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Analysing the strategic position of a business Flashcards

1
Q

What is a mission?

A
  • The overall reason for a business’s existence
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2
Q

What is an objective?

A
  • The goals that are set by the business to achieve their overall mission
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3
Q

What is a mission statement?

A
  • A qualitative description about an organisation
  • It states the overall reason for a business’s existence
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4
Q

Why is a mission statement important?

A
  • It helps stakeholders to understand the intentions of the business
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5
Q

What are corporate objectives?

A
  • The overall objectives of the business
  • They are driven by the business’s mission statement
  • They help to drive the objectives of individual departments within the business (the functional objectives)
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6
Q

What are functional objectives?

A
  • They are the objectives of each department within a business (e.g. the objectives in the finance, HR, operations or marketing departments)
  • They are driven by the corporate objectives
  • They are helpful to ensure that the business’s overall strategy is being implemented so they can achieve their mission
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7
Q

What is a strategy?

A
  • A medium to long term high risk plan of action to achieve the business’s objectives
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8
Q

What is a tactic?

A
  • A short term low risk plan for implementing a strategy
  • They focus on the day to day business activities
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9
Q

What are the distinctions between strategies and tactics?

A

tactics:
- short term
- take action (on the strategy)
- low risk
- reactive to changes in strategy
- flexible

strategy:
- long term
- action plan
- proactive
- rigid

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10
Q

Give some ways that ownership could impact a business’s objectives

A
  • the type of business
  • Style of management used
  • shareholders
  • is it a profiting or non-profit business?
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11
Q

What is short terminism?

A
  • An approach taken by businesses that prioritises short term goals and profits at the potential expense of sustainable long term success
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12
Q

What factors does short-terminism emphasise?

A
  • Share price
  • Revenue growth
  • Gross and operating profit
  • Unit costs and productivity
  • Return on capital employed
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13
Q

Give 3 reasons why short-terminism might occur?

A

1) Pressure from shareholders to get a quick return on their investment
2) Legal requirements to publish financial reports every 3 months (they might want to make the business look good)
3) The CEO or BOD bonuses are linked to the share price performance which incentivises them to boost short term performance so share price increases, meaning they can get more bonuses

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14
Q

How might you spot short terminism?

A
  • If not much money is being invested into research and development
  • If there are frequent changes in a business’s strategy
  • If the business is buying back their own shares to it appears as though demand for shares rises so that the share prices rise meaning share price performance improves (allowing CEO or BOD to recieve more bonus’s)
  • High divident payments rather than reinvesting profits
  • More takeovers than internal growth
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15
Q

What is the risk of short- terminism?

A
  • poor innovation due to lack of investment in research and development
  • poor profits in the long-term
  • employee disengagement
  • puts long term performance at risk (e.g market share, quality, innovation, brand reputation, employee skills, social responsibility
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16
Q

Give some ways that the internal environment could impact a business’s objectives

A
  • the size of the business
  • culture within the business
  • resources the business has available
  • views of leaders and managers
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17
Q

Give some ways that the external environment could impact a business’s objectives

A
  • political factors
  • ecomomic factors
  • social factors
  • technological factors
  • legal factors
  • environmental factors
    -competition
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18
Q

What is SWOT analysis?

A
  • A strategic planning tool that is used to consider a business’s individual circumstances
  • It considers the internal factors that are in the business’s control (S & W) as well as the external factors that are outside the business’s control (O & T)

S = strengths
W = weaknesses
O = opportunities
T = threats

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19
Q

What are the key things to remember about SWOT analysis?

A
  • it is different for every business
  • it is dynamic (constantly changing)
  • must be regularly updated
  • not a guarentee of success
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20
Q

What is a balance sheet?

A
  • It tells you what the business owns, owe and are owed, tells you all of their assets and liabilties
  • It gives information from a particular point in time
  • It tells you where the business is getting its capital from
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21
Q

What are non-current assets?

A
  • Non-liquid assets (meaning they CAN’T be turned into cash easily within 1 year)
  • They are the assets that will be owned or last for more than one year (long- term)
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22
Q

Give some examples of non-current assets

A
  • land and buildings
  • motor vehicles
  • computers
  • furniture
  • machinery
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23
Q

What happens to the value of non-current assets over time?

A
  • Their value depreciates
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24
Q

What are current assets?

A
  • More liquid assets (meaning they CAN be turned into cash easily within 1 year)
  • They are the assets that are expected to be sold, used or exhausted within 1 year
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25
Q

Give some examples of current assets

A
  • Bank loans
  • Cash
  • Recievables
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26
Q

What are current liabilities?

A
  • The money that a business owes in the short-term
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27
Q

Give some examples of current liabilties

A
  • payables
  • loan (short-term)
  • overdraft
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28
Q

What are non-current liabilities?

A
  • The money that a business owes in the long-term
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29
Q

Give an examples of a non-current liability

A
  • Long-term bank loan
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30
Q

How do you calculate net assets?

A

Net assets = current assets - current liabilities

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31
Q

What is equity?

A
  • The value of shares issued by a company
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32
Q

What is total equity the same as?

A
  • Net assets
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33
Q

Give some examples of equity

A
  • shareholder funds
  • retained earnings (reserves)
  • drawings (money or assets taken out of a business)
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34
Q

What is working capital?

A
  • The value of a business’s liquid assets left after their short-term debts have been paid
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35
Q

What is working capital the same as?

A
  • Net current assets (current assets - current liabilities)
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36
Q

What does more capital employed mean?

A
  • The business is more liquid
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37
Q

Why doesn’t a business want too much of its capital employed tied up in inventory or recievables?

A
  • They can’t use it to pay of debts
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38
Q

What is capital employed?

A
  • The amount of capital a firm uses to operate (the capital they have available to pay its day to day debts)
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39
Q

How do you calculate capital employed?

A

Capital employed = non-current liabilities + equity

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40
Q

What is fixed capital expenditure?

A
  • Money used to buy non-current assets (fixed assets, those that are used over and over again to produce good and services)
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41
Q

Why does a business need capital expenditure?

A
  • To start up
  • For growth/expansion
  • to replace worn out equipment
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42
Q

Why might a supplier be interested in the liquidity of a business?

A
  • Because the more liquid a business is the better it will be at paying its debts, helping suppliers to decide whether to offer a business trade credit and if so how much
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43
Q

When considering data from a balance sheet what should you compare to?

A
  • previous years of the business
  • business’s in the same industry
  • business’s in a different industry
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44
Q

What might a quick increase in a business’s non-current assets imply?

A
  • Perhaps they have invested in property or machinery meaning they could be investing in a growth strategy
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45
Q

What does an increase in reserves imply?

A
  • An increase in profits
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46
Q

What is an income statement?

A
  • It describes the income and expenditure of a business over a given period of time (usually 1 year)
  • They can contain data from previous years too for easy comparisons between the years
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47
Q

How do you calculate gross profit?

A

Gross profit = revenue - cost of sales

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48
Q

What does gross profit show?

A
  • The efficiency of sames, how efficiently a firm is manufacturing and selling their product
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49
Q

How do you calculate operating profit?

A

Operating profit = gross profit - operating expenses

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50
Q

What does operating profit show?

A
  • The efficiency of a firms operations
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51
Q

How do you calculate profit before tax?

A

profit before tax = operating profit - finance income

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52
Q

How do you calculate profit for the year?

A

profit for year = operating profit + profit from other activities - net finance income - taxation

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53
Q

How do you calculate gross profit margin?

A

GPM = (GP/revenue) x 100

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54
Q

How do you calculate operating profit margin?

A

OPM = (OP/revenue) x 100

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55
Q

How do you calculate net profit margin?

A

NPM = (NP/revenue) x 100

56
Q

What is a cash flow statement?

A
  • A statement recording the cash coming into (cash inflows) and going out (cash outflows) of a business over time (usually is it a forecast of what will occur in the future)
57
Q

How do you calculate net cash flow?

A

Net cash flow = cash inflows - cash outflows

58
Q

If the closing balance for January is £10,000 then what is the opening balance for February?

A

£10,000
- Because the closing balance is the opening balance of the next period (e.g. the next month)

59
Q

What is financial analysis and what do you use to do it?

A
  • The process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability
  • You can use you balance sheet, income statement and cash flow statement
60
Q

What kind of things doesn’t financial analysis consider?

A
  • quality of your staff
  • market share
  • future targets for sales
  • productivity of the business
  • customer satisfaction
  • legislation
  • the economy
  • the market environment
  • competitors
  • technological change
61
Q

What are the problems with using a balance sheet?

A
  • It is a statement at one point in time, so may not help predict the future
  • It doesn’t tell you about any external factors
  • They don’t value some intangible assets such as the skilll of the workforce
  • If debts are included as an asset it can be misleading
62
Q

What are the problems with using an income statement?

A
  • It doesn’t take into account any external factors
  • Doesn’t consider some internal factors such as staff morale
  • Inflation can distort the true value of revenue, affecting its usefulness
  • It can be deliberately distorted, by bringing forward sales from the next trading period and including them in this one
63
Q

What are the problems with cash flow statements?

A
  • It is unable to account for changing costs (could result in miscalculations)
  • It doesn’t anticipate changes in the external environment or things outside the business’s control
  • The data that’s internal to the business may not be accurate
  • Doesn’t work without goals or a vision in place for the business
64
Q

What is return on capital employed?

A
  • A financial ratio showing how efficiently a business is turning capital into profit
  • How much money is being made by the business compared to how much has been put in
65
Q

What type of ratio is return on capital employed?

A
  • A profitability ratio
66
Q

What does profitability mean?

A
  • Measures the efficiency with which a business makes profit in relation to its size
  • Organisations that are more efficient will realise more profit from their resources than less efficient organisations which spend more to generate the same profit
67
Q

How do you calculate return on capital employed?

A

ROCE = (operating profit or profit before tax / total equity + non-current liabilities) x 100

68
Q

What should we compare our return on capital employed to?

A
  • Previous years of the business
  • Competitors
  • Across industries
  • Interest rates
69
Q

How might a business improve their return on capital employed?

A
  • Improve operating profit faster than capital employed
  • Decrease capital employed but maintain operating profit
70
Q

What is the current ratio?

A
  • A ratio measuring the risk of a business going bankrupt in the short term
71
Q

What type of ratio is the current ratio?

A
  • A liquidity ratio
72
Q

What does it mean for a firm to be solvent?

A
  • It means they are able to meet their financial commitments (pay its debts)
73
Q

When calculating the current ratio what does it mean if current assets divided by current liabilities is less than 1?

A
  • It is very risky (there is likely to be liquidity problem within the business)
74
Q

When calculating the current ratio what does it mean if current assets divided by current liabilities is between 1 and 1.5

A
  • There is a cause for concern
75
Q

When calculating the current ratio what does it mean if current assets divided by current liabilities is between 1.5 and 2?

A
  • This is an acceptable region (about right)
76
Q

When calculating the current ratio what does it mean if current assets divided by current liailities is greater than 2?

A
  • They are probably missing out on an opportunity
  • It probably means they aren’t utilising their resources properly
77
Q

What does a current ratio that is too high imply?

A
  • Good liquidity
  • Poor working capital management
78
Q

What does a current ratio that is too low imply?

A
  • Poor liquidity
  • Poor working capital management
79
Q

How might a business improve its liquidity?

A
  • Decrease stock levels
  • Speed up the collection of debts that are owed to the business (reduce recievable days)
  • Slowing down payments to creditors (increase payable days)
80
Q

What is inventory turnover?

A
  • It compares the cost of all the sales a business makes over the year to the average cost of stock held
  • It measures how efficiently and quickly you are turning inventory into sales
  • The number of times a year a business sells all of its stock
81
Q

What type of ratio is inventory turnover?

A
  • An efficiency ratio
82
Q

How do you calculate inventory turnover?

A

Inventory turnover = (cost of sales / cost of average stock held)

  • Cost of sales at a particular point in time
  • Average stock held throughout the year
83
Q

What type of product may have a large inventory turnover and why?

A
  • Perishable goods because you have to constantly replenish stock
84
Q

How might a business improve its inventory turnover?

A
  • Increase sales
  • Decrease stock held
85
Q

What is aged stock analysis?

A
  • When a business lists all of its stock in age order, so the manager can discount old stock and cut down orders for stock that is sellling slower
  • This helps make sure that old stock gets sold before it becomes obsolete or unsaleable
86
Q

In general is it better to have a high or low inventory turnover and why?

A
  • High because it shows you are quickly converting stock into salesso you have less cash tied up in inventory
87
Q

How might a business obtain a high inventory turnover?

A
  • Using a ‘Just in time’ stock contol system
88
Q

Why is a reduction in inventory turnover probably a bad thing? What may cause this decrease?

A
  • Could suggest you’re not selling stock or marketing very well
  • This could be caused by a switch from a ‘Just in time’ to a ‘Just in case’ management system
89
Q

What factors influence the rate of inventory turnover?

A
  • Nature of product
  • Importance of holding inventory
  • Length of product lifecycle / fashion
  • Inventory management system used
  • Quality of management
  • Variety of products being offered
90
Q

What is meant by revievable (debtor days) days?

A
  • The average number of days it takes for a business to collect debts (e.g from customers)
91
Q

Why might fewer recievable days be better for a business?

A
  • Helps improve cash flow
  • Limits chances of losing out on capital
  • Lower borrowing costs (less short-term borrowing)
  • Helps them look good to suppliers potentially allowing them to negotiate trade credit
  • boosts working capital (recievables increase current assets)
92
Q

Why might longer recievable days be better for the business?

A
  • They can use it to promote their products to customer (e.g. “buy now, pay later”)
93
Q

How do you calculate recievable days?

A

(recievables / revenue) x 365

94
Q

What are payable (creditor) days?

A
  • The average number of days it takes a business to pay its suppliers or other creditors
95
Q

Why might fewer payable days be good for a business?

A
  • Helps them look good to suppliers
  • Shows they are reliable
  • Suppliers might offer trade credit as a result
  • Helps boost relations
96
Q

Why might longer payable days be good for a business?

A
  • It gives them a longer period of time before they have to pay debts back
  • Could improve their cash flow
97
Q

How do you calculate payable days?

A

(payables / cost of sales) x 365

98
Q

What are the limitations of ratio analysis?

A
  • Information could be unreliable
  • It ignores qualitative factors (e.g market conditions, management quality, employee morale etc…)
  • You have to rely on historical data to predict the future (could be inaccurate)
  • Comparing ratios across industries can be misleading (as different markets have different standards)
  • May not be adjusted based on external changes (e.g. inflation)
  • They are usually used for a single period of time so its difficult to spot trends
  • Subject to manipulation
  • Non- financial factors are ignored ( e.g customer satisfaction, competitive positioning, innovation etc…)
  • Don’t consider the individual business and their corporate goals
99
Q

Why are financial ratios important?

A
  • They provide a scientific basis for decision making
  • Provides a guide for assessing the strengths and weaknesses of a firm
  • They can be used alongside other things to assess success and failure
  • They help guide and support decision making
  • Helps with benchmarking
100
Q

What is a core competency?

A
  • Something unique that a business has, or can do, strategically well
  • This can give them a competitive advantage
  • Core competencies lie under strengths when doing SWOT analysis
101
Q

What are the 4 ways that core competencies can arise?

A
  • Collective learning within the business
  • Having the ability to integrate skills and technologies
  • Having the ability to deliver superior products and services
  • Being able to differentiate yourself from the competition
102
Q

What are the 3 conditions that a business needs to meet to have a core competency?

A
  • Has to provide consumer benefits
  • It needs to be difficult for competitors to imitate
  • To be leveraged widely to many products and markets
103
Q

According to the core competencies theory how should a business manage core and non-core competencies?

A
  • Focus on core competencies
  • Outsource non-core competencies
104
Q

What are some criticisms to the core competencies approach?

A
  • It is too enthusiastic about outsourcing which can damage competitiveness
  • Difficult to identify core competencies that are genuinely unique
  • Could make businesses too confident about their skills (core competencies)
105
Q

Name some non-financial objectives

A
  • Customer satisfaction
  • High employee engagement and morale
  • Environmentally responsible
  • Quality products or services
  • Growth
  • Survival
  • Social and ethical objectives
  • Brand reputation
106
Q

Why is it difficult using non-financial methods of assessing performance?

A
  • There is no standard to compare against (not really)
  • Can be subjective to opinions
  • They often reflect what has happened rather than what will happen
  • Qualitative measures may be more important
107
Q

What is Elkington’s tripple bottom line?

A
  • A model used to measure performance in a more balanced way
  • It considers the future sustainability of the business
  • It assesses business performance based on: profit, people and planet
  • It takes into account that profit is not the only factor that can measure success
  • It aims to measure the financial, social and environmental performance of a business over a period of time
108
Q

What is the value of Elkington’s tripple bottom line?

A
  • Encourages businesses to think beyond profit and measure performance in other way too
  • Encourages CSR reporting
  • supports measurement of environmental impact
109
Q

What are the problems with Elkington’s tripple bottom line?

A
  • It isn’t very useful as an overall measure of business performance
  • Difficult to make comparisions due to lack of consistent and reliable methods of measuring people and planet
  • It isn’t a legal requirement to report it
110
Q

What is meant by competition legislation?

A
  • Laws and regulations that businesses must comply with in relation to how they compete in markets
111
Q

What is the purpose of competition laws?

A
  • To promote fair compeititon
  • Stop the abuse of customers (by businesses)
  • Prevents monopoly or oligopoly power
  • Widen customer choices for products and services (variety)
  • Encourages innovation
  • Makes it easier for new entrants to the market
112
Q

What are businesses not allowed to do under the competition law?

A
  • Agree prices with competitors
  • Form a cartel
  • Limit production to reduce prices so they can reduce competition
  • Partition markets or customers between eachother
  • Agree with competitors what purchace price will be offered to suppliers
  • Cut down prices below costs to force another weaker competitor out of the market
113
Q

Why are mergers or takeovers sometimes blocked?

A
  • If the businesses are too big them merging or taking over another business could give them too much power (e.g. tesco and asda can’t merge)
114
Q

Why is blocking some mergers or takeovers a good thing?

A
  • To stop one (or two) businesses having control over the market prices
  • Encourage competition
  • Protect customers
  • Help customers recieve a variety of products and services
  • Prevent monopolies or oligopolies
115
Q

What is a cartel?

A
  • An agreement between businesses that doesn’t benefit customers e.g. fixing prices, restricting supply of goods, divide up customers
116
Q

What is the CMA and what do they do?

A
  • The competition and markets authority
  • They regulate business competition and enforce competition laws to protect consumers
117
Q

What are the benefits of competition?

A
  • Encourages innovation
  • Drives down costs and prices
  • Increases variety for customers
  • Helps improve quality (due to trying to be better than competitors)
  • Businesses can gain competitive advantages
118
Q

How does the equality act (2010) protect employees in the workplace?

A
  • It protects them from discrimination based on:
  • Age
  • Disability
  • Gender reassignment
  • Marrige or civil partnership
  • Pregnancy or maternity
  • Race
  • Religion or belief
  • Sex
  • Sexual orientation
119
Q

What is the difference between direct and indirect discrimination?

A
  • Direct discrimintion is treating someone unfairly or differently because of a protected characteristic
  • Indirect competition is when everyone is treated the same but it has a worse effect on others (e.g. all employees must not wear head coverings because this could indirectly discriminate against some religions)
120
Q

How does the discrimination law affect recruitment in a business?

A
  • They aren’t allowed to state in job adverts what age, race, gender, etc… a person must be to get the job (only if it is a requirement e.g a female is needed to clean female toilets)
  • They have to make decisions about who to employee without discriminating and they have to be able to justify their choice
121
Q

Why is avoiding discrimination when recruiting employees a good thing?

A
  • It ensures fairness
  • Creates a more diverse workforce
  • Helps gain a wider range of skills, talents and experiences
122
Q

How does the discimination law affect how business pay employees?

A
  • They have to pay male and female employees the same pay for work of equal value
  • Males and females are entitiled to the same benefits (e.g. company car)
123
Q

How might paying employees unfairly affect the workplace?

A
  • Reduces quality of work
  • Lack of motivation
  • Fall in productivity
  • Poor staff retention
124
Q

How does the discimination law affect promotions and redundancies in a business?

A
  • Ensures everyone has the same opportunity to get promoted
  • If they need to make staff redundant they aren’t allowed to be discriminatory when doing so
125
Q

What is the purpose of a tribunal?

A
  • If employees feel that they have been treated unfairly by their employers they can make a claim to a tribunal
  • A tribunal judge helps settle the case
  • The employer might have to pay compensation or give the employee their job back if they have unfairly dismissed them
126
Q

What is secondary picketing?

A
  • When workers protest outside of a business, that doesn’t employ them, but does business with their employer
  • They do this in the hope that the business will convince their employer to solve their problem
127
Q

What is are the terms an employment contract?

A
  • Employees have the right to a safe working environment
  • Employees are entitiled to 28 days of paid holiday
  • Employees have the right to paid maternity and paternity leave
  • Employees have to attend work when they’re supposed to, and be on time
  • Employees must be willing to carry out any reasonable task that is asked of them
128
Q

Why is the state pension age rising?

A
  • People are living for longer and so can work for more of their life
129
Q

Why do we have environmental laws?

A
  • To influence the behaviour of individuals and businesses in order to reduce the negative impacts on the natural environment
130
Q

What rules MUST a business comply with in relation to the environment law?

A
  • Control and limit their emission levels in the sea, rivers and the air
  • They should correctly store, dispose and recover waste
  • Storing and handling hazardous substances correctly
  • Adopt a more sustainable way of packaging goods
  • Dispose of waste water in the right way
131
Q

Why does a business comply with environmental laws?

A
  • Avoid costs (fines)
  • Avoid damaged reputation
  • To benefit society positively
132
Q

What does sustainability mean?

A
  • To act in a way that benefits the future
  • So it has a positive impact on the environment in the long term
133
Q

What are some of the key features of the European Union?

A
  • 27 countries
    -Use a single currency (not all countries)
  • Allows for the free movement of goods, capital, enterprise, people and workers
  • The UK joined in 1973
  • The UK voted to leave in 2016
134
Q

What are the benefits of the EU?

A
  • No tarriffs, quotas or boarder restrictions
  • Lower import costs for businesses
  • Level playing field
  • Wide target market for exports
  • Stronger consumer protection laws
  • Strong employment rights protection
135
Q

What are the drawbacks of the EU?

A
  • Use of single currency
  • We can’t sign our own trade deals
  • Government can’t give subsidies to key sectors(financial help)
  • Bureaucracy and red tape (lots of rules and regulations)
136
Q
A
137
Q
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Business (10 decks)

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