Analysing the strategic position of a business Flashcards
1
Q
What are strategies?
A
The long term goals made by senior managers.
2
Q
What is a mission?
A
The overall reason for the business’ existence.
Therefore, determines the business’ strategic position.
3
Q
What is a mission statement?
A
Provides a common focus for everyone within an organisation and hence a common sense of direction.
4
Q
What are the influences on the mission of a business?
A
Personal beliefs, values and objectives of the leaders/founders.
Business ownership e.g. sole trader or company.
Values and relative power of shareholders.
Degree of competition.
5
Q
What are corporate objectives?
A
Medium to long term quantifiable targets to fulfil the mission statement.
6
Q
What is short termism?
A
Pressure to achieve these objectives within 2 years.
Will not be thinking about the long term growth e.g. if profits are used to issue dividends rather than reinvest in the business to fund growth.
7
Q
What are the internal influences on corporate objectives?
A
Mission statement
Leaders’ personal objectives and values.
Performance
Organisational cultural
Internal shareholders
8
Q
How does business ownership influence corporate objectives and decisions?
A
Objectives of a company will be heavily influenced by the
objectives of the shareholders.
However this may vary depending upon whether it is a Plc or Ltd.
A sole traders’ objectives will be predominantly influenced
by the individuals’ objectives.
9
Q
What are external influences on corporate objectives?
A
External environment (PESTEL)
Investors’ objectives
Competitive environment
Global markets
External stakeholders
10
Q
What is functional decision-making?
A
Decisions made within a business by managers of a specific functional area i.e. a department responsible for one aspect.
11
Q
How do strategic decisions impact functional decisions?
A
Marketing- research into new markets, product development.
Finance- raising finance to support growth, proportion of long term funding that in debt.
Operations- relocating production abroad, outsourcing.
HR- delayering.
12
Q
What is a SWOT analysis?
A
A diagnostic tool used to identify the internal strengths, weaknesses, external opportunities, and threats to a business.
13
Q
What are the values of a SWOT analysis?
A
Structured approach to analysing a business.
Considers both internal and external issues.
14
Q
What are strengths?
A
Characteristics that gives the business a competitive edge. In each functional area e.g. strong brand image, skilled workers, good financial positions and cash flow, strong supply chain.
15
Q
What are weaknesses?
A
Limitations of the business e.g. not maximising profits.
16
Q
What are opportunities?
A
Chances to improve business performance.
17
Q
What are threats?
A
External factors affecting the business.
18
Q
What does the income statement show?
A
Profits and losses
19
Q
What does the balance sheet show?
A
Assets (what is owned) and liabilities (what is owed)
20
Q
What are non-current assets?
A
Used to generate revenue
Kept by the business for more than a year.
e.g. vehicles, machinery, building
21
Q
What are current assets?
A
The business doesn’t plan to keep it for a long time.
Likely to be turned into cash within a year.
e.g. inventories (cost of storage, can become out of date / absolute), receivables (e.g. owe the business buy now, pay later), cash.
22
Q
What are current liabilities?
A
Payables (suppliers you owe), overdrafts.
Debts which must be paid within a year.
23
Q
What are non-current liabilities?
A
Debts the business has more than a year to pay e.g. bank loans, mortgages.
24
Q
What can be used to assess the liquidity position of a business?
A
Current liabilities and non-current liabilities
25
How is working capital calculated?
Current assets - current liabilities
focuses on cash flow
26
How is the current ratio calculated?
Current assets / Current liabilities
e.g. 07:1 for every 70p the company has in current assets, they owe £1 in current liabilities.
27
What is the benchmark for the current ratio?
2:1
28
What is the formula for the acid test?
Current assets - stock (can become out of date) / current liabilities
e.g. 0.4:1
less able to over their short-term debts.
Evaluating by looking at receivables
29
What is the benchmark for the acid test?
1.5:1
30
What are the liquidity ratios?
Current ratio
Acid test
Focusing on cash flow - the business's ability to cover their short term debts.
31
What is return on capital employed (ROCE)?
A measure of how efficiently a business uses capital to generate profits.
Profitability ratio - business's ability to make a profit.
32
How is capital employed calculated?
Total equity (amount you invest into the business) + non-current liabilities (amount you borrow to invest)
33
How is ROCE calculated and what are the implications?
Operating profit / Total equity + Non-current liabilities x100
To determine if it's good or bad depends on the industry, goals and competitors.
The lower it is, the less efficient the business is using capital therefore if the business is in a competitive industry, ROCE will be lower.
e.g. 27% for every £1 of capital employed in the business 27p is generated in operating profit.
34
What is liquidity?
The business's ability to meet short-term debts and day-to-day expenses.
If a business can not meet current liabilities from current assets then it is at risk of failure if creditors demand immediate payment of debts.
35
How can liquidity be improved?
Increase current assets and/or reduce current liabilities:
-sell assets that are no longer being used i.e. turn them from a non-current asset to a current asset (cash).
-move cash balances from current accounts to high interest-bearing accounts so their value increases more rapidly.
-switch to long-term sources of finance.
-monitor debtors to avoid bad debts.
36
What is gearing (%)?
Measures what proportion of a business's capital is funded through long-term loans. (shown in non-current liabilities).
37
How can gearing be calculated?
Non-current liabilities / Total equity + Non-current liabilities x100
If gearing is above 50%, the business's risk increases.
38
What are efficiency ratios?
Assess the internal management of a business i.e. how efficient are managers in controlling the current assets.
Look at the management of cash and inventory:
Payable days (current liabilities)
Receivable days
Inventory turnover
39
How can payable days be calculated?
Payable days (creditors- people that the business owes) = Payables / Cost of sales x365
40
How can receivable days be calculated?
Receivable days (people who owe the business) = Receivables / Sales revenue x365
41
What is inventory turnover?
Measures how frequently a business turns over its inventory in a year (how quickly do they sell their stock).
Will vary depending upon the nature of the firm e.g. fashion retailer at least each season.
42
How can inventory turnover be calculated?
Cost of sales / average inventory held (opening stock + closing stock / 2)
43
What is the value of financial ratios when assessing performance?
Provides a tool for the interpretation of accounts.
Structure from which comparisons can be made (overtime or with other businesses).
Aids decision-making (internally or externally by investors).
44
What are the limitations of financial ratios when assessing performance?
Possibility that account have been window dressed (there is a suspicion or risk that the company's financial statements have been deliberately altered or presented in a misleading way to give a more favourable impression to investors, stakeholders, or regulators).
Need to consider reasons behind ratios e.g. is ROCE lower than previous years because of an investment programme.
Quantitative information only.
45
Why may a business try to have a longer payable days ratio?
To ease cash flow problems
46
What may a short payable days result in?
Discounts from suppliers
47
What happens if receivables are higher?
The number of days increases which means the debtors are not paying the business quickly.
Could be due to the economy
48
What can occur if payable days are longer?
Suppliers may charge additional interest.
49
What are examples of businesses with low and high receivable days?
High street coffee chain = low receivable days
Most commercial businesses = longer receivable days
50
What is the political environment?
Government actions that impact the strategic and functional decisions made by businesses.
These actions can be local, national, or international authorities.
They will impact heavily on the competitive environment and the infrastructure that allows businesses to operate effectively.
51
What is legislation?
Creating and enacting laws to protect individuals, businesses, and society as a whole.
52
What is competition law?
Promote fair competition in markets and stop the abuse of consumers by businesses due to monopoly power. This means that anticompetitive practices such as price fixing between businesses are illegal.
Mergers and takeovers are monitored and will not be allowed if it is deemed that they significantly reduce
competition e.g. Tesco would not be allowed to takeover
Sainsbury's.
53
What are firms not allowed to do?
Agree prices with competitors.
Limit production to reduce competition.
Partition markets or customers between each other e.g. geographically where each firm takes a different region to avoid competition.
54
What is competition policy?
Seeks to improve the competitive nature of markets.
Alleviate market failure to protect the interests of consumers and society as a whole.
55
How can competition policy be achieved?
Curtailing monopoly power and protecting competitive markets.
Restricting mergers and prohibiting cartels.
Improving how markets work e.g. providing greater information.
Creating fairness in markets for both businesses and consumers so that businesses don't abuse their dominant market position but can make acceptable profits that will drive innovation and increases in productivity.
56
What are the costs of competitive policy?
Reduce creative destruction, where businesses with monopoly power can provide huge investment in R&D leading to innovative products and production processes. These would have benefited society as a whole.
Stop some businesses, particularly natural monopolies, from realising huge economies of scale which could have been passed on to the consumer.
Lead to government failure where government intervention in markets reduces welfare as the authorities create distortions in the market leading to inefficiencies.
57
What are the benefits of competition policy?
Lower prices
Improved quality
Increased choice
Innovation
Competitive advantage
58
What is labour market law?
Designed to protect the worker from discrimination within the workforce and to make it easier for businesses to recruit workers.
59
How have labour market reforms impacted trade unions?
Reduction in trade union power and influence. This may give rise to lower wage rises.
60
What are the arguments for the national living wage
to increase?
Encourages people to supply labour
Reduces inequality
Reduces welfare burden
Increases demand in the economy
Improves standards of living
61
What are the arguments against for the national living wage to increase?
May create unemployment
Interferes with the workings of the market
Reduces UK competitiveness
Lower supply of goods and services as workers become too expensive, increasing business costs.
62
What is environmental law?
Legislation designed to influence the behaviour of individuals and businesses to reduce the negative impacts on the natural environment.
e.g. limits to emission levels to sea, rivers and air.
guidelines, limits, and bans on waste disposal.
quotas on the use of finite resources e.g. fishing quotas.
Government can inspect businesses and impose fines on those failing to comply.
Compliance can often increase costs to a business.
63
Why does the government look to promote enterprise in the economy?
Creates jobs and leads to economic growth
64
Why does the government support business start-ups?
Provide employment and are the large businesses for the future.
Provide future tax receipts increasing government income.
Can help start-ups become more environmentally friendly.
Support moves into export markets helping UK businesses to become globally competitive.
Enable relocation to a specific area e.g. one with high unemployment.
65
What type of training can the government provide start up businesses?
Financial e.g. small business accounts.
Marketing e.g. how to target market segments.
Operations management e.g. advice on location.
People e.g. how to recruit a suitable workforce.
66
What is the criteria used to classify the size of a business?
The number of employees, turnover and net worth shown on a balance sheet.
67
How do entrepreneurs and small and medium size enterprises (SMEs) impact businesses?
Create competition
Supply goods and services
Offer specialism and expertise
Buy goods and services
68
How do entrepreneurs and small and medium size enterprises (SMEs) impact the economy?
Provide employment
Pay taxes
Social benefits
69
Why is regulation implemented by the government?
To create competitive markets.
Protect the interests of consumers so that they are not exploited by businesses .
Effective regulation will lead to greater choice and lower prices.
Create conditions for continued investment in infrastructure in important areas of the economy.
70
What is regulation?
The creation of rules and sanctions within an industry in order to modify the economic behaviour of firms.
71
What does privatisation lead to?
Monopoly power as most firms privatised operate in markets with barriers to entry such as economies of scale.
72
What is de-regulation?
The opening of markets to new competition through the removal of rules and regulations that create barriers to entry.
73
What are the arguments for de-regulation?
The creation 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
74
How will governments improve the infrastructure to help businesses operate more effectively?
Transport network = improves ease and speed of connections e.g. rail, road and air.
Provision of utilities = ensuring electricity, gas, water etc are adequately supplied.
Provision of information = ensuring access to fast information e.g. broadband.
75
Why does the government and EU use environmental policy?
To control levels of pollution, waste management and climate change.
This will include legislation to reduce the impact of business activities on the environment.
76
What are pollution permits?
Allows businesses to produce a legal level of pollution every year.
If a business does not use all of its permits it can sell them to other businesses that pollute above their allowance.
This provides a financial incentive for businesses to reduce pollution.
77
What is international trade and the benefits?
The exchange of goods and services between countries.
UK trade and investment helps businesses export to foreign markets and helps foreign companies in setting up production in the UK.
It identifies opportunities around the globe, providing advice and networks for UK businesses.
This might include overcoming issues such as cultural and language problems.
78
What is investment appraisal?
The use of numerical techniques to predict the financial outcomes of potential capital investments.
79
What is investment appraisal used for?
Compare different options e.g. Location A or B.
Weighs up the cash outflows i.e. initial investment plus continued costs against the future cash inflows.
These include:
Payback
Net prevent value (NPV)
Average rate of return
80
What is payback?
Calculates how long it will take to pay back the cost of the initial investment. (Faster payback, faster profits)
Shows how many years and months.
81
How can payback be calculated?
1) Calculate during which year the investment cost will be covered.
2)Calculate how many months
82
What are the assumptions of the payback period?
The longer the payback period the greater the degree of risk and uncertainty.
Need to also consider how the investment is being funded e.g. if via a bank loan what will the impact be on the gearing.
Assumes that in the year of payback that the cash inflow is equal each month.
What happens after payback not considered.
83
What is average rate of return?
Calculates average profit as a % of the cost of the initial investment.
84
How can the average rate of return be calculated?
1) Calculate average annual profit
Total net cash flow (inflows - outflows) / Number of years
2) Calculate ARR
Divide average annual profit (Total profit / number of years) / initial investment x100
85
What are the assumptions of the average rate of return?
Allows for easy comparison with other forms of investment.
The higher the ARR the better the proposed investment.
However there is no consideration given to the timings (doesn't show the year) of the inflow.
Must be higher than the base interest rates that banks are offering.
It depends on the qualitative data available.
86
What is net present value?
Calculates the total return on an investment taking into account the time value of money.
It discounts the return each year to recognise that £1 today is not the same as £1 in 3 years time using discount factor.
87
How can NPV be calculated?
1) x each net cash inflow by the relevant discount factor.
2) add up all the annual NPVs to calculate the total return on the investment.
3) - the initial investment
88
What are the assumptions of the NPV?
A positive NPV implies a worthwhile profitable investment.
But is it a big enough return to justify the risk?
Takes into account the time value of money but the discount factor is a prediction.
Inflation is accounted.
May be inaccurate - managers may be bias to get a variable outcome.
89
What is an investment criteria?
A predetermined set of guidelines against which an investment can be judged.
-minimum targets expected from investments
-will partly depend upon culture (risk taker or risk averse)
-may be influenced by the level of confidence in the predicted figures.
90
What are the benefits of using NPV?
Considers all future cash inflows.
Reflects the risks that future cash flow will not be as expected.
A higher discount rate suggests the project is more risky - take a bigger amount of cash.
Different levels of risk can be accounted for by adjusting the discount rate.
91
What are the drawback of NPV?
Most complicated method
Choosing the discount rate is hard, particularly for long projects.
Results can be influenced.
92
What is Porter's 5 force model?
A framework for analysing the nature of competition within an industry.
Helps understand and assess industry profitability and attractiveness.
93
What does Porter's 5 force model include?
Intensity of rivalry within the industry.
Bargaining power of buyers (customers)
Threat of new entrants (depends on barriers to entry e.g. market share)
Bargaining power of suppliers
Threat of substitute products
94
What are the reasons why competitive rivalry and profit vary between industries?
Size (revenue, quantity)
Structure
Distribution channels
Customer needs and wants
Profitability
Growth
Product life cycle
Alternatives for the consumer
95
What are examples of low profit industries?
Airlines
Cafes
96
What are examples of high profit industries?
Soft drinks
Pharmaceuticals
97
Why are profits high in soft drinks?
A "licence to print money"
Customers and suppliers have little power
High brand awareness and loyalty = less desire for substitutes
High barriers to entry e.g. economies of scale
98
How does Porter's model link with industry profitability?
Low industry profits associated with:
strong suppliers
strong customers (buyers)
low entry barriers
many opportunities for substitutes
intense rivalry
High industry profits associated with:
Weak suppliers
Weak customers (buyers)
High entry barriers
Few opportunities for substitutes
Little rivalry
99
What is the threat of new entrants?
If new entrants move into an industry they will gain market share and rivalry will intensify.
The position of existing firms is stronger if there are barriers to entering the market.
If barriers to entry are low then the threat of new entrants will be high.
100
What does a high gearing percentage indicate?
The more leveraged you are as a business - the more sensitive you are to interest rate increases.
At risk if interest rates rise and profits are either low or inconsistent.
Liquidity issue
Reduced financial flexibility - less ability for R+D - may impact innovation.
Investors see it as a sign of instability - may sell shares - lower share price - vulnerable to takeover if plc.
Depends on the nature of the business/industry e.g. property, airlines often high because of initial fixed costs.
101
When is a high gearing % appropriate?
Lower interest rates
Consistent and high profits
If you want to keep control of your business and avoid using shares as a way of expansion.
102
When is a low gearing % more appropriate?
High interest rates - more secure from a liquidity perspective.
Low or inconsistent profits
Happy to expand the shareholder base and have no concerns about giving up control.
103
How can the gearing ratio be reduced?
Reduce non-current liabilities - using cash to pay down loans, mortgages, bonds - but could cause liquidity issue - look at current ratio.
Increase share capital - might mean giving up control by taking on more shareholders.
104
What is Carroll's corporate social responsibility pyramid?
The extent to which a business addresses the concerns and obligations of its wider stakeholders.
The actions a business takes over and above the minimum required by law in addressing societal needs and wants.
105
What does Carroll's CSR pyramid consist of?
Economic responsibilities - responsibility to be profitable, maintain a high level of operational efficiency, maximise sales and minimise costs, make sound strategic decisions, maintain a strong competitive position; and provide investors with adequate and attractive returns to their investments.
Ethical responsibilities - responsibility to be ethical; to do what is right; just and fair and to avoid or minimise harm to stakeholders.
Legal responsibilities - responsibility to obey all laws and adhere to all regulations, this includes environmental and consumer laws.
Philanthropic responsibilities - expectations that businesses will be good corporate citizens; to contribute financial and human resources to the community and to improve the quality of life.
106
What are the strengths of Carroll's CSR pyramid?
Easy to understand
Simple message - CSR has more than one element
Emphasises importance of profits
107
What are the weaknesses of Carroll's CSR pyramid?
Should ethics be at the top?
Businesses don't always do what they claim when it comes to CSR.
108
How does the CSR pyramid link to stakeholders?
Failure to fulfill economic responsibilities will affect employees and owners if the business is not profitable.
Legal responsibilities are vital to the owners but are also necessary for employees and consumers.
Ethical responsibilities will affect all stakeholders but particularly employees, consumers and suppliers.
The major effect of the philanthropic responsibilities is on the local community.
109
How does technology link to marketing decision-making?
Analytics and dynamic pricing - competitive advantage
Audience reach - how social media is being used by businesses - target customers.
Customer relationship management - manages interactions between customers.
110
What is the strategic importance of technology?
Key relationship between technology and strategic success.
Technology may not be a source of competitive advantage if competitors exploit it too.
Rapid technology change can challenge all competitors in a market.
111
How can technological changes provide an opportunity to change business models?
The product being sold:
materials or production processes used
method of delivery e.g. physical vs online
the extent of customisation
How the product is sold:
what distribution channels is used (direct vs intermediaries)
pricing model (subscription vs free)
112
What is the social environment?
The way in which changes in society affect a business' activities
113
How do societal changes link with marketing?
Changes in society are a key driver of change in markets
Segments are often defined based on social groups (e.g. income, age, gender)
Size, structure, and growth of segments closely related to changing social trends.
Marketing has to understand the nature and significance of social trends.
114
What is shareholder value?
Implies that the ultimate measure of a company's success is the extent to which it enriches shareholders.
115
What might cause an increase in the exchange rate?
Increasing demand for exports = higher demand for the currency
Lower demand for imports
Speculation - traders may bet that the exchange rate will rise
An increase in interest rates - making it more attractive to hold the currency
Foreign direct investment - higher demand for the currency
