of new

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customers available for their product, In this case the lens model is used in helping come up with
decisions (Gabrill & Gibs, 2017).
In relation to whether an investor can secure shares in the company or not, an investor will
need to make a comparison of many factors following the forecasts indicating a profit downfall
in the future. An investor can look at factors like whether the company still has the capability to
remain in business despite negativities in the forecasts. Other factors to be considered also
include an analysis on if there is a possibility of the market trends causing the negativities in the
forecasts to fall back to a conducive macro- environment for the JB Hi-Fi consumer electronics
company. The decision of an investor to decide on buying shares in Electronics Company will be
depend on the satisfaction of the investor on the analysis of the responsible cause of the earnings
shortfall in the forecast. In addition, an investor will also consider the effectiveness of measures
put place to help the company adapt to the macro-environment proving unfavorable for the
future.
Capitalism is generally a term used to refer to an economic system in which the ownership
of capital goods is by an individual. The perfect example of capitalism can be the free market. In
this type of economic system, the production activities of both goods and services depend on the
available demand and supply in the market (Bowles, 2015). Since it is a free market, Different
producers of diverse goods and services stand an equal chance in the exploration of the market.
There are no restrictions on where to invest, which goods and services to produce. There are also
no directives on the prices at which to sell goods and services. This form of economic system
exists in modern countries although as the mixed capitalist system, the mixed capitalist system
also involves Government regulations (Menezes, 2007).

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A capitalist economic system involves the aspect of the private property. An
individual party can, therefore, get into a voluntary exchange of private property in for of a trade.
This type of engagement is meant to bring about some additional gains for both the parties in the
trade engagement. The gains are referred to as profits. The profits in the economic system are
meant to indicate that inputs which had a lower value can be used to produce a more valuable
final output.
To ensure profits, the sole owners of the private properties usually compete in the process
of acquiring customers. Since the individuals or business trade their private property for profits,
this, therefore, makes accounting a vital aspect of the profit making process. Through the use of
accounting, the business or the individual owner of the property will be able to keep an account
of the performance of the business and profit trends. This case scenario also supports the idea of
capitalism being legitimized by accounting. Since the company is operating in a free market
because it does not experience restrictions. The firm takes into consideration accounting as one
of the critical aspects of ensuring it has control and knowledge of its performance. It is for this
reason that it has the capabilities of making forecasts (Jeffrey & Joyce, 2015).

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