Analysing the strategic position of a business 7 Flashcards
What is a mission statement?
Sets out a purpose of an organisation and gives its reason for existing.
What do mission statements focus on?
They focus on:
- What the business wants to be
- Values of business
- Range of firms activities
- Importance of different stakeholders
What is a vision statement?
What a business wants to be in the future, more long term
What influences a business’ mission?
- Values of the founders of the business
- Values of business’ employees
- Industry that the business is in
- Society’s views
- Ownership of the business
What are the 8 areas of business activity where useful objectives could be set?
- Market position
- Innovation
- Financial resources
- Physical resources
- Human resources
- Productivity
- Social responsibility
- Profits
What is a strategic decision?
A specific commitment to action
What influences corporate objectives and decisions?
- State of economy
- Global prices
- Technological changes
- Migration
- Business’s ownership
- Business culture
- New leader
- Poor performances
- Pressures from short termism
What is short-termism?
The pressure to deliver quick results which may harm longer term development.
What is the difference between strategy and tactics?
Strategy is long term plan to achieve the business’s vision through corporate objectives.
Tactics are short term and involve strategys
What is SWOT analysis?
Method of strategic analysis which considers the internal and external environments of a business Strengths Weaknesses Opportunities Threats
Benefits of SWOT analysis?
- Low cost and straightforward technique that can be used by all business’s
- Can assist managers to think in a structured way and focus on both the internal operations and its external environment
- Encourages management team to develop plans that are logical in the context of the business’s current position
- Recognise risk
- Combined with other management techniques
- Can be used with a business’s function
Limitations of SWOT analysis?
- Only covers issues that can be classified as S W O T, can be hard to address uncertain or two-sided factors
- Doesn’t provide solutions and further analysis needs to be done
- Managers many underestimate the importance
- Should be based on reliable data, but opinions of those collecting the data
- If data is poor then analysis is likely to be unuseful
What is a balance sheet?
Represents a snapshot of a business’s financial position at a given time. It shows assets and liabilities
Benefits of a balance sheet?
- Shareholders may use balance sheets to assess a business’s potential to generate goods returns in the future.
- Suppliers use for short term analysis of a business’s position
- Managers as an indication of performance of the business. Can use information to make decisions
What are assets?
What business uses its capital to purchase.
Current: turned into cash in less than a year (cash and inventories)
Non-Current: turned into cash in over a year (land)
What is a liability?
Debt owed by the business to organisations or individuals
What factors influence how much working capital a firm holds?
- Volume of sales
- Amount of trade credit offered by the business
- Whether or not the firm is growing
- Length of operating cycle
- Rate of inflation
What is depreciation?
A reduction in the value of an asset over time
What is an income statement?
A financial account which includes revenues and expenditures over a period of time
What 2 main profits are included in an income statement?
Gross and Net
Who would be interested in income statements + why?
Managers - Cost of sales/expenses Turnover/operating profit Shareholders - Operating and net profit Turnover Retained profit Dividends Employees - Wage costs Profits after tax Retained profits HM Revenue and Customs - Net profit before tax Depreciation
How do some companies ‘window dress’?
- Borrow money for short periods of time to improve their cash position just before balance sheet is made
- Sale and leaseback improves a companies cash or liquidity position
- Capitalising expenditure
- On income statements sales may be brought forward to an earlier to boost revenue
How is gross profit calculated?
Revenue - COGS = Gross Profit
Gross profit margin?
Gross profit / Sales revenue x 100
Operating profit?
Gross profit - indirect costs = operating profit
Operating profit margin?
Operating profit / Sales revenue x 100
Net profit?
Operating profit - remaining costs = net profit
Net profit margin?
Net profit / Sales revenue x 100
What is ROCE showing?
Compares the amount of profit earned with the amount of capital employed by the business.
How is ROCE calculated?
operating profit / capital employed x 100
Current ratio?
Current assets / current liabilites
What do gearing ratios show?
Measure the long term liquidity of a business of a business. How firms have raised their long term capital.
Gearing?
non-current liabilities / total equity + non-current liabilities x 100
What does inventory turnover ratio show?
Measures the companies success in converting inventories into sales
Inventory turnover ratio equation?
costs of goods sold / average inventories held
Receivable days?
receivables / revenue x 100
Payable days?
payables / cost of sales x 100
What do businesses need to be aware of with ratio analysis?
- Comparisons
- Historical
- Window dressing
- Limited focus
What is good about ratio analysis?
- Gives insight to business performance
- Comparisons from previous years
- Comparisons with other businesses
What is bad with ratio analysis?
Only considers financial aspects not:
- market
- position of firm in the market
- quality of workforce and team
- economic environment
What is the political environment?
Comprises actions taken by local, national or international authorities that affect the activities of a business.
What is included in the political environment?
- Encouraging enterprise
- Regulation of market
- Country’s infrastructure
- Issues relating to the environment
- International trade
What financial support is available from the government?
Enterprise allowance - a grant and a loan
Funding for lending - banks to borrow BofE at cheaper than market rates for 4 years
Enterprise finance guarantee - allows small businesses to get normal commercial loans
What non-financial support does the government offer?
Advice on:
- Finance and cash flow
- Recruiting and developing staff
- Improving leadership and management skills
- Marketing, attracting and keeping customers
- Making the most of digital technology
How else does the government support enterprise?
- Reducing the number of regulations
- Reducing tax for small businesses
- Supporting innovation through £4.6billion
- Range of schemes to develop new products and processes
- Recruits young business owners to volunteer as enterprise champions
- Works directly with schools and colleges to encourage the use of schemes
What are the intended effects of the policies for businesses?
- Encourage enterprise and innovation in small organisations but can help all
- Influence decision to start or expand a business
- Functional decision making
What is regulation?
The enforcement or principles or rules that result from the passing of a law or series of laws
What are regulators?
There to support those to regulate to comply with the rules in a variety of different business activities
How does regulation affect businesses?
- Create free and fair competition between businesses
- Regulate high profile industries
- Privatised monopolies to protect consumers and other businesses
- Self regulation by businesses
How can regulation create free and fair competition?
- ‘Windfall’ taxes
- Controlling prices
- Restricting rates of return on capital invested by businesses
- Unbundled access
What impact will regulation have on UK businesses?
- Stops them maximising profits by charging higher prices
- Adverse publicity if fined
- Take a range of functional and strategic decisions to reduce impact of threat
- Opt out of tightly regulated markets
- Provides a stable long term environment to operate
- Can facilitate investment
- Reduces barriers to entry
What is infrastructure?
Transport, communication and energy supplies that allow us to do things
What opportunities have investment in infrastructure created?
- Construction industry
- Rail industry
What threats have investment in infrastructure caused?
- New businesses mean other businesses being worse off
- May cause unemployment
- Wind farms are an eyesore
What are implications of international trade?
- Revenue and employment
- Competition
- Easier to sell abroad
- Larger market
- Economies of Scale
- Offshoring
- Takeover
How has UKTI helped?
- organising trade fairs overseas to promote UK exports to potential buyers
- open to export initiative
- financial support for UK exports
- assist businesses and enterprise ensuring that exporters receive integrated support from the UK government by working with other agencies
- political ties
What are the 3 elements of the legal environment?
Competition
Employment of Labour
Environmental Issues
What are the 3 competition laws?
Competition Act 1998
Enterprise Act 2002
Enterprise and Regulatory Reform Act 2013
What does the competition law look at?
Cartel Activity - agreements between businesses not to compete with each other, working together to limit the extent of competition
Abusing a dominant market position - unfair prices, limiting production, unfair and inconsistent terms on different trading partners
Other anti-competitive practices
When can an employee be dismissed fairly?
Where a job no longer exists
Gross misconduct
Failing to carry out duties in a satisfactory manor
Ending of a contract
What are the 2 environmental acts?
Environmental Protection Act 1991 - minimise pollution
Environment Act 1995 - control pollution, conservation or environment and restoring contaminated land and mines
EU and international environmental laws?
- Climate change
- Air, water and land pollution
- Waste management
- Protection of nature, species and biodiversity
- Noise pollution
What is GDP?
Measures the value of a country’s total output of goods and services over a period of time
What is the exchange rate?
The price of one currency expressed in terms of another
What uncertainties can arise from the exchange rate? for businesses?
- Uncertainty over revenue
- Uncertainty regarding quantities likely to be sold
- Uncertainty regarding competitors responses
What’s inflation?
Inflation is the average change in prices
What’s deflation?
The average rate of decreasing prices
How is inflation measured?
CPI, in the basket of goods and services
What is the impact of inflation and deflation on a business?
Managers may anticipate prices and make decisions based off of these, which may actually fuel the price changes
What are the different taxes that businesses pay?
Income tax Corporation tax VAT National insurance payments Customs and excise duties
What influences taxation?
- Raise sufficient revenue to cover government expenditure
- Encourage customers and businesses to increase consumption of some products such as renewable resources or discourage others
- Fiscal Policy
How do taxes impact businesses?
- Try to minimise tax payments within the law through specialist tax lawyers to increase profit margins and dividend payments
- Places with low taxes can encourage foreign investment
- Reducing national insurance may encourage employment or reduce capital investment
What is quantitative easing?
When the central bank buys assets usually financial assets such as government and corporate bonds using money it has created to boost money supply
What is forward guidance?
When the government communicates its own forecasts and expectations of future levels of interest rates in order to influence business and consumer confidence and decision making
What is privatisation?
Transferring organisations from state to the ownership and control of individuals
What is protectionism?
A government policy which favours the use of measures intended to prevent the free entry of imports into a country which can be done in the following ways
How can protectionism be done?
- Tariffs
- Quotas
- Subsidies
- Soft loans
- Technical barriers to trade
- State procurement policies
What does protectionism cause businesses to do?
- Use more expensive suppliers
- Establish production facilities within countries that impose restrictions
- Lobby governments and international bodies to persuade countries to remove barriers to trade
What is globalisation?
Trend for markets to become worldwide
Why has globalisation occured?
- Support from governments and major businesses
- Falling cost of international and transport communications
- Growth of global trading blocs and the reduction of barriers to trade
- Growth of multinational companies
- Increasing global incomes and growing demand for goods and services
Whats good and bad about globalisation?
- Increased sales, revenue and profit
- Cheaper resources
- Economies of scale
- Developing different products for different markets
- Downward pressure on prices
- New producers
- Increased need for investment
- Threat of a takeover
What is an emerging economy?
A country with low incomes per head but one which is enjoying high rates of economic growth
Why are emerging economies important?
- Labour resources
- Large markets
- Rapid growth rates
- Natural resources
What is the risk of emerging economies?
- Economic risks (inflation)
- Political risk
- Risks to brand or corporate image
How can businesses be affected by social change?
- Demand of different goods and services
- The way businesses produce goods and services
What impact does technology have on behaviour?
- Development that synchronise home appliances and control domestic appliances from outside the home
- Wearing technology that monitors factors such as blood pressure
What are the implications of online growth?
- Decrease in store numbers
- Share of online retail sales will increase
- Decreasing employment
- Increase in companies that cease trading
- Lower costs
- Amount of consumers that can be reached by all businesses
- Easy and cheap to start up
What is CSR?
A business philosophy that emphasises that firms should behave as good citizens, they should consider their acts on society as a whole
What are the 4 levels of carroll’s CSR pyramid?
Philanthropic Responsibility
Ethical Responsibilities
Legal Responsibilities
Economic Responsibilities
What is the shareholder concept?
- Meet the responsibilities of shareholders through maximising profits
- This should increase share price and dividend payments
- Encourages short termism and increased risks to generate profits
What is ESV?
Enlightened shareholder value - the idea that companies should pursue shareholder wealth with a long-term orientation that seeks sustainable growth and profits based on responsible attention to all relevant stakeholder interests.
What information do CSR reports include?
- Using sustainable sources of raw materials
- Ensuring suppliers trade responsibility
- Operating an extensive health and safety policy
- Engaging in a continuous process of environmental management and monitoring the effects of production on the environment
- Trading ethically and taking into account morals in decision making
What are the pressures for socially responsible behaviour?
- Consumers expect it and are more aware of business behaviour
- Social media
- Attract employees
- Build a stronger brand
- Support in accessing new markets
- Support growth
- Improve revenue
How has technology impacted businesses?
- Marketing
- Production (CAD/CAM)
- Communication within a business
- HR
4 key elements of digital technology?
- Social Media
- Mobile Technology
- Data analysis
- Cloud computing
What affects the competitive environment?
- Power of rivals and potential rivals
- Customers
- Suppliers
What’s porter’s 5 forces?
Competitive rivalry Bargaining power over suppliers Bargaining power of customers Threat of substitutes Threat of new entrants
When will competitive rivalry be greater?
- Entry to an industry is straightforward
- Easy for customers to move to a substitute
- Little differentiation between products
- Competitors are of similar size
- Competitors have similar corporate strategies
- Costly for a competitor to leave
- Market is not growing
How do firms react to rivalrly?
- Competitive pricing
- Use of promotional deals
- Innovation
What impacts do changes in competitive environment have?
- Seek new markets
- Develop new product ranges
- Seek alliances or mergers
- Suppliers
- Power of buyers
- Substitutes
