3.7 Analysing the strategic position of a business Flashcards
Why are mission statements important?
-They communicate the purpose and values of an organisation to its stakeholders
-They enable measurable goals and objectives to be identified
What are some facors that influence the mission of a business?
1) The size of the business
Small business may reflect personal interests of owner
2) Range of activities undertaken by the business
3) Nature of owners and importance of stakeholders
Mission must be understood and agreed upon by all stakeholders if it is to be effective
What are cooporate objectives?
Goals of the whole organisation rather than of different elements of organisation.
What are some examples of cooporate objectives?
Maximising shareholder wealth.
Maximising sales revenue.
Focusing on a firm’s core capabilities rather than venturing into risky
diversification.
Social and environmental responsibility.
Adding value.
Enhancing reputation through continuous technological innovation.
What are some internal influences on cooporate objectives?
-Profit making or non-profit
-Relative power of stakeholders
-Ethics
-Business culture
-Resource contraints
What are some external influences on cooporate objectives?
-Pressure for short termism from shareholders
-PESTLE
-Demographic trends
-Actions of competitors
-Enviromental factorsd
What is the difference between strategy and tactics?
Strategy = Medium to long term plan through which an organisation aims to retain its objectives
Tactics = The means by which the strategy is carried out
What are the links between mission, cooporate objectives, strategy and tactics?
Mission statement will influence coorporate objectives -> strategy will be plan for how cooporate objectives are acheived -> tactics are how the strategy will be played out.
EXAMPLE:
Mission statement = ‘To connect for a better future’
Cooporate objective = Increase market share in North America
Strategy = Improve brand image in comparison to competitors
Tactics = Televesion and online advertising campaigns
What is the difference between strategic and functional decision making?
Strategic decisions tend to be more high risk, require more resources and take longer to succeed. Funciontal decision making is more day-to-day, carried out by middle management and the outcomes can be more easily predicted
What is SWOT analysis?
A technique that allows an organisation to assess its overall position, OR the position of one of its divisions, products or activities
Strengths, Weaknesses, Opportunities and Threats
How is a SWOT analysis carried out?
By an Internal and External audit
Internal audit = determines strengths and weaknesses in relation to competition
External audit = assesment of opportunities and threats to a business by analysing external enviroment.
What are the benefits of a SWOT analysis?
-Structured approach to assessing internal and external influences on an organisations performance
-A basis to make decisions on linking present and future position of business
-Leaders can analyse what needs to be done to counter threats to organisation
-Encourages an outward looking approach
What do the balance sheet and income statement make up?
A businesses anual accounts
What does a business do with its anual accounts?
Submit them to its shareholders aswell as the government
What are the disadvantages of a SWOT analysis?
-Time consuming and the situation may change rapidly
-Can oversimplify data used in decisions
-Data used may be based on assumptions that turn out to be untrue
What is the balance sheet of a business?
A document describing the financial position of a company at a particular point in time.
Compares value of items owned by the company and the amount it owes
What is an income statement?
A document showing the income and expenditure of company over a period of time, usually a year.
Summary of a businesses trading performance.
What are liabilities?
A businesses debts
What are non-current and current assets?
Non-current = items that a business is likely to own for long period of time
Current assets = items that a business may not expect to have in 12 months time
What are current and non-current liabilities?
Current = repayed within the next 12 months
Non-current = Lon term debts, not payed within 12 months
What is ‘capital employed’?
Equity + non-current liabilities
Equity = Shareholder capital + retained profits
What are a businesses net assetts? What does this mean if a business has positive net assetts?
Total assetts - total liabilities.
If they exist, then money must have come into the business that it hasnt borrowed to pay for assetts
What will be shown at the bottom of a balance sheet?
How the business has raised extra funds to pay for its net assetts I.E
Share capital
Retained profit
What is a businesses total equity?
The sum of the sources of money that have come into the business to cover its net assetts
What is gross profit?
Revenue - costs of sales
What is operating profit?
Gross profit - operating costs (expenses other than costs of sales)
What is ‘finance income’ on an income statement?
Money earnt from storing money at bank I.E Interest payments
What is ‘finance costs’ on an income statement?
Any interest business has had to pay to financial providers
How do you calulate return on capital employed? (profitability)
(operating profit / capital employed) x 100 = ROCE %
AKA Primary ratio
What is capital employed AKA ROCE ratio beneficial for?
A good measure of how well a business is generating profits from its its capital
What are the drawbacks to ROCE ratio?
A business might lease or hire many of tis production capacity which would not be included as assets in the balance sheet.
How is ROCE used?
The higher the % the better, figure is copmared to previous years to see trend.
How could a business improve ROCE?
1) Improving top line (increasing operating profit) without a corresponding increase in capital employed
2) Maintain operating profit but reduce the value of capital employment
4 evaluation points for ROCE
1) Higher % is better
2) Watch for trend overtime
3) Watch out for low quality profits which boosts ROCE
4) Leased equipment will not be included in capital employed
What is the current ratio?
A financial ratio which assesses the liquidity of a business:
current assets / current liabilities = expressed as a ratio
Why is the current ratio used?
To check that working capital is being used efficiently.
Also of interest to stakeholders such as suppliers and those lending money.
Low ratio might suggest future problems being paid
What are some negatives of the current ratio?
-Doesnt consider quality of current assets or the timing of cash flows
-Low current ratio is fine if the business is generating cash
-Ratio can vary significantly between industries therefore is not useful for inter-industry comparisons
What is the gearing ratio?
The proportion of finance that is provided by debt relative to the finance provided by equity (or shareholders)
How is the gearing ratio calculated?
(long-term liabilities / capital employed) x 100 = Gearing %
What are the other terms for the ‘gearing’ of a business?
Leverage OR acid test ratio OR debt equity ratio
What is considered a highly geared or lowly geared business?
over 50% = high
lower 25% = low
How could a business reduce gearing?
-Focus on profit improvement
-Repay long-term loans
-retain profits rather than pay dividends
-Issue more shares
-Convert loans into equity
How could a business increase gearing?
-Focus on growth, invest in revenue growth rather than profit
-Convert short-term debt into long-term loans
-Buy back ordinary shares
-Pay increased dividends out of retained earnings
-Issue preference shares or debentures
When is high gearing good?
A mature business which produces strong and reliable cash flows can handle large amounts of gearing. Long-term debt is cheap, and it reduces the amount shareholders have to invest in a business
What is the ‘payable days’ formula used for?
Estimating the average time it takes a business to settle its debts with traed suppliers. The ratio is useful when assesing the liquidity position of a business
What is the formula for calculating the ‘payable days’ ratio?
(trade payables / costs of sales) x 365
How are the results of the payables days ratio interpreted?
In general, a higher number is better as the longer it takes for a business to pay its debts the better cash flow it has. HOWEVER this ahs negative repercussions on suppliers ; loss of goodwill.
The creditor days should be higher than the debtor days.
Be careful, a high figure may indcate liquidity problems
What is the ‘debtor days’ ratio used for?
Assesing the time it takes for trade debtors to settle their bills with the business. Liquidity
How is the debtor days ratio calculated?
(value of trade debtors / revenue) x 365
How are the results of the debtor days ratio interpreted?
A high figure (above indutry average) suggest problems with debt collection or the general financial position of customers, indicating customers are receiving excessive credit.
What is inventory/stocks?
Those thigns that a business holds in order for it to produce and trade:
Raw materials
Goods half compelted
Finished goods
What is the inventory turnover ratio used for?
One of the 3 main ratios to measure how efficiently a business is managing its working capital.
Inventory turnover = measures how many times a business replaces its inventory each year
How is inventory turnover calculated?
costs of sales / average value of inventories held = EXPRESSED
AS number of times a business turns its inventory into costs of goods sold.
How is the inventory turnove number interpreted?
-Changes from one year to another, comparing to other businesses
-If number has fallen, suggests slower turnover of industry -> this suggests ; a build up of slow moving/obselete inventory OR a business wants to hold more inventory to better meet demand
-Inventory turnover will vary between industry
-Lean production means lower levels of inventory and higher levels of inventory turnover
What is working capital?
current assetts - current liabilities
Same as net assets
What ratios can be used to assess the efficiency of a business?
Payable days, debtor days and inventory turnover
What ratios can be used to assess the profitability of a business?
ROCE, gearing,
What data other than financial can be used to assess the performance of a business?
-Labour productivity
-Labour turnover
-Retention rates
-Market share
-Sales volume
What are core competencies?
Something unique that a business has or can do that enables it to compete effectively.
What other managemtn tool can core competencies be related to?
The S in SWOT analysis, the srenghts, the sources of competitive advnatage
What are the 4 actions of a business that a core competency can arise from?
- Colelctive learning within the business
- Ability to integrate skills and technologies
- Ability to deliver superior products and services
- Ways a business is differentiated
What are some examples of core competencies?
IKEA = Innovaye designs
Apple = intergated ecosystem between products
Starbucks = Differntiated accorss world
What are the 3 conditions a core competence has to meet?
1) Provide consumer benefits
2) Hard for competitors to immitate
3) Can be leveraged widely into many products and markets
What is the Kaplan and Nortons balanced Scorecard used for?
To measure business performance using both financial and non-financial data
How does the balanced scorecard work?
A top down approach, first analysing the businesses mission and vision statements, then indentifying ‘key performance indicators’ from 4 different perspectives.
What are the 4 perspectives of the balanced scorecard?
Financial perspective = Measures of financial performance I.E; ROI, ROCE, Opertaing profit margin
Customer perspective = Measures of customer satisfaction I.E; level of product returns, customer service feedback/online ratings
Internal processes = Measures of how efficient business is I.E; lead time between innovatio and launching product, unit costs
Organisational capacity = Measures of businesses ability to innovate I.E; retention rates of key employees, measure flow of new business ideas
What are some advantages of the balanced scorecard?
-Provides a broader view of how business is performing relative to its missions and vision than just financial performance
-Involves everyone in business, not just financial department
-Highly flexible, many different KPIs can be used
What are some drawbacks of using a balanced scorecard to asses business performance?
-Danger of too many KPIs, can become confusing, should only use the KEY p[ieces of data
-Need to find balance between 4 perspectives
-In many businesses, senior managemtn are purely concerned with financial perspective due to their bonuses ETC
-Needs to be updated regularly to be useful
What is Elkingtons Triple Bottom line?
A model used to asses business performance relating to CSR.
Idea is to encourage businesses that their is more to business activity than just making a profit.
The three areas of Elkington’s Triple Bottom line are the three Ps:
Profit, People, Planet
Why does the Triple Bottom Line exist?
-Businesses have for too long focused on narrow measures of performance; I,E profit, share price etc…
-Profit is important but is not the only factor that should be considred when assesing business performance
Explain each of the 3 Ps from the Triple Bottom Line
Profit = reported in income state, reliable figure in terms of business success, measure extent to which busines is making a profit
Planet = How business activties impact on enviroment, alot more difficult to measure, some ways include; Carbon Emisions
People = Assess the extent to which a business is socially reponsible, hardest to measure of the 3 Ps
What are the benefits of the triple bottom line to a business?
-Encourages business to think beyong jsut profit being realtive measure of performance
-Encourages wider CSR reporting
-Supports measures of enviromental impact and sustainability
What are some drawbacks of the triple bottom line?
-people and planet are quite difficult to measure and ensure comparitability between different organisation
-No legal requirement for business to report their Triple Bottom Line, therefore there has not been a large applicatio of the performance measure
What is a urbanisation?
The movement of people withing a country from the country side to urban areas
What is migration?
The movement of people between coutries and regions
What are some real life examples of changes in conusmer lifestyle and buying behaviour in recent times?
-Growth in number of single person households
-Increasing conectivity via mobile devices
-Improved level and spread of information
-Greater social consciense
-Multi channel distribution widens consumer choice
What is CSR?
Corporate Social Responsibility is a management concept whereby businesses integrate social and enviromental concerns in their actions and interatcions with stakeholders.
What are the benefits of CSR/ the arguments for it?
-It is the ethical thing to do
-Improves a businesses image and reputation
-Necessary in order to avoid regulation
-Imporved social enviroment will benefit a business
-Attractive to stakeholders
-Can charge a premium price
-Helps to prevent resource depletion
What are the drawbacks/arguments against CSR?
-Some argue that the only social responsibilty to a business is to create shareholder wealth
-The efficeint use of rsources will be reduced if business must alter how they act
-Businesses cannot decide what is in societies interest
-Extra costs will be incurred that will be passed on to consumers
-CSR stifles innovation
How can CSR be demostrated?
-Sustainable sourcing
-Respobsible marketing
-Safe conditions and working enviroment
-Responsive customer service
-Protecting the enviroment
-Supporting social causes
-Reinvest profits in education / other socailly beneficial areas
What was Friedmans view regarding CSR and what was Carrol’s view regarding CSR?
Friedman = The social responsibility of a business is to increase profit
Archie Carrol = Profit is important, but businesses have a wider purpose and social responsibility
What is Carroll’s CSR pyramid?
A framework for thinking aboout CSR, representing four responsabilities of business. Bottom being most important.
From bottom of pyramid to top =
- Economic
- Legal
- Ethical
- Philanthropic
Explain the economic resposibility of Carroll’s CSR pyramid
Business must first make a profit, is only useful to society if it is able to survive, pay wages etc.
Explain the legal resposibility of Carroll’s CSR pyramid
After economic, a business must then obey the law and other regulation
Explain the ethical resposibility of Carroll’s CSR pyramid
Responsibility of a business to ‘do the right thing’, to act morally and fairly
Explain the philnathropic resposibility of Carroll’s CSR pyramid
Where businesse go beyond acting ethicly and begin to give back to society
What is Micheal Porter’s five forces used for?
A framework for analysing the nature of competition within an indsutry
What are porters 5 forces?
Threat of new entrants to a market
bargaining power of suppliers
Bargaining power of customers
Threat of substitute products
Degree of competitive rivalry
What is meant by the term investment appraisal?
techniques used to analyse the financial aspects of investment projects, and to decide whether an investment project is worthwile
What are 3 methods of investment appraisal, how do they work?
Payback period: Time it takes for a project to repay its intial investment
Average rate of return:
( (Total net profit / N”of years it will last) / intial cost ) x 100 = %
Looks at the total profit a project makes per year as a % of what it costs
Net present value (NPV):
Must use discount factor to bring cash flows back to their present value, will usually be given to you.
Present value = (cashflow) X (discount factor)
We then add up all of the present values to get the net present value
