3.7 ANALYSING THE STRATEGIC POSITION OF A BUSINESS Flashcards
1
Q
Define Assets
A
What the business OWNS
2
Q
Define Liabilities
A
What the business OWES
3
Q
Define Non-current Assets
A
Assets that provide a benefit for the business in the long-term (Over a year)
4
Q
Give an example of non-current assets
A
Buildings and machinery
5
Q
Define Current Assets
A
Assets that will be used up or sold in the short-term and the cash balances kept within the business
LESS THAN A YEAR / WITHIN A YEAR
6
Q
Give an example of current assets
A
Raw materials
7
Q
Define Current Liabilities
A
What the business owes in the short-term
LESS THAN A YEAR / WITHIN A YEAR
8
Q
Give an example of current liabilities
A
Short-term debts
9
Q
Define Non-current Liabilities
A
What the business owes in the long-term
MORE THAN A YEAR
10
Q
Give an example of non-current liabilities
A
Long-term debts
11
Q
Define Working Capital
A
Cash available to pay short term debts/liabilities
12
Q
Equation for Working Capital
A
Current Assets - Current Liabilities
13
Q
Define Net Assets
A
Value of assets overall
14
Q
Equation for Net Assets
A
Net Current Assets + Non-current Assets - Long-term liabilities
15
Q
What is Net Assets equal to?
A
Capital Employed
16
Q
Define Capital Employed
A
Amount of long-term money put into a business
17
Q
Define strategy and tactics
A
Strategy: how we do things, medium/long term plan of action, put in place to achieve a business objective.
Tactics: short term that helps to achieve a strategy- daily activities such as sending emails
18
Q
Influences on the mission of a business
A
- Size
- What its about
- Target market
- £££
- Owners
- PESTLE (external factors)
19
Q
Internal influences on Corporate Objectives
A
- Business ownership
- Attitude to profit
- Ethical stance
- Organisational culture
- Leadership
- Stakeholder influence
20
Q
External influences on Corporate Objectives
A
- Economic environment
- Political / legal environment
- Competitors
- Social and technological changes
21
Q
Define Strategic Position
A
Concerned with the way in which a business as a whole distinguishes itself in a valuable way from its competitors
A firm’s decisions on how to serve customers and compete against rivals
22
Q
Define ‘short-termism’
A
- For survival
- Up to 1 year
- An excessive focus on short-term results
23
Q
Disadvantage of ‘short-termism’
A
- Can mean forget about long term measures and not focus on them
24
Q
Why may a business be concerned about the short term?
A
- Stock market actions
- Reliance on bonuses based on short-term performance
- Changes in leadership and strategy
25
Give a contextual example of a business that has a long-term perspective
Unilever - doesn't publish data to analysts and media
26
How would you evaluate the ROCE of a business?
The higher the percentage figure, the better.
Compare with the ROCE from previous years to see if there is a trend of ROCE rising or falling.
Based on snapshot of business' balance sheet
27
What does 'return on capital' tell us?
- Measure of return
- How good a business is at converting money invested to profit
- Provides way of comparison
- Speculate opportunity cost - what a business could have done if they invested elsewhere
28
# Mention if internal or external
What does 'SWOT' stand for?
Strengths (Internal)
Weaknesses (Internal)
Opportunities (External)
Threats (External)
29
Define 'SWOT' analysis
Method for analysing a business, its resources and its environment.
Focuses on the internal strengths and weaknesses of a business (compared with competitors) and the key external opportunities and threats for the business.
30
What does 'SWOT' aim to cover?
- What the business does better than the competition
- What competitors do better
- Whether it is making the most of the opportunities available
- How a business should respond to changes in its external environment
31
Mention examples of strengths of a business
| *S*WOT
- Reputation for high quality products
- Seen as innovative
- Very profitable in comparison to other organisations
32
Mention examples of weaknesses of a business
| S*W*OT
- Reputation as poor employer
- Product portfolio full of declining products
- High levels of staff turnover / absenteeism
33
Mention examples of opportunities of a business
| SW*O*T
- Main competitor having financial difficulties
- Government encouraging more spending
- Fall in exchange rates, helping exporters
34
Mention examples of threats of a business
| SWO*T*
- High levels of competition in a market
- Innovation / USP from competitors
- Increased interest rates
- Products becoming obsolete
35
# Define 'opportunities'
(SWOT)
What a business can take advantage of
36
Give examples of an internal strategy (method of achieving a goal or target)
- Delayering
- Expansion
- Retrenchment
37
Give examples of an external strategy (achieving a goal or target)
- Analysing trends
- Being aware of laws
- Being aware of technical advances
- Viewing economic conditions
38
Define an 'incremental strategy'
Bit by bit
39
Give examples of an incremental strategy (achieving a goal or target)
- Kaizen
- Lean production
- Streamlining: improvement of the efficiency of a certain process
40
Give examples of a disruptive strategy (achieving a goal or target)
- Adapting to digitalisation: modern world
- Adjusting to Covid-19
- Becoming more environmentally friendly to ward off pressure groups
41
Why is change valuable?
- Out the old, in with the new
- To innovate products: Netflix going online
- Expansion: target new markets
- Become more efficient
42
Why is change valuable?
- Out the old, in with the new
- To innovate products: Netflix going online
- Expansion: target new markets
- Become more efficient
43
What does the Lewis Forcefield Model suggest?
Forces for change vs. Forces restricting change
Whichever is higher has a stronger influence
()
Change in middle and arrows on each side
44
Advantages of 'Lewis Forcefield Model'
- Easy to observe / make
- Identifies both sides of the predicament
- Identifies negative forces so the business can strategise how they can get around this
45
Disadvantages of 'Lewis Forcefield Model'
- Requires participation: Reliant on people scoring individually if they are 'for' or 'against' - bias
- Could cause conflict between for and against
46
Define 'ethics'
Moral principles or standards that guide the behaviour of a person / business
Being ethical = doing the right thing!
47
What makes a business ethical?
- Responsibility for mistakes
- Making customers aware of origins/change of products
- Less waste
- Following laws
- No sweatshops
48
Advantages of a business being ethical
- Gains more customers: e.g. vegans
- Builds positive reputation through good press/media
- MAY BE WORTH INVESTMENT
49
Disadvantages of a business being ethical
- Higher cost
50
Define 'core competencies'
Unique strengths of a business that cannot be easily replicated by competitors
Should be adapted to meet demands of the market
Must focus on them when developing strategies
51
Difficulties a business could face when using non-financial methods to analyse performance
- Time consuming
- May be unreliable as doesn't look at finances which could pinpoint certain issues with cashflow
- May be opinion based, BIAS? Disruption in accuracy
52
Common reason for short-termism
- Survival
- External environment (PESTLE) - COVID-19
- Stock market's influence
- Reliance on bonuses from employees
- Frequent changes in leadership and strategy
53
If a business focuses too much on the short term, what may happen?
- Long term becomes less important, which could cause future issues
- Distract them from overall aim of the business
54
How can you tell if a business is short-termism?
FINANCIAL INCENTIVES BASED ON THE SHORT-TERM, seem to be throwing all money away
- Short-term bonuses (e.g. sell 20 houses in next 4 months for a bonus)
- High dividends rather than reinvesting profits - satisfy shareholders - REINVESTING IS LONG-TERM TO GROW
- Take-overs rather than internal growth - increase customers quicker and easier
55
Define 'long-termism'
Tendency for management to focus on long-term gains
(1 year+)
- Shows business' ability to sustain/grow
e. g. staff training (build productivity overtime) / building core competencies
56
Advantage of 'short-termism'
Tackles issues promptly
57
What is the 'Kaplan and Norton's Balance Scorecard'?
Highlights range of influences on the success of a business beyond that of the traditional view of looking at profit
Combines non-financial measures with financial measure (CREATES BALANCE!)
Top-down approach
Identifies key performance indicators
58
What is the 'Kaplan and Norton's Balance Scorecard' made up of?
FOUR MAIN PERSPECTIVES (FT. KEY PERFORMANCE INDICATORS)
Spider diagram with 'Vision and Strategy' in middle, then around it...
- Financial
- Internal processes
- Organisational capacity
- Customer
59
Advantages of 'Kaplan and Norton's Balance Scorecard'
- Provides broader view of business performance
- Provides specific targets that can be MONITORED
- Tailored to business, accurate
- Involves all stakeholders in the business
- Highly flexible - KPI' chosen by business
60
Disadvantages of 'Kaplan and Norton's Balance Scorecard'
- Can get complicated
- Requires a lot of data - time / money
- Too many KPI's to manage
- Balancing is not easy
- Needs updating regularly: admin costs / extra tasks for staff
61
Suggest a focus of financial performance ('Kaplan and Norton's Balance Scorecard')
Financial performance
62
Suggest a focus of customer ('Kaplan and Norton's Balance Scorecard')
Customer satisfaction
63
Suggest a focus of internal processes ('Kaplan and Norton's Balance Scorecard')
Business efficiency
64
Suggest a focus of organisational capacity ('Kaplan and Norton's Balance Scorecard')
Knowledge and innovation
65
Suggest a KPI of financial ('Kaplan and Norton's Balance Scorecard')
ROI
66
Suggest KPI's of customer ('Kaplan and Norton's Balance Scorecard')
Levels of returns, service rating
67
Suggest KPI's of internal proceses ('Kaplan and Norton's Balance Scorecard')
New product lead times, unit costs
68
Suggest KPI's of organisational capacity ('Kaplan and Norton's Balance Scorecard')
Employee retention
Flow of new product development ideas
69
Define 'The Political Environment'
- The government actions that impact on the strategic and functional decisions made by a business
- Can be by local, national or international authorities
- Impact heavily on the competitive environment and the infrastructure that allows businesses to operate effectively
70
Define 'legislation'
Involves creating and enacting laws in order to protect individuals, businesses and society
71
Define 'legal environment'
Collection of legislation that impact on activities of organisations
72
Scope and effects of the UK / EU law related to competition
- Promote fair competition - stop MONOPOLY happening
73
What is an 'anti-competitive product' ?
ILLEGAL
Doesn't promote fair competition in the market
e.g. price fixing between businesses
74
Governments impact on mergers and takeovers
| WITH CONTEXT
They are monitored and will not be allowed if it is deemed that they significantly reduce competition
e.g. TUI and Thomas Cook not allowed to merge - monopoly empire
Markets that are not competitive will be investigated
75
What does the 'competition law' not allow businesses to do?
Firms are not allowed:
- To agree prices with competitors
- To limit production in order to reduce competition
- Partition markets or customers between each other (TERRITORY) - e.g. geographically where each firm takes a different region to avoid competition
76
General features of UK and EU Competition Policy
- Seeks to improve the competitive nature of markets
| - Seeks to alleviate market failure to protect the interests of consumers and society as a whole
77
How can the government make sure that 'competition law' is successful?
- Curtailing monopoly power and protecting competitive markets
- Restricting mergers and prohibited cartels (businesses group together in order to regulate supply to markets)
- Creating fairness in markets for both businesses and consumers, so that businesses don't abuse their dominant market position but are able to make acceptable profits that will drive innovation and increase productivity
78
Define 'cartel' (Competition Law)
Businesses working together to only supply certain businesses, to benefit them
'We are not going to use you unless you stop supplying to...
79
Define 'monopoly'
COMPLETE DOMINANCE OF MARKET
- There is only one business in the market
- Government refers to any business that has at least 25% market share as having monopoly powers
80
On what condition will CMA regulate markets for 'monopoly power' ?
When they have 40% market share
81
Define 'market power'
Ability to set price above those that would be charged if there were competition
82
How can 'monopolies ' exploit consumers? And why may this enforce regulation?
Charging high prices as customers have NO other choices... therefore they are regulated, to stop this happening
FREE AND FAIR COMPETITION MUST BE ACHIEVED
83
Benefits of UK and EU 'Competition Policy'
- Lower prices: no monopoly utilising, lots of other options
- Improved quality: businesses strive to improve quality and customer service as MORE RISK of losing market share
- Innovation: businesses invest in R&D to compete - allowing new products for society
- Competitive advantage: more efficient businesses that have better understanding of the requirements of the consumer
84
What does the 'competition policy' allowing more room for innovation benefit the most?
New / small businesses to grow
Consumers gaining better products
85
Define 'labour market' / 'employment legislation'
Aims to ensure that employees and employers act fairly in dealing with each other by defining their rights and obligations
86
What aspects comes under the 'Equality Act 2010'
- Age
- Disability
- Gender reassignment
- Marriage and civil partnership
- Pregnancy and maternity
- Race
- Religion and/or belief
- Sex
- Sexual orientation
87
What is the main disadvantage of having the 'Equality Act 2010' ?
Difficult to regulate
88
What are all of the rights given to employees?
- Employment Relations Act: allowing trade union membership
- Employment Act: relating to dispute resolution
- Children and Families Act: shares parental leave and paternal pay. Allows flexible working for all employees
89
Define 'Children and Families Act'
- Allows maternity / paternity leave
| - Allows flexible working for all employees
90
Define 'Employment Relations Act'
Allowing trade union membership
91
Define 'Employment Act'
- Dispute resolution
| - Mediate the relationship between workers, employing entities, trade unions and the government.
92
# Define 'Labour Market Law'
And what it covers
Designed to protect the worker from discrimination within the workplace and to make it easier for businesses to recruit workers
It covers:
- Wage discrimination
- Discrimination
- Labour market reforms: reduction in trade union power and influence
93
Should the national living wage be increased?
| ARGUMENTS FOR
- Reduces inequalities
- Increases demand in the economy (GDP)
- Improves standard of living
- Less pressure groups
- Makes staff more productive and satisfied
94
Should the national living wage be increased?
| ARGUMENTS AGAINST
INCREASE IN BUSINESS COSTS
- May create unemployment: business tries to survive
- Lower supply of goods and services as workers become too expensive
- If goes up, price for everything else goes up
95
What does the UK and EU law related to the environment relate to?
Water + Land
96
What does the 'environmental law' enforce?
And specify...
Ensures businesses don't have negative impact on environment
- Limits to emission levels to sea, rivers and air
- Guidelines, limits and bans on waste disposal (e.g. plastic bags)
- Quotas on use of finite resources (e.g. fishing)
GOVERNMENT CAN INSPECT AND FINE THOSE WHO FAIL TO COMPLY
97
Why was introducing a cost to plastic bags a good strategy by the UK government?
Changed the way you think about using them
Anything of a cost makes customers think
98
Main disadvantage of following 'environmental laws' for a business
Compliance can often increase costs
99
What are the two types of environmental law?
- Environmental Protection Act
- Environment Act
BOTH PUT COSTS UP
100
What is the 'Environmental Protection Act' (Environmental Law)
Businesses must improve the control of pollution arising from industrial and other processes
101
What is the 'Environmental Act' (Environmental Law)
- A business must clean up any contaminated sites that it owns
- Environment Agency able to oversee environmental protection
102
Businesses being environmentally friendly
- New environmentally friendly production
- New products that meet higher environmental standards
- Greater use of recycling
103
Why do the government promote enterprise in the economy?
- Creates jobs
| - Leads to economic growth
104
Reasons why the government support start-ups
- Provide employment and large businesses of the future
- Future tax receipts, increasing government income
- More environmentally-friendly future
- Support moves into export markets, helping UK businesses to become globally competitive THEREFORE BRINGING MORE MONEY INTO UK ECONOMY
105
Over the pandemic, how did the government use grants?
Survival, kept employment and businesses alive
106
Where is the finance for 'grants' sourced from?
Tax money (from public)
107
The government can provide training to start up businesses in a variety of areas...
- Financial (e.g. small business accounts)
- Marketing (e.g. how to target market segments)
- Operations management (advice on location)
- People (how to recruit a suitable workforce)
108
What are the 3 types of grant?
- Local
- National
- European Government
109
What is an SME?
And defined by what?
Small and medium size enterprises
Defined by number of employees, turnover and net worth shown on balance sheet
110
What makes up a medium enterprise?
No. Employees: < 250m
Turnover in Euros: < 50m
Net worth shown on balance sheet: < 43m
111
What makes up a small enterprise?
No. Employees: < 50
Turnover in Euros: < 10m
Net worth shown on balance sheet: < 10m
112
What makes up a micro enterprise?
No. Employees: < 10
Turnover in Euros: < 2m
Net worth shown on balance sheet: < 2m
113
How do entrepreneurs and SME's impact on the economy?
- Provide employment
- Pay taxes
- Create competition
- Supply goods and services
114
What are 'regulators' and their role?
Watch over the actions and choices made in a market
- Complaints should be made to regulators (OFCOM - TV&Media Faye Love Island)
- Monitor prices
- Maintain high standards of customer service
115
Why does the government undertake regulation?
- Create competitiveness in the market
- Greater choice of lower prices
- Ensure fair environment in all sectors
- To create conditions for continued investment
116
Define 'regulation'
Creation of rules and sanctions within an industry to modify the economic behaviour of firms
117
Why does privatisation lead to monopoly power?
Most firms privatised operate in markets with barriers to entry
This can be countered through regulation and deregulation
118
Arguments for regulation
- Protecting consumers against the abuse of monopoly power that would lead to higher prices
- To create an environment that will encourage businesses to strive for efficiency through reduced costs: achieved through CAPPING PRICES
- To ensure quality and choice are maintained
119
Define 'de-regulation'
Opening up of markets to new competition through the removal of rules and regulations that created barriers to entry
'Fishermen can fish anywhere' > Costs decrease > Benefit the customer
120
Arguments for 'de-regulation'
The creation of competitive markets will lead to greater efficiency:
- Businesses strive to reduce costs in order to compete effectively
- Businesses strive to meet consumer demand by reducing price and providing a greater range of products
- Less government intervention allows businesses to produce to the needs of the market, FLEXIBILITY
121
Examples of infrastructure
- Transport network (e.g. rail, road and air)
- Provision of utilities (e.g. gas and water)
- Provision of information (e.g. broadband)
122
Contextual examples of the government improving infrastructure
HS2
Heathrow 3rd runway
123
Advantages of Heathrow 3rd Runway being built (CONTEXT)
- Needed to trade / transport more people
- Facilitates increase in air travel in UK
- More employment
124
Disadvantages of Heathrow 3rd Runway being built (CONTEXT)
- More pollution (environmental)
| - Destruction of homes / houses (previous infrastructure) to make space
125
What is a 'pollution permit'?
Allows businesses to produce a legal level of pollution every year
THESE ARE TRADEABLE ON THE MARKET
126
What is 'UKTI'?
UK Trade and Investment
- Helps businesses export to foreign markets and helps foreign companies in setting up production in UK
- Identifies opportunities around the globe, providing advice and networks for UK businesses
- This might include overcoming issues such as cultural and language problems
127
Define 'Elkington Triple Bottom Line'
A way of assessing business performance based on three important areas:
- Profit (Internal)
- People (Internal)
- Planet (External)
FOCUSES MORE ON OTHER STAKEHOLDERS (Bigger Picture)
- Profit will come when sustainable
128
# Define 'people' ('Elkington Triple Bottom Line')
With a disadvantage
Measures extent of which business is socially responsible.
| Hard to calculate and report reliability and consistency
129
Define 'profit' ('Elkington Triple Bottom Line')
Familiar to managers identified from income statement.
130
Define 'planet' ('Elkington Triple Bottom Line')
Measures of business’ impact on environment
131
Where is 'Elkington Triple Bottom Line' used? (Marketing and Operating)
- Used in marketing to market a product in a sustainable way, increasing sales as a business meets all criteria
- Used in operations so a business can operate in a sustainable way, becoming more ethical which will create a better brand image
- Strategic planning tool for the future – long term approach
132
Context for 'Elkington Triple Bottom Line'
- SPORTSDIRECT: have a lack of use of Elkington’s Triple Bottom Line as they focus mostly on a singular stakeholder, in their shareholders, rather than other stakeholders such as employees which causes a lack in employee morale as they focus on maximising profits through the exploitation of staff.
- Therefore, there is an imbalance between all features
- Make no action to work towards a more improved environment
133
What does 'Elkington Triple Bottom Line' suggest and aim to achieve?
SUSTAINABILITY
- There is more to a business’ success than profit
- Aims to measure the financial, social and environmental performance of a business over a period of time
134
Benefits & value of the triple bottom line
- Encourages businesses to think BEYOND narrow measure of performance (profit)
- Encourages corporate SOCIAL RESPONSIBILITY
- Can improve brand image if becoming more ethically sustainable through improving these factors
135
Drawbacks of 'Elkington Triple Bottom Line'
- Not very useful as an overall measure of business performance, only focuses on three factors out of many
- Hard to reliably and consistently measure People and Planet bottom lines, expectations constantly changing
- No specific guidelines on what a business should report on
136
Define 'globalisation'
Process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integration of economies and societies worldwide.
137
'Business is the main driver of globalisation'
Argue for this statement.
- Going multi-national means increase sales, profit and shareholder value
- Barrier to international business are lower and falling, meaning easier to become international
- Government want to encourage domestic businesses to expand, to improve UK economy
138
Define 'market liberalisation'
Markets freeing up, less communism
139
Ways of 'going global'
- Establish production sites overseas
- License technology and other IP (intellectual property) - allowing other organisations to use your tech
- Joint ventures (mergers/takeovers)
- Franchising
- Offshoring / outsourcing
140
Define 'licensing technology'
Allowing other organisations to use your technology
141
Advantages of 'Globalisation'
- Gain better understanding of global markets
- Tax evasion
- Increase brand image
- Higher profits and stronger position
- Unit costs lower in poorer countries
- EXTEND LIFE OF OBSCELETE PRODUCTS IN POORER COUNTRIES, as less advanced (Apple do this)
- Opportunities for staff to work abroad
- More intense competition - keep on toes and innovative
- Access cheaper goods and services from emerging countries
- More investors available
- Creates jobs abroad
142
Disadvantages of 'Globalisation'
- Initial cost is expensive - complex to set up
- Takes time, don't focus on other tasks
- Have to change products to meet cultures of other countries. MCDONALDS' INDIAN MENU
- Increased transportation costs - tariffs / tax
- Can create unemployment (not needed anymore in UK)
- Increased global trade / output = more CO2 emissions
143
Define 'tariffs' (Globalisation) and what does it cause
- Tax imposed by a government of a country on imports or exports of goods
- Causes the level of imports into a country to fall
144
Define 'quotas' (Globalisation)
Restriction imposed by a government on the amount or number of goods or services that may be exported within a given period
145
Define 'TradeBloc' (Globalisation)
Intergovernmental agreement, barriers to trade (tariffs and others) are reduced / eliminated
146
Define “balance sheet”
A snapshot of the business’ assets and liabilities on a particular day / time
147
Define “depreciation”
The fall in value of an asset over time
148
Why may a business produce a financial statement?
- Get an overview of the value of a business - good if wanting to sell it
- Notice financial issues
- Make quick + easy decisions, snapshot at any time
- Forecast if investments will be necessary / will work
149
What does an “income statement” show?
Shows a business’ revenues and costs, thus its profit and loss
150
Define a “ratio”
How much there is of something compared to something else
Ratios in business can also be presented as %
151
List all “financial ratios”
- Current ratios
- Gearing
- Return on capital employed
- Payable days
- Receivable days
- Inventory turnover
152
Define “ratio analysis”
It is a technique for analysing a business’ financial performance by analysing different pieces of data from company accounts
153
Define “liquidity” and the ratio used for it
Firm’s ability to pay their short term debts (current liabilities)
Current ratio used for it
154
What does “current ratio” measure?
And suggest ideal measurement
Ability of a business to meet its short term liabilities (debts) and it’s expressed in the form of a ratio
Should be higher than 1:1
1.5 : 1 —> 2:1 (ideal)
Measure below 1.5 : 1 suggests a liquidity problem
155
What does a firm with a high current ratio suggest?
May not be investing enough cash into non-current assets to further expand the business to generate additional profit
156
When will firms often experience poor liquidity?
When growing due to the extra costs incurred so before expansion, a company will want a healthy current ratio.
157
What is the gearing ratio measured in? (units)
%
158
What does 'high gearing' suggest?
Firm has borrowed a lot of money compared to their total capital
159
What does “gearing” show?
And suggest ideal figure
- What proportion of the capital invested in the business has come from loans
- No ideal figure!
160
What is judged as 'high gearing' ?
Value of +50?
161
What is judged as 'low gearing' ?
Below 25%
162
What does 'low gearing' suggest?
Firm raised most capital through alternative sources of finance
Missing potential opportunities
163
Benefits of 'high gearing'
- Less need to raise finance through share capital when bank loans are used, so there will be less shareholders - making it easier to control the company and make long-term strategic decisions
- Less dividend payments will be required as share capital will not be needed - more retained profit and investment rather than payments to shareholders
164
Benefits of 'low gearing'
- Company will have lower interest and loan repayments positively impacting its liquidity
- Makes the business more attractive to investment of potential shareholders
- Firm will not be as vulnerable to the cost impact of interest rate changes
- Reduced risk as the business has less debt and fewer creditors who could put the business into liquidation if these debts go unpaid
165
What does “ROCE” measure?
- Relative profitability
- Evaluate business performance
- Lets owners/investors understand how efficient the business is at producing profit, based on capital invested in the business.
166
What does “Inventory (stock) turnover” measure?
How quickly inventory (stock) is converted into sales
167
What is 'inventory (stock) turnover' measured in?
And what does the figure represent?
- As a number and not a ratio
| - Figure represents number of times in a year that the firm sells average value of its stock held
168
Ideal 'inventory (stock) turnover' figure
Higher the figure, the better
As implies they are selling goods and shifting stock more quickly
But no overall ideal number as depends on the business
169
Factors influencing inventory (stock) turnover
- Popularity of product
- Type of product (perishable goods will need high turnover figures)
- Type of business (retailers need to hold stock)
- Changes in consumer tastes and fashions
- Quality of research
- Product portfolio
170
What does “receivables (debtors) days” show?
Number of days it takes to convert receivables into cash
| i.e. how long it takes to collect debts from customers
171
What is 'inventory (stock) turnover' measured in? (units)
Days
172
How will firms get HIGHER receivable days?
TRADE CREDIT
Offer long credit periods
173
How will firms get LOWER receivable days?
Businesses that deal mainly in cash or do not offer credit sales will have lower figures
174
What does “payables (creditors) days” show?
Number of days it takes to pay any payable owed
| i.e. how long it takes to pay suppliers
175
What is 'payables (creditors) days' measured in?
Days
176
What is a firm's preference to payables and receivables?
Will want a higher figure, preferably higher than their receivable days, so they are not paying their debts too quickly and not before they receive the revenue.
This should improve their liquidity and cash flow control
RECEIVING MONEY BEFORE PAYING IT OFF !!!
177
What does 'GDP' measure?
Gross domestic product
Measures value of all goods and services produced by an entire economy over a period of time (usually goods)
Used to measure economic performance of a country
178
Define 'economic environment'
Consists of key economic factors that influence the behavior of businesses and their customers
179
How can economic growth be supported by the government?
- Government spending
- Cutting interest rates
- More exports than imports
- Training/development of staff (uni incentives)
- Lower taxes (more grants)
180
Positive effects of economic growth on businesses
- Growth of GDP means higher revenues and higher profitability
- Gives potential for economies of scale
- Sustained growth, increase confidence and therefore supports business' plans for the future
- Supports strategic decisions
181
Negative effect of economic growth on businesses
If growing too fast, can lead to recession
182
How is GDP measured?
And how much should the economy grow by per quarter?
Quartley (3 months)
0.6 per quarter / 2.4% a year
183
What contextually helped boost GDP?
'Eat out to help out' - COVID-19
184
Describe the 'business cycle'
1. Boom
2. Recession
3. Slump
4. Recovery
185
Define 'business confidence'
Describes the forward-looking expectations of firms.
No confidence = no investment
Confidence = more risks taken
186
Describe 'boom' ('business cycle')
GDP HIGH! - high consumer spending
Period characterised by high levels of consumer spending, business confidence, profits and investment as the same as rising costs, increasing prices and at full capacity (capacity utilisation)
187
What factors does 'boom' ('business cycle') lead to?
- Dividends increase
- Shortage of resource - selling more
- Overheads high, so have to charge higher price to facilitate
- Higher GDP
188
Describe 'recession' ('business cycle')
Period characterised by falling levels of consumer demand, profit and business confidence, lack of investment and more people unemployed.
A fall in GDP for two consecutive quaters
189
How is a national recession measured?
A fall in GDP for two consecutive quarters
190
What does 'recession' ('business cycle') lead to?
- Income starts to go down
- Falling demand lead to reduced prices
- Business closures
- Low investment
- Focus on survival
- Lack of business confidence
191
Describe 'slump' ('business cycle')
Period characterised by very low levels of consumer demand, investment and business confidence, an increasing number of businesses failing and high unemployment
192
What does 'slump' ('business cycle') lead to?
- Deflation (falling price) across entire economy
- GDP low
- Unemployment is high
- Lots of redundancies
- Low level / lack of demand (prices decrease to entice purchases)
193
Describe 'recovery' ('business cycle')
Period classified by slowly starting to rise levels of consumer demand, rising investment, patchy but increasing business confidence and falling levels of unemployment.
194
What does 'recovery' ('business cycle') lead to?
- Production starts to increase
- Employment increases
- Business confidence grows
- Potential shortages of resources and materials
195
How will times of economic growth impact a business' decision making?
- HR: more need for staff
- Maximise shareholder returns - dividends
- Pay off debts from the recession
- Build relationship with suppliers - allows deals and bulk
- More capital available for investment and retained profit - more likely to invest/expand
196
Ideal business confidence figure
95%
197
What does the 'Average Rate of Return' do?
Compares the average yearly profit from an investment with the cost of the investment and is stated as a percentage.
198
Advantages of 'Average Rate of Return'
- Balance risk
- Helps justify investment
- Helps choose investment opportunity
199
Disadvantages of 'Average Rate of Return'
Based on forecast, don't know for sure (doesn't counter in external factors)
200
Ideal 'Average Rate of Return' figure
High as possible
201
What should a business consider when considering an investment?
And what is this concept called?
INVESTMENT APPRAISAL
1. What are the total profits likely to be earned by the investment in the foreseeable future
2. How quickly the investment will cover its costs
202
What does the 'Payback (period)' calculate?
And what does it involve?
Time taken for an investment to generate sufficient returns to pay for its initial cost
Involves subtracting net returns gained from investment each year until nothing is left to pay of the initial investment
203
Ideal 'Payback' figure
SHORTEST POSSIBLE
204
How to work out the precise 'payback' (Months and Years)
1. Work out how many cumulative you need to reach 0
2. Look at net cash flow from the next year
3. Divide (1) by (2)
205
Advantages of 'Payback'
- Simple to calculate
- Quick screening tool for analysis
- Early return is especially important when liquidity is more important than profitability
206
Disadvantages of 'Payback'
- Disregards all cash flow beyond the payback period so fails to measure overall profitability
- It ignores the time value of money
- It discriminates against projects that involve a long payback period
207
Advantage of calculating GDP
Calculated in real time, adjusted so inflation is ignored
208
Define the term 'economic environment'
Consists of key economic factors that influence the behaviour of businesses and their customers
209
What is economic growth proportionate with?
A good economic environment
210
How can economic growth be supported by the government?
- Cutting interest rates
- Government spending/investment
- Lower taxes
- More grants
- More exports/imports
- SUPPORTING SMALL BUSINESSES
211
How can economic growth be supported by businesses?
- Change objectives to growth
| - Training/development of staff: increasing quality of labour
212
Positive effects of economic growth on businesses
- Growth in GDP = higher revenues and higher profitability
- Gives potential for economies of scale
- Increased business confidence: supporting plans for the future (strategic decisions)
213
Negative effect of economic growth on businesses
If growing too fast, can lead to recesion
214
Contextual examples of GDP increasing (2)
After COVID-19 lockdown, people spend their savings
RECOVERY FROM RECESSION
or
'Eat out to help out', encouraged GDP increase to combat recession
215
How is GDP measured?
Quarterly (every 3 months)
216
What is the expected growth rate for an economy?
0.6 per quarter
or
2.4% per year
217
What may consumer spending influence?
Business confidence
218
What may consumer confidence affect?
Business confidence
219
How will times of economic growth impact a business' functional decision making?
(Short to medium-term)
- Maximise shareholder return
- Pay off debts from recession
- HR, more staff needed
220
How will times of economic growth impact a business' strategic decision making?
(Long-term)
- Improve product portfolio
- More capital available for investment and retained profit (build business gradually): more likely to invest/expand
- Build relationship with suppliers overtime
- Marketing
- Training schemes
221
Define 'functional'
Short/medium term
or Departmental
222
Define 'exchange rates'
The price of one country's currency, in terms of other currencies
223
How do exchange rates impact business activity?
- Impact if they bring goods into the country
- May only sell in selected countries: as fluctuating exchange rates may reduce business confidence
- May influence domestic businesses (in own country)
224
Define 'appreciation'
An increase in the value of a currency is called an appreciation. This meaning the currency is worth more
e.g. £1 = $1.60
225
What does 'SPICED' stand for?
| businesses impacted by changes in exchange rates
Strong Pound: Imports cheaper, exports dearer
226
What does 'WPIDEC' stand for?
| businesses impacted by changes in exchange rates
Weak Pound: Imports Dearer, Exports Cheaper
227
What does 'SPICED' suggest?
| businesses impacted by changes in exchange rates
- Business that import will be able to buy cheaper raw materials and finished goods
- Business that export may see less demand as looks less attractive to customers
228
What does 'WPIDEC' suggest?
| businesses impacted by changes in exchange rates
- There will be greater demand from abroad for UK goods
- Input prices will increase if raw materials are imported
- If the business has a price inelastic product, it will be able to pass the increase in costs onto the consumer
MORE EXPENSIVE TO BUY IN STUFF (IMPORT) BECAUSE POUND WORTH LESS THAN OTHER CURRENCY, SO GETTING WORSE VALUE
229
Define 'exchange rate uncertainty' (with context)
UK exchange rates are determined by supply and demand, this means they fluctuate on a regular basis
230
What issues can 'exchange rate uncertainty' give international businesses?
- Hesitant to invest
| - Low business confidence
231
How can international businesses overcome 'exchange rate uncertainty' ?
- Consider loans to get them through a few months
- Slightly reduce spending/costs to minimise risk
- Pull out of international market all together
- R&D to find best nations
232
Define 'inflation'
General rise in prices or a fall in the value of money
A sustained increase in the average price level of an economy
AS PRICES GO UP, MONEY IS WORTH LESS
233
What does the 'rate of inflation' show?
How prices have changed, based on the same period a year earlier
An indication of the cost of living changing
234
What are the two measurements of inflation?
- Retail Price Index
| - Consumer Price Index
235
Define 'Retail Price Index' (RPI)
Measurement of 'basket' of goods and services representative of what people buy in the UK
236
Define 'Consumer Price Index' (CPI) and how its measured
Picks 600/700 of most commonly purchased goods/services from UK households, classes them as a 'basket'.
It then takes this basket, as a whole, and compares current from last measurment to find the CPI which measures inflation.
237
The two causes of inflation
- Cost push inflation
| - Demand pull inflation
238
Define 'demand pull inflation'
Process by which prices rise because there is excess demand in the economy. An increase in demand means an increase in price.
239
Define 'inflationary expectations'
Views about what will happen in the future, regarding inflation
240
Advantage of 'inflationary expectations'
If aware in advance what will happen regarding inflation, a business can plan ahead and save themselves from potential recession
241
Disadvantages of 'inflationary expectations'
- Could be wrong
| - Only a prediction
242
Define 'deflation'
Opposite to inflation
When there's not enough demand (GDP decrease), companies reduce their prices
243
What can 'deflation' cause?
- Fall in productivity
- Lower prices
- Rise in unemployment (cutting costs to facilitate lower prices)
244
Impacts of low inflation on UK economy
- Business confidence increase
- Business more successful
- Imports/exports successful
- Low prices: increasing morale of consumers as they get more for their money
- Employees earn more: increasing motivation
245
Impacts of high inflation on UK economy
- Lack of confidence (both business and consumer)
- More unemployment
- Wages decrease, less motivation
- Cost of living goes up
- Prices go up (encourage saving)
- Business struggles with imports/exports
246
Define the 'fiscal policy'
- Sets tax rates
| - Sets government spending
247
Contextual example of 'fiscal'
Government's
248
What 'monetary' control?
Interest rates
249
List 3 types of tax
- Income tax
- Corporation tax
- VAT
250
Define 'income tax'
Tax on how much someone earns (their income)
251
Define 'corporate tax'
Taxes paid by a business
252
Define 'VAT'
Tax paid on a product or service
253
How does an increase in 'income tax' affect GDP?
People have less money, meaning that GDP goes down as they spend less
254
How does a decrease in 'income tax' affect GDP?
People have more money, so they spend more, which boosts the GDP
255
How does an increase in 'corporation tax' affect a business?
May put them into a phase of retrenchment
256
How does an increase in 'VAT' affect GDP and business confidence?
Prices going up to facilitate the VAT, so the business can still make profit
So, customers are less attracted so spend less
Meaning that business confidence and GDP go down
257
What must the government do when considering the 'fiscal policy' ?
BALANCE SPENDING AND TAX !
258
How will raising taxes affect a business?
- May have to change objectives
- Decrease confidence (consumer+business)
- Borrow more money? Borrow less money?
259
How will cutting taxes affect a business?
- Increase spending (GDP)
| - Increase confidence
260
How is 'Fiscal Policy' used to achieve objectives?
- Keep inflation on target (2%)
- Stimulate economic growth and employment, during times of recession
- Maintain stable economic cycle that minimises 'boom and bust'
261
How does the government spend its money?
- NHS
- Education
- Infrastructure (HS2)
- Aid abroad
- GRANTS + SUPPORT
- Emergency services
- Defence
262
Benefit of government spending
Help areas of economy that the current business environment can't help
263
Disadvantages of government spending
- Might not benefit everyone
| - Expensive to cover
264
Define 'expansionary fiscal policy'
Helps to lower unemployment, cutting taxes - giving more money to spend. However, can cause inflation
265
Define 'contractionary fiscal policy'
Reduction of government spending and increase taxes as a measure to control inflation in the economy.
Does the opposite to expansionary, reins in economic growth on a sustainable level
266
N/A
N/A
267
N/A
N/A
268
Define 'more open trade'
A.K.A. international trade
- Free trade / no restrictions
- No government interventions
269
Benefits of 'More Open Trade'
- Cheaper costs (as no tariffs)
- Job creation in imports and exports
- Economic growth
- Can reach more customers / go international
270
Define 'protectionism'
- When a government protects domestic businesses and jobs from foreign competition by giving them subsidies, while improving tariffs and quotas on imported goods.
- Encourages sale of domestic products, which increases GDP of the country.
271
Define 'non-tariff barriers'
Subtle controls by government without being 'obvious' such as constantly changing regulations or forcing imports to use only one entry point.
272
Define 'embargos'
Forbidding trade with a particular country.
273
Advantages of 'protectionism'
- Countries develop a variety of new industries, adding local jobs and boosting economic growth
- Allows small businesses to grow
274
Disadvantages of 'protectionism'
- Prices of imported goods rise due to decreased supply, therefore the price of domestic rise as less competition
- If you restrict a country's trading in your country, they may restrict from you... RETALIATION
275
What is liquidity all about?
Cash flow
276
What is needed to evaluate liquidity?
Balance sheet
277
How is liquidity determined?
Relationship between current assets and current liabilities (current ratio)
278
What is the minimum acceptable liquidity? (current ratio)
1.5 - 2.5
279
What is considered a low current ratio? And what could this mean?
Below 1, liquidity problems
280
What would a high current ratio suggest?
Too much working capital tied up in inventories and debtors
281
When looking at the current ratio, why is it important to look at trends rather than actual figures?
Because current ratio is adapted and personal to a business, differs between businesses
282
Define 'acid test ratio'
Current ratio, but make a small adjustment...
- Eliminate the current asset that is typically the hardest to turn into cash
283
Effects of inflation on consumers
- As prices rise (inflation), money loses its value and people become less confident in money. So saving is reduced.
- Inflation can get out of contol - price increases lead to higher wage demands, as people try to maintain their living standards.
- Consumers on fixed incomes (e.g. pensioners) lose out because their real income falls
284
Positive effects of inflation on businesses
- Industry-wide price rises, enable revenues to grow as businesses can get away with charging more
- Depsite increase in costs, businesses can increase their prices to pass onto consumers. They are in power, however, this may cause relationship to deterorate
285
Negative effects of inflation on businesses
- If costs are rising due to inflation, a business may not be able to pass them into customers (if price i elastic product)
- Can disrupt business planning
- Associated with higher interest rates (costing more to borrow money)
- May reduce demand as consumers exercise caution (sacrifices)
- May make decision making more challenging
286
Why has globalisation increased in the last years/decades?
- Increase population
- Rise in internet
- Infrastructure
- Increase competition
- More wants and demands
- Containerisation
287
# Define 'emerging economies'
With examples of 'emerging economies'
Developing countries with fast developing, but not fully developed, economies.
China, India, Brazil, Russia
288
Advantages of 'emerging economies'
- Cheaper labour
| - Create jobs to more countries out of poverty and therefore spending money, creating economic activity.
289
Define 'CSR' (Corporate Social Responsibilities)
The idea that a company should go above and beyond what is required by law to help society, its workforce's quality of life and the environment.
290
The importance of 'CSR' (Corporate Social Responsibilities)
- Public are more aware
| - People expect CSR as part of business culture
291
Context of 'CSR' (Corporate Social Responsibilities)
McDonald's Planet Champion Program trains employees to find ways of reducing the environmental impact of the company
292
Advantages of 'CSR' (Corporate Social Responsibilities)
- Improve brand image / reputation
- Business / consumer confidence
- Improve employee morale
- Increase talented applicants
- Positive publicity (but is it a PR stunt?)
293
Disadvantages of 'CSR' (Corporate Social Responsibilities)
- Costs lots of money (will shareholders agree?)
- These costs passed onto customers (higher prices to facilitate increase in unit costs)
- Difficult for small businesses
294
Relationship between 'CSR' (Corporate Social Responsibilities) and the objective of survival
CSR will be the first area to cut for survival
295
The five areas of 'The Stakeholder Concept'
- Employee
- Community
- Government
- Suppliers
- Customers
296
What does 'The Stakeholder Concept' do that Elikington's Triple Bottom Line doesn't?
Sees all stakeholders as important.
297
Define 'The Shareholder Concept'
- Business' responsibility aimed at meeting requirements of shareholders
- Main corporate objectives = profit maximisation
- Higher profits = higher dividends
- Good performance = share price rise and market capitalisation increase
298
What does 'The Stakeholder Concept' and the 'The Shareholder Concept' have in common?
Underpins a business' ethical approach, suggesting who is more important to the business
299
Describe the layout 'Carroll's Pyramid of CSR'
Top = Philanthropic
Ethical
Legal
Bottom = Economic
300
Define 'Carroll's Pyramid of CSR'
MUST BALANCE
A model that shows what society expects from a business, splitting it up into four unique responsibilities
301
What are the top 2 responsibilities of 'Carroll's Pyramid of CSR' known as?
Voluntary capacity
| Philanthropic and Ethical
302
How can 'Carroll's Pyramid of CSR' be used?
Analyse business decisions and assess whether they are made out of necessary (economic and legal responsibilities) in a voluntary capacity (ethical and philanthropic responsibilities).
303
What are the bottom 2 responsibilities of 'Carroll's Pyramid of CSR' known as?
Necessary
| Economic and Philathropic
304
What does 'Net Present Value' (NPV) show us?
The true value of an investment, taking into account the impact of inflation and interest rates on the time value of money.
305
What aspect of an investment does interest rates and inflation affect?
The returns it generates overtime
306
Suggest step-by-step how to calculate the NPV (Net Present Value)
1. Add up discounted cash flow
| 2. Subtract cost of investment
307
What does the discount factor suggest on the 'NPV' (Net Present Value) chart?
Shows the impact of inflation and a loss of interest has a value on the revenue generated from investment.
308
What does 'Year 0' suggest on the 'NPV' (Net Present Value) chart?
Shows cost of the investment
309
Define a 'demographic change'
Change in the structure of a country's population over-time, in terms of factors such as: age, sex and race.
310
What is a diverse range of races and religions within a country proportionate to?
A diverse range of cultural businesses being introduced... emerging markets
311
What market especially benefits from an increased population?
Housing market
312
Benefits of demographic and population movements within a country
- Higher demand
| - Diverse workforce
313
Contextual example of a business benefiting from an ageing population
Saga = over50's cruises
314
Threats of demographic and population movements within a country
- Lack of new employees which bring new ideas and innovate ideas
- Resistant to change/adapt within the business
- Increased competition, targeting new markets
315
How can migration changes and increased global population alter GDP?
Increased GDP in country moving to, but decreased in country they came from.
316
How can businesses exploit migrant workers?
Pay them less as they're used to receiving less (depending on where they came from). This is evidence of exploitation and may harm brand image as a result.
317
What % of the world lives in cities? (Urbanisation)
50%
318
Positive aspects of urbanisation
- Community spirit
- Increased footfall
- Brings more skilled workers
- Easier/Cheaper access to infrastructure
- Job opportunities
- Higher income
319
Negative aspects of urbanisation
- Increase in emissions (environmental)
- Rural businesses lose out
- Crime and poverty increase
- Over-population (Mumbai)
320
Ways that businesses can respond to urbanisation
- CSR pyramid
- Supporting low skilled workers (training)
- More offices in rural areas as will be cheaper
321
Contextual example of a business using modern technology
AmazonGo
322
How does the 'monetary policy' work?
- 'Monetary Policy Committee' (MPC) meet every month to decide level of interest rates
- MPC consider wide range of economic factors such as: GDP, unemployment and exchange rates
323
Define 'Cost push inflation'
Occurs when there is an increase in the costs of production (including wages, raw materials, fuel, taxation), which causes firms to increase their prices
324
When must a business consider exchange rates?
When businesses export / import goods
325
Define 'strategic'
Long term
