3.7 Analysing the strategic position of a business Flashcards
Define balance sheets
Balance sheets provide a snapshot of the assets and liabilities of a business at a point in time
What are balance sheets also referred to as?
Financial statements
What is an asset?
What the business owns
What are liabilities?
What the business owes
What are non-current assets (fixed assets)?
Assets that provide a benefit for the business in the long term
Give 2 examples of fixed assets (non-current assets)
Buildings and machinery
What is a current asset?
Assets that will be used up or sold in the short term and the cash balances kept in the business
Give 3 examples of current assets
Stocks, Debtors and cash
What are current liabilities?
What the business owes in the short term
Give 2 examples of current liabilities
Creditors and bank overdraft
What are non-current liabilities?
What the business owe in the long term
Give 3 examples of non-current liabilities
Loans, mortgage and car finance
What is working capital?
The money available for the day to day runnings of a business
Working capital formula
Current assets - current liabilities
Net assets formula
Net current assets + non-current assets - long term liabilities
What is capital employed always equal to?
Net assets = capital employed
Capital employed formula
non-current liabilities + total equity
What is a creditor?
An individual or business that has lent funds to a business and is owed money
Define income statement
A financial statement showing a businesses revenues and costs and thus its profit or loss over a period of time
What are the 6 types of financial ratios?
- Current ratio
- Gearing
- ROCE
- Payables days
- Receivables days
- Inventory turnover
What is the current ratio?
Current assets : current liabilities
Gearing formula
[Non current liabilities / (total equity + non current liabilities)] X 100
What does ROCE stand for?
Return on capital employed
ROCE formula
[Operating profit / (total equity + non current liabilities)] X 100
Payback period formula
(Income required / net cash flow from next year) X 12
Average rate of return formula
(Average annual profit / initial cost of investment) X 100
Net present value formula
Sum of (Net cash flow X discount factor) = Net present value
Give three benefits to financial analysis
1) Useful for comparing a business’s current performance to its competitors performance
2) Helps managers make decisions based on the company’s financial strengths and weaknesses
3) Potential investors and lenders can use the analysis to decide if they want to invest or lend to the business
What is the biggest disadvantage to financial analysis?
Financial analysis doesn’t cover anything that is qualitative
What are the two things that gearing shows?
Shows where a business gets its capital from and how vulnerable a business is the changes in interest rates
What are core competences?
Core competences are the capabilities of a business that are unique to that business and give it a competitive advantage over its rivals. They are capabilities that rivals do not have
What are the 2 models that are used to measure overall performance?
- Kaplan and Norton’s Balanced Scorecard
- Elkington triple bottom line
What are the four perspectives of the balanced scorecard?
Financial
Customer
Internal processes
Learning and growth
What does KPI stand for?
Key performance indicator
The balanced scorecard looks at 4 persepctives, what does it measure within in these perspectives? And how are they all linked?
Efficiency and effectiveness is measured within each and they are linked to the overall strategy and vision of the business
For each perspective on the balanced scorecard, what is considered when analysing it?
Objectives
KPIs
Targets
Initiatives are identified that are key to success
How is the balanced scorecard model balanced?
Improvements in one area cannot be made at the expense of improvements in another.
However, improvements in one area often have a positive impact on another area.
What are the 3 p’s in Elkington’s triple bottom line model?
People
Profit
Planet
What is represented by the overlapping area in the centre of the triple bottom line model?
Sustainability
How is sustainability achieved in the triple bottom line model?
Sustainability is achieved when there is an ideal balance between social, environmental and financial performance
What is the mission of a business?
The mission of a business is its overall purpose
What influences the mission of a business?
It’s influenced by what are the owners want the business to achieve, their personal values and beliefs, and what market opportunities there are
What are the four main factors that influence corporate objectives?
- Ownership - the form of the business and whether it’s for profit or nonprofit
- Short termism
- Internal environment – size, culture and resources of the business
- External environment - PESTLE
What is an example short termism? (Think: shareholders)
Shareholders can demand a quick return on their investment, which leads to short-term objectives to increase profit that don’t necessarily benefit the business in the long-term
What is a strategy?
A strategy is a medium to long-term plan of action developed to achieve a businesses objectives.
When can a strategy be put into place?
Strategy can only be put into place when is an organisation has outlined its aims and objectives
What are tactics?
Tactics are short term plans for implementing strategy, so are more focused on day-to-day activities
What does SWOT stand for?
Strengths
Weaknesses
Opportunities
Threats
What three things does the competition law state?
1) Businesses cant conspire to fix prices - where an agreement is made to keep the price of a product above a fixed amount
2) Businesses can’t conspire with competitors to limit production so that higher prices can be charged due to the shortage
3) Businesses can’t divide the market to avoid having to compete
What are the 3 laws that stop businesses abusing their dominant position?
1) Dominant businesses can’t demand exclusivity
2) They can’t demand that retailers must buy a second type of product in order to buy the popular products they actually want
3) Businesses can’t sell goods at a loss to for smaller competitors out of the market
What do the laws that stop businesses abusing their dominant position prevent?
Monopolisation of a market
What is a monopoly?
When one business has complete control over the market. There is no competition and if customers need the product they have to pay whatever price the monopoly sets
Who can prevent monopolies occurring?
The CMA can prevent monopolies from occurring by stopping takeovers and mergers
What are 3 examples of laws and legislation that protect the environment?
- Landfill tax
- Climate change act
- The EU’s Emission Trading System
What laws protect customers?
- Trade descriptions act 1968
- Sale of goods to consumer regulations 2002
- Consumer protection act 1987
- Data protection act 1998
What is the name of the labour law that controls what rights employees have?
The equality act 2010
What does the equality act 2010 do/protect?
The equality act 2010 protects employees from discrimination based on age, gender, race, religion, disability, pregnancy etc. These things are known as protected characteristics
What are the two types of discrimination?
Direct and indirect discrimination
What is direct discrimination?
Direct discrimination is treating someone less favourably because they have a protected characteristic
What is indirect discrimination?
Indirect discrimination is when everyone is treated the same but it has worse effects on one group of people than on others
What is a contract of employment?
A contract of employment is a legally binding agreement between employer and employee about what duties and rights of the employee and the employer are, including hours, salary, holidays, etc
What does the UK government encourage?
The UK government encourages entrepreneurs to set up businesses because enterprise benefits economies – new businesses increase productivity and create new jobs. The government is especially keen to promote enterprise in areas that need economic regeneration – this provides lots of opportunities for new businesses
What are 4 strategies described in the business enterprise policy?
– Government schemes allow enterprises to borrow money at lower interest rates and encourage private investment in businesses
– To make it easier for small businesses to succeed, they don’t have to pay business rates and unemployment allowance means a national insurance contributions bill is reduced by £2000
– The great business website has been launched to advise people on setting up and running a business
– The government is backing initiatives to encourage young entrepreneurs
Why are improvements in infrastructure good for the economy?
Improvements in infrastructure are good for the economy as they make businesses more productive, e.g by allowing people, goods and raw materials to move about quickly, as well as making data transfer through broadband network quicker. In the short term, infrastructure improvements provide jobs to, for example in constructing new roads
What are four things that can make international trade easier or harder?
– Tariffs (import taxes?)
– Quotas to put limits on imports or exports
- Joining trade blocs such as the European Union
– Trade embargoes ban trade with a particular country
What is GDP?
Gross domestic product is the total market value of goods and services produced within a nation over a period of time
What does GDP indicate?
GDP indicates the size of nations economy
What is economic growth? And how is it measured?
Economic growth is an increase in the nation’s production of goods and services. It’s measured as the rate of increase in GDP
What are the two main things that economic growth is determined by?
Resources and productivity
How can governments encourage short-term growth?
Governments can encourage short-term growth by cutting taxes and interest rates. This encourages businesses to borrow money and invest in production. It also encourages consumers to borrow money and spend it on goods which increases demand in the economy
What are the benefits of economic growth?
– Growth in GDP means higher revenues and higher profitability for businesses
– Potential for economies of scale
- Increases confidence
What are the disadvantages to economic growth?
– Fast growth may cause shortages of raw materials and skilled labour
– If growth is too fast it’s usually followed by a recession
What are the typical characteristics of a boom?
– GDP is high
– As production reaches maximum capacity there are shortages and price increases
– Shortages of skilled labour mean wages rise
What are the typical characteristics of a recession?
In a recession, income start to go down, demand goes down and business confidence is reduced
What are the typical characteristics of a slump?
GDP is at a low. Businesses close factories and there are a lot of redundancies. Unemployment is high. A lot of businesses become insolvent or go bankrupt
What are the typical characteristics of a recovery?
In recovery, production increases unemployment decreases. People start to have more money to spend
What is inflation?
Inflation is an increase in the price of goods and services
What measures UK inflation?
The consumer price index
What is demand-pull inflation?
High inflation can be caused by too much demand. It happens when there is an increase in disposable income so people buy more and companies can’t supply goods quickly enough and increase their prices. This is demand pull inflation.
Excess demand when the economy is near its full capacity is called overheating. Demand pull inflation can actually make profits go up and businesses can put up prices in response to high demand without their costs going up buy as much
What is cost – push inflation?
Rises in inflation can be due to rising costs pushing up prices.
Wage rises can make prices go up – especially if productivity isn’t rising.
Cost-push inflation can make profit margins go down because businesses do not decide to put their prices up
What is deflation?
Deflation is the opposite of inflation – it’s when there’s not enough demand so companies reduce their prices
What does deflation cause?
Deflation causes a falling productivity because companies won’t keep endlessly working and supplying the market with goods that nobody wants. Lower productivity usually means firms don’t need as many workers so deflation often leads to rising unemployment. This makes demand drop further in cause firms to lower prices even more
What is are exchange rates?
Exchange rate is the value of one currency in terms of another currency
What two methods do the government use to try to keep the economy under control?
Fiscal policy and monetary policy
What does fiscal policy monitor and change?
Tax rates and the amount of government spending
Explain what is an expansionary fiscal policy?
An expansionary fiscal policy is implemented when there is economic slowdown and high unemployment.
It’s done by cutting taxes and/or raising spending.
Government borrowing increases and demand for goods and services increases
Explain what a contractionary fiscal policy is?
Contractionary fiscal policy is implemented when production is at 100% capacity and there is a risk of high inflation.
It’s done by raising taxes and/or cutting spending.
Government borrowing decreases and demand for goods and services also decreases
What does the monetary policy control?
Interest rates
What are the four aims of the monetary policy?
1) Control inflation
2) Control the overall rate of economic growth
3) Manage unemployment levels
4) Influence foreign exchange rates
What is protectionism?
Protectionism is when government protect domestic businesses and jobs from foreign competition by giving them subsidies, while imposing tariffs and quotas on imported products.
What must the government balance open trade with?
Protectionism
What is open or free trade?
Open trade is when imports and exports are not restricted. The World Trade Organisation (WTO) regulates trade between member countries
Give two advantages of protectionism
– Countries develop a variety of new industries, adding local jobs and boosting economic growth
– Allow small businesses to grow as they don’t have to compete with multinationals
Give two disadvantages of protectionism
– Prices of imported goods rise due to decrease supply – prices of domestic goods rise without a change in quality as there is less competition
– if you restrict a countries trading in your country, they may restrict your trading in theirs
Give 4 benefits of open trade
– Countries specialise in what they are good at
– countries benefit from economies of scale
– more choice and lower prices for consumers
– developing countries can export goods and increase their living standards
Give three disadvantages of open trade
– If you are local jobs as multinationals expand abroad
– employee skills are concentrated around certain jobs
– seven countries may use sweatshops and child labour to keep the cost down to compete internationally
What is globalisation?
Globalisation is the increase in how interconnected the world is
What is an emerging economy?
Emerging economies are developing countries was fast growing but not yet fully developed economies
Give four examples of the most significant emerging economies
China, India, Brazil and Russia
What are demographic changes?
Demographic changes are changes in the structure of the UK population over time in terms of things like age, sex and race changes
What is urbanisation?
Urbanisation is an increase in the proportion of the population living in cities
What is migration?
Migration is the movement of the population from one area or country to another. There are currently more people moving into the UK the moving out of the UK
What is CSR?
Corporate social responsibility is the idea that a company should go above and beyond what is required by law to help society, its workforce quality of life and the environment
What model shows what society expects from a business in terms of CSR?
Carroll’s pyramid of CSR
What are the four types of CSR responsibilities?
Economic
Legal
Ethical
Philanthropic
What can new technology create?
Opportunities and threats
What model analyses the level of competition in an industry?
Porter’s five forces model
What are the five competitive forces that are outlined in Porters five forces model?
Barriers to entry Buyer power Supplier power Threat of substitutes Rivalry within the industry
