Paper 2- Theme 3.1 Business objectives and strategy ✅ Flashcards
define SWOT analysis
a method used to analyse a business’ internal strengths & weaknesses and external opportunities & threats, and help with strategic planning
define Key Performance indicators
what are they used for
examples
• quantifiable measures of internal aspects of business performance that are determinants in whether the business is currently successful
- considered to ensure a robust identification of internal strengths and weaknesses
- can also be compared against previous years, competitors or industry averages
examples: FROM ALL FUNCTIONS (hr, finance, marketing, sales, - sales volume - unit cost - market capitalisation - market share - capacity utilisation - staff turnover - brand value
define opportunity
favourable external factors, out of a business’ control, that could give the firm a competitive advantage or economic benefit, if pursued
- external
define threat
external factors that may prove detrimental to business finance or provide competitive disadvantage, if not dealt with accordingly
- external
define strengths
an aspect of business’ operations or performance that has competitive advantage or is superior to other aspects of their own business
- internal
define weakness
an aspect of a business’ operations or performance that has competitive disadvantage or inferior to other aspects of their business
- internal
examples of external influences
- fiscal policy (interest rates, inflation)
- legislation & protectionist measures
- monetary policy (government spending and taxes)
- unemployment rate
- external shocks (unpredictable natural disasters or war)
- changes in market - consumer trends, changes in demographic
- changes in competition
- technological changes
- supplier
- exchange rate
strengths of SWOT analysis
•identify threats and encourage strategic planning to deal with
• highlight opportunities
—> first mover advantage
• identifying core SWOT leads to fact-based analysis
—> fresh perspectives new ideas
• encourages strategic planning of turning weaknesses to strengths (long termist)
- > or focus on maximising strengths (short termist)
- ——> however this could also create LT sustainable competitive advantage
• help understand where competitive advantage of business is
- > or where competitors are better
- — greater insight when using consultative approach
weakness of SWOT analysis
• oversimplifies the factors influencing the opportunities or threats facing the business
—-> may lack comprehension in strategy
•success dependent on managerial skill to interpret and generate strategy
—> invest into recruitment and training for success
• time consuming and complicated
—.> not all might be used
•depends on accuracy of information
- –> if primary, higher costs
- –> if secondary, available to rivals and less reliable
- snapshot of current situation
- may restrict growth if mainly focusing on nullifying threats
define market capitalisation
- how much it would cost to buy all shares in business
define PESTLE analysis
a method used to analyse the external environment that a business operates in
- and the P E S T L and E factors that may influence business operations
list PESTLE factors
Political Economic Social Technological Legal Environmental
define each PESTLE factor
Political - how government policies could affect business
Economic - how the state of the economy may affect business
Social - how factors about the demographic and behaviour of customers may affect business
Technological - how changes in technology may affect business
Legal - how legislation changes may affect business
Environmental - how environmental issues and damage may affect business
political factors
• government spending • industry regulations • government policy - competition policy - monetary policy - fiscal policy
economic factors
- business cycle
- consumer spending
- employment rates
- exchange rates
- inflation
- interest rates
- economic growth
social factors
- consumer tastes and trends
- demographic changes (currently ageing)
- changing lifestyles (healthy eating)
- pressure groups impact
technological factors
- new production processes
- mobile technology
- disruptive technologies
- big data (used for finding solutions in masses of information as markets expand)
define destructive technologies
- innovations with a product or service that is likely to create a new market and eventually transform an existing market
legal factors
- legislation
- –> employment (wages, rights)
- –> health and safety
- –> environmental
- protectionist measures
environmental factors
- pressure to become sustainable
- —> from media, pressure groups and because of resource depletion
- pressure to limit pollution and emissions
- pressure to dispose waste in a environmentally friendly way
different between policies and legislation
policies are guidelines to achieve an outcome
legislation is law
strengths of PESTLE analysis
• encourages research of wider business environment
1 ——> can anticipate future business threats ….. develop contingency plans
2 —-> can spot potential business opportunities ….. first mover advantage
• can assess possible implications of entering a new market
—> less risk
• more accurate overview of external influences than SWOT
—> used together to assess extent of opportunities and threats further
•provides simple, easy to use framework for analysis
—> minimal cost on training
•encourages development of strategic thinking in organisation
—> empowers workers as ideas may be used, increased motivation
weaknesses of a PESTLE analysis
- time consuming and expensive, if use primary
- –> if use secondary may not be accurate to base strategies off
- constantly changing global dynamics may only provide snapshot (needs to be repeated)
- –> also hard to predict changes, due to pace of change of environments
- too much information collected may lead to ‘paralysis by analysis’ (struggle making decisions due to overthinking)
- –> or not enough information leads to oversimplification
- must provide critical and unbiased view about environment operated in
- —> must recruit and train highly skilled staff
what does changing competitive environment mean
- means markets are constantly evolving
- many businesses enter and leave market
define Porters 5 forces
a framework used to analyse the nature of competition in a market
- it considers 5 competitive forces that affect the intensity of competition in an industry
state porters 5 suggested forces
- threat of new entrants
- bargaining power of suppliers
- bargaining power of buyers
- threat of substitute products
- rivalry amongst competitors
factors affecting how industries are different
- size
- growth
- structure
- distribution
- customer needs and wants
- profitability
position of each of the forces in a low profit industry (e.g. airlines)
- high threat of new entrants (low barriers to entry because no firm has huge profit margins)
- strong customers
- strong suppliers
- high threat of substitutes
- intense rivalry
define threat of new entrants
effect of high threat of new entrants
potential effect of a new business entering the market
(high barriers of entry = business in stronger position)
- lose market share to them
- increase rivalry
- barriers of entry determine the strength of the position of the business in the current market
define barriers to entry
examples
obstacles that a business has to face when it is considering establishing themselves and competing in a new market
—> reduces likelihood they enter market
e. g.
- economies of scale (must have bargaining power of supplier and have high output to compete in some markets)
- brand loyalty to current businesses, and reputation
- technology and innovation
- current business’ expertise and knowledge in current market
- legislation
- set up costs
define bargaining power of suppliers
effect of high bargaining power of suppliers
how much negotiation power a supplier has over those who buy from them
- may sell at higher price (reduce profits)
- sell with less or no credit (worsen cashflow, limit working capital)
—> may restrict strategy —> can’t be a cost leader
factors affecting the bargaining power of supplier
- number of big competing suppliers
- scarcity or uniqueness of what they are supplying
- size of supplier
- size of business purchasing from them
- cost of switching supplier is high (e.g. contracts in place)
- ethical stance
define bargaining power of customers
effect of high bargaining power of customers
extent to which customers are able to pressure businesses to drive down the price
- forces businesses to drive down price
- forces businesses to improve quality or differentiate from other firms
factors affecting the bargaining power of customers
- availability of substitutes
- necessity of product (e.g. normal goods)
- volume of orders
- cost of switching to other products/suppliers
define threat of substitute products
effect of high threat of substitute products
another firm’s product that meets the same customers needs, in the same market, as a businesses’ own product
- drive for differentiation
- may drive costs down
factors affecting the level of threat of substitutes
- price of their product in comparison
- level of customer loyalty, reputation and industry expertise
- availability of substitute products
• technological change is rapidly increasing number of substitutes
define rivalry amongst competitors
- the level of competition between existing firms in a market
- —- the central factor in Porter’s Five Forces analysis
effect on strategy for business in highly rivalled market
- spend on innovation and product improvements
- price competition: competitive pricing
OR - increase non price competition : advertising, sales promotion
—–> all result in higher costs and lower profit margins
determinants of the level of rivalry amongst competitors in a market
- numbers of competitors in the market (more competitors, higher competition)
- —> and substitutes
- market growth (high rivalry in declining or slow growth markets, as they can only grow through taking each others market share)
- structure of cost –> high fixed cost % makes it hard to exit market, so more competitors
- –> high fixed costs % also leads to high competition on volume, as profit margins are lower
- level of differentiation and brand loyalty
- level of overseas competition
strengths of Porter’s Five Forces analysis
- used by business, in alignment with Ansoff’s Matrix, to analyse the attractiveness of new industries
- can assess the security of their market share and potential growth
- —> identify threats, or opportunities for a new market
- help estimate current competition and risk in industry
- –> inform decision making of where to protect and where to grow its products
- identify opportunities to expand business {through vertical integration e.g (acquire supplier)}
weaknesses of Porter’s Five Forces analysis
- doesn’t consider external forces that may affect market forces (assume they are static)
- —-> e.g PESTLE
- only provides snapshot of market, ALSO with increasing technology makes substitutes and threats to entry more dynamic
- impractical for large firms who operate in many different markets, and have a large product portfolio
- lack of statistical support as to which force is most important, subjective, up to management skillset
