Topic 7 - Analysing The Strategic Position Of A Business Flashcards

Question

What does current ratio allow a business to explore, and how do you solve it ?

Answer 1

The current ratio calculation allows a business to explore its liquidity by comparing current assets with current liabilities. Current ratio can be calculated using: Current assets ÷ current liabilities

Answer 2

Gearing calculations can be used to calculate the proportion of long-term funding which comes from debt. Gearing can be calculated: (Non-current liabilities / capital employed) x 100

Answer 3

Payables days can be used to calculate the time taken for a business to pay those it owes money to. Payables days can be calculated: (Payables ÷ cost of sales) × 365

Answer 4

Receivables days can be used to calculate the time taken for a business to collect the money that it is owed. Receivables days can be calculated: (Receivables ÷ revenue) × 365

Answer 5

Using financial ratios allows a business to compare performance across years. Using financial ratios allows a business to compare its performance to competitors but only if their information is available.

Answer 6

Using financial ratios does not take into consideration non-financial information such as changes in the external environment.

Answer 7

A sole trader may use ratios to calculate performance, but these will not reflect the possible risk of a competitor opening within the next month on the same street.

Answer 8

From the operations function From the marketing function From the human resources function

Answer 9

Labour productivity can be used Capacity and capacity utilisation can be used Quality measures can be used

Answer 10

Sales forecasts can be used Brand loyalty and satisfaction data can be used

Answer 11

Data from different departments, teams or divisions may be compared to indicate performance. Data from different years may be compared to indicate performance. Data from the business may be compared to competitor data, if available, to indicate performance. Data from the business may be compared to the industry to indicate performance.

Answer 12

Absenteeism rates can be used to provide information on a business’ strengths and weaknesses. Labour costs per unit of production can be used to provide information on a business’ strengths and weaknesses. Labour turnover can be used to provide information on a business’ strengths and weaknesses. Employee costs can be used to provide information on a business’ strengths and weaknesses.

Answer 13

Using non-financial information to assess performance may not provide a full overview of business performance. Non-financial information may need to be combined with financial information in order to get an overview of the business’ performance. Using financial and non-financial information to assess business performance may not take into account additional factors such as the business’ impact on the environment, or its employee’s wellbeing

Answer 14

Core competences refer to a business’ ability to combine its skills, knowledge, and processes to provide it with an advantage over competitors, known as competitive advantage

Answer 15

A business’ combination of skills, knowledge and processes will often deliver a unique selling point which is difficult to imitate by competitors.

Answer 16

Core competences allow businesses to attract and retain customers, even in a competitive market. Core competences allow businesses to add value throughout their production process. For example, Apple’s reputation as an innovative technology manufacturer allows it to add value to the products it creates, as customers are usually happy to pay a higher price for a product associated with the brand.

Answer 17

Outsourcing products can lead to quality issues as some production processes are passed to third parties who may seek to cut costs during production at the expense of quality.

Answer 18

The term 'core competence' was first used by Hamel & Prahalad's 1990 paper. They argued that big businesses should be viewed as a collection of core competences (ability to do stuff), rather than a group of businesses or industries.

Answer 19

Rumelt (1974) had previously argued that diversified businesses who operated in lots of industries performed better if the same core competences or core activities were shared across all the industries

Answer 20

Kaplan and Norton’s balanced scorecard seeks to provide managers and leaders with a framework with which business performance can be assessed. (Performance assessment)

Answer 21

financial performance customer performance internal process performance learning and growth performance

Answer 22

revenue cash flow profit profitability

Answer 23

brand loyalty customer retention customer satisfaction

Answer 24

productivity capacity quality

Answer 25

employee engagement labour turnover retention training induction provision

Answer 26

As Kaplan and Norton state that a business must consider its performance in all four of these areas, it is suggested that profit and financial performance alone is not the only measure of business performance which should be considered by managers and leaders. For example, if Foxconn assessed its performance using the balanced scorecard, employee engagement concerns may be identified which affect the business’ overall performance, despite profit and profitability data indicating greater performance within the area of finance.

Answer 27

The balanced scorecard provides leaders and managers with a framework to assess and measure the performance of different aspects of the business.

Answer 28

Elkington’s Triple Bottom Line theory also provides managers and leaders with a framework to assess business performance based upon the business’ profit, but also on its impact on people and the planet:

Answer 29

In Elkington’s Triple Bottom Line, the business’ profit is considered as an important element of determining the business’ overall performance; however Elkington states that such profit should also be used to support the community.

Answer 30

In Elkington’s Triple Bottom Line, the business’ impact on the people affected by the business, such as employees and customers, is considered as an important element of determining the business’ overall performance.

Answer 31

In Elkington’s Triple Bottom Line, the business’ impact on the planet is considered as an important element of determining the business’ overall performance.

Answer 32

Profit Impact on people Impact on the planet

Answer 33

Explain the break-even point The break-even point states how many products a business must sell so that the revenue it generates covers its’ costs. At the break-even point, the business does not make a profit or a loss. A business only makes a profit if it sells more than this number of units. Often, a new business’ aim is to survive and to do this the business should be trying to sell enough products to meet the break-even point. Argument that it is useful This suggests that break-even analysis is useful for businesses who have the goal of survival. Break-even can also be used to conduct ‘what if’ analysis. The owner of the business could manipulate the inputs to the breakeven calculation to see the impact of the changes on the break-even point. For example, when deciding which property to rent, the fixed cost value could be changed to see the break-even point in different locations/premises. Alternatively, when deciding what price to charge, this analysis tool could be used, alongside market research, to again see how many products would need to be sold. A new business may not have this data, so making decisions with the aim of reaching breakeven can be helpful. Argument that it is useless One significant assumption of the break-even analysis is that the selling price remains constant and all products are sold at the same price. If a business sells a product at a discount or uses promotional techniques such as BOGOF (buy one get one free), then the number of units that need to be sold will be different to the analysis. A new business needs to attract customers and, in order to do this, they may use promotional techniques such as BOGOF, money off first spend vouchers, or free samples to entice customers. During the first few weeks or months, the owner can gather data on the success of their products. As a result of this they may wish to modify the pricing. Break-even analysis cannot account for the complexities of operating as a responsive business and this reduces the usefulness of the tool.

Answer 34

Explain efficiency ratios Efficiency ratios focus on how well the business is using the resources it has. It is important to note that figures should be contextualised by comparing with previous years or competitors. Receivable days calculates the number of days a business waits to receive payment from a customer after delivering the product. Trade receivables show the number of days between the business receiving the product and paying the supplier. Ideally, for cash flow, businesses want to have a lower receivable days figure and to negotiate a higher payable days number. Receivable days The manufacturer waits 34 days to collect payment from debtors, which is much higher than the competitor who only has to wait for 20 days. As a new business, cash is incredibly important as the chance of insolvency is higher than when a business is established and profitable. Perhaps, at the moment, the business does not have the power to force quicker payments and may attract customers by offering longer trade credit terms. Over time, the business should try to reduce the receivable days to ensure the stability of its cash flow. Payable days As with receivables, the manufacturer is not as efficient as the competitor as it pays creditors much quicker (17 days in comparison to 45). The business may not have established relationships with suppliers for them to allow longer trade credit terms and they may be trying to develop these over time. The businesses needs to be cautious as for every time they receive payment, they are paying out twice to suppliers. This will negatively affect the liquidity and cash flow position, potentially leading to a shortfall of cash. To improve this the manufacturer needs to negotiate longer payable days and shorter receivables.

Answer 35

Political changes Environmental changes Social changes Technological changes Legal changes Ethical changes Competitor changes

Answer 36

Political and legal changes can present businesses with opportunities and threats. Political and legal changes can affect decision making at the corporate level and functional or departmental level. For example, the introduction of the National Living Wage presented a threat for many businesses as total costs increased.

Answer 37

Legislation about competition and competitive practices can affect a business. Competition laws ban businesses from acquiring or taking over other businesses if competition will be substantially reduced. Legislation about employment regulations can affect a business. Working time regulations and the equality act state provisions a business must make for supporting and protecting employees. Legislation related to environmental protection can affect a business. Laws around pollution provide guidance in terms of the pollution created by businesses and these laws must be complied with.

Answer 38

VW was accused of an environmental scandal which failed to comply with environmental regulations. In 2016 Three’s takeover of mobile operator, O2 was banned on the basis that competition would be reduced substantially and this could lead to the exploitation of consumers.

Answer 39

Enterprise is a political factor which involves national and local schemes to support new, start-up businesses. Regulators exist to ensure businesses are following industry rules so that consumers are not taken advantage of. Infrastructure is a political factor and relates to the transport systems and communications networks used to support trade and supply. International trade is a political factor and refers to the trading of goods and services internationally.

Answer 40

Gross Domestic Product Taxation Exchange rates Inflation Government policies Trade

Answer 41

Gross Domestic Product (GDP) is the value of goods and services produced by a country during a certain period. Changes in GDP can affect a business’ decision making as GDP growth is likely to coincide with an increase in demand which businesses must respond to. For example, in a GDP boom, a business may make a strategic decision to diversify and enter a new market.

Answer 42

Taxation refers to the tax paid by businesses on any profits made. Changes in taxation can affect a business’ decision making. For example, increased taxation will reduce profit after tax which can affect strategic investment decisions. If there is less money left over to invest, then the business is likely to have to prioritise better.

Answer 43

Inflation refers to the general increase in price levels and the reduction in the real value of money. Changes in inflation can affect the decision-making process of a business because rising costs may mean that a business has to increase its prices to maintain its profits at the same level.

Answer 44

Fiscal policy refers to the use of government expenditure and taxation to influence demand. Changes in government expenditure and taxation can increase or decrease demand which businesses may need to respond to. Monetary policy (MPC not government) refers to the controlling of money supply and interest rates to control economic activity. Increasing interest rates may affect business decision making as consumers may increase their savings and therefore decrease spending which can affect demand for a business’ products.

Answer 45

Open trade and protectionism refer to the ability of countries to trade either with or without barriers to trade. Protectionist measures can reduce international trade which can affect a business importing and exporting goods and services. For example, banana sellers are affected by protectionist measures governing the trade of bananas and this affects supply and cost.

Answer 46

Globalisation is the increasing trend for individual markets to become unified and worldwide

Answer 47

Globalisation offers businesses opportunities to expand and target international markets

Answer 48

Globalisation increases competition for local businesses and this can reduce market share and sales revenue.

Answer 49

Targeting emerging economies can help a business to extend the product life cycle for its goods and services. Emerging economies offer business new markets to target which can increase sales volume. Emerging economies offer businesses increased access to labour resources often at a reduced cost compared to the labour market in the business’ home country. For example, a clothing manufacturer can benefit from offshoring production to an emerging economy as labour may be cheaper.

Answer 50

Glocalisation (a word made by combining globalisation & localization) TNCs use glocalisation to help spread globalisation. This means that they adapt their products to the needs of local consumers. For example, lots of global food TNCs offer a different menu in India where beef is not eaten. Since 2012, McDonald’s has served the McVeggie and McSpicy Paneer in India.

Answer 51

Sometimes, glocalisation reflects the different laws in different countries. For example, BMW makes right-hand drive cars for the UK because we drive on the left whereas, in Germany, cars are left-hand drive.

Answer 52

As countries develop and their populations have higher disposable incomes to spend on ‘luxury’ items, TNCs are able to access new markets and sell their products in these countries.

Answer 53

They take advantage of the removal of barriers to trade to earn more profit and increase their market share. TNCs use outsourcing and offshoring to make sure that they are able to maximise their profits by minimising the costs of producing their goods.

Answer 54

Bananas are mainly grown within the tropics and production is centred on Latin America (80% of exports), West Africa and parts of Asia. Other producers include Asian countries (e.g. the Philippines) and west African countries (e.g. Cote d’Ivoire). Production is dominated by large American TNCs (e.g. Chiquita and Del Monte) Some production is sold directly to supermarkets. Organic and Fairtrade produce is sold at a higher price. The largest importers are the EU countries and the USA.

Answer 55

During 2016, global car exports amounted to over US$720 billion. World production of cars is dominated by huge TNCs, based in the USA, Germany, Japan and South Korea. The main importers and exporters of cars are all developed countries (Europe, USA) or emerging economies (India, China, middle eastern countries). The leading importer is the USA. The leading exporter is Germany. The bulk of world trade in cars is between rich countries where people have high disposable incomes. China and India are major producers of cars, but do not export significant amounts.

Answer 56

Offshoring is when a TNC moves part of its production overseas

Answer 57

BT outsources some of its call centre work to India to benefit from lower labour costs there. The large English-speaking population of India means that it is possible to have the call-centres of a British TNC in another country.

Answer 58

Nike produces all of its trainers in various locations abroad. China has the most factories but there are also production plants in Thailand, South Korea, Vietnam and India.

Answer 59

Explain interest rates Interest can either be charged on consumers' borrowing on things like mortgages, or it can be earned on savings held with banks. People with more savings want high interest rates so that they earn more interest on their savings. Whereas, borrowers want lower rates as this reduces the interest that they have to pay to the financial institutions that have lent them money. Explain interest rates in the UK In the UK, the Bank of England uses monetary policy to control inflation and stabilise the UK’s economy. One of the main tools it uses is the Bank Rate, which is the interest rate that the Bank of England offers to financial institutions. This rate affects the rate that financial institutions (banks) then offer to the public. When interest rates are low, people spend more and the opposite is true when rates are increased. Analysis for individuals who are saving When interest rates decrease, people with savings receive a smaller reward for saving. Therefore, the incentive to save money is lower. This is particularly true if the interest rate is lower than inflation. If inflation is higher than interest rates, the amount of real goods that one can buy with their savings falls over time. As a result, low interest rates encourage people to spend their disposable income. There will be increased demand for luxury goods, such as Mercedes cars, during this time. Analysis for individuals who are borrowing Low interest rates allow consumers to borrow money and pay back a relatively small charge. This makes credit more affordable. This can make people feel wealthier. For luxury businesses, this is positive as consumers are more likely to spend money. The car industry promotes using credit when buying a car. So lower interest rates makes buying a car more affordable because interest payments will be lower. Therefore, not only are consumers more inclined to purchase a car, they are likely to purchase a more extravagant brand. Judgement Reducing interest rates will have a positive impact on Mercedes sales and on Daimler. Regardless of an individual’s circumstances, low interest rates encourage people to spend their disposable income and even take out more credit. During periods of low interest and high consumer confidence, consumers feel increased wealth and are more likely to splash out on non-essential luxury goods, such as cars.

Answer 60

Urbanisation describes people moving from rural areas to urban areas. People usually move to urban areas because there are more job opportunities there.

Answer 61

Migration describes people moving from one country to another, with the intention of residing and accessing employment. For example, increasing migration has increased demand for cultural food shops and this can reduce demand for groceries from established retailers.

Answer 62

Consumer lifestyle changes occur when buying habits or spending patterns change. For example, Morrisons has introduced online grocery shopping to respond to changes in consumer expectations.

Answer 63

Social changes can include the growth of e-commerce and the changes in buying habits as people begin to expect the availability of e-commerce platforms to complete online transactions.

Answer 64

The UK’s population is ageing, and as healthcare improves and people live longer, demand for products and services can change. For example, Saga holidays, which targets over 50s with holiday packages, may need to increase its capacity as demand from over 50s increases for its holiday products.

Answer 65

The UK’s population is expanding as birth rates continue to increase. An expanding population will increase demand for products and services and businesses must be able to respond to these increases to maintain market share. For example, as the population increases, food producers must be able to increase production to meet demand.

Answer 66

Migration, the movement of people between countries, can affect demand for products and services.

Answer 67

As consumer awareness of healthy eating continues to increase, consumers may demand healthier food options. For example, McDonalds must respond to these changes in demand and in June 2018 introduced a healthier children’s menu. Burger King introduced a new Whopper made with artificial meat from the company Impossible Foods.

Answer 68

As consumer awareness of wellbeing and fitness continues to increase, consumer demand for fitness products is likely to increase. For example Fitbits, will increase, and this may affect businesses such as Vue as consumers change their hobbies and habits.

Answer 69

As consumers take advantage of advancements in e-commerce, demand for online shopping will increase and businesses must be responsive to these changes. For example, Morrisons only introduced online shopping several years after their competitors did. They initially partnered with Ocado to do their online food retail business.

Answer 70

As social media use continues to grow, businesses must adapt customer service procedures to reflect changes in consumer expectations. For example, consumers expect to be able to contact businesses through social media and businesses must respond by updating their processes to offer this contact method if they are to maintain competitiveness.

Answer 71

E-commerce

Answer 72

Corporate social responsibility, known as CSR, is a term used to describe an approach whereby businesses seek to exceed basic legal requirements by considering their impact on society

Answer 73

Satisfying employees Satisfying customers Satisfying shareholders Satisfying suppliers Satisfying the community

Answer 74

by offering job security, safe working conditions and fair wages

Answer 75

by offering reliable products, fairly priced, which exceed legal safety requirements.

Answer 76

by increasing share price and through payment of stable and regular dividends.

Answer 77

through paying fair prices, making regular on-time payments and offering exclusivity

Answer 78

Businesses focussing on their social responsibilities may seek to satisfy the community by offering employment and funding restoration projects and community facilities. For example, XEROX offers several initiatives to support local communities including the Green World Alliance, the Electronic Industry Citizen Coalition and the XEROX Community Involvement Program. These commitments to social responsibility indicate the value XEROX places on social responsibility above and beyond its pursuit of profit and its obligation to meet basic legal requirements.

Answer 79

Businesses focussing on their social responsibilities may seek to satisfy the community by offering employment and funding restoration projects and community facilities. For example, XEROX offers several initiatives to support local communities including the Green World Alliance, the Electronic Industry Citizen Coalition and the XEROX Community Involvement Program. These commitments to social responsibility indicate the value XEROX places on social responsibility above and beyond its pursuit of profit and its obligation to meet basic legal requirements.

Answer 80

CSR can increase a business’ costs through paying for initiatives, offering employees fair wages and agreeing to pay suppliers fair prices. CSR, though initially increases costs, can attract customers to the business and increase market share and sales revenue in the long-term.

Answer 81

Carroll’s Corporate Social Responsibility pyramid

Answer 82

1. Economic 2. Legal 3. Ethical 4. Philanthropic

Answer 83

The first responsibility a business should fulfil is its economic responsibility; being profitable is the foundation of the hierarchy and allows the business to move through additional responsibilities.

Answer 84

The second responsibility a business should fulfil is its legal responsibilities, for example, paying employees the national minimum wage.

Answer 85

The third responsibility a business should fulfil is its ethical responsibilities; ethical responsibilities see a business making moral decisions such as, for example, agreeing to pay employees more than the legal requirement in order to support their standard of living.

Answer 86

The final responsibility a business should fulfil is its philanthropic responsibilities; here the business supports society and the community through, for example, supporting charitable events and sponsoring public facilities.

Answer 87

The shareholder concept states that businesses have a responsibility only to raise value for shareholders through increasing share prices and paying dividends and that profit maximisation is the only focus of the business.

Answer 88

The stakeholder concept states that as well as satisfying shareholders’ needs, the business must place equal emphasis on satisfying the needs of all other stakeholders, including employees, customers and suppliers.

Answer 89

Porter’s five forces is a model that allows you to analyse the competitiveness of a business environment. The 5 forces model presents five different forces impacting the competitiveness of a business environment

Answer 90

Bargaining power of suppliers Barriers to entry Substitutes Rivalry

Answer 91

The bargaining power of suppliers relates to how much power suppliers in the market have. If suppliers have more power, the market may be less attractive, as suppliers can charge higher prices. The bargaining power of buyers relates to how much power buyers in the market have. If buyers have more power, the market may be less attractive, as buyers can demand a lower price. Often bargaining power is the relative number of people. If there is 1 supplier, they are likely to have more power than if there are 100 suppliers.

Answer 92

Barriers to entry relate to how easy it is for a new business to enter the market. If barriers to entry are low, the market will be more competitive as new businesses are likely to enter.

Answer 93

The threat of substitutes relates to whether customers are likely to buy an alternative product. If this threat is high, the market is less attractive, as customers are more likely to shop elsewhere. On a hot day, ice cream and lemonade might be substitutes.

Answer 94

Rivalry amongst existing competitors refers to how much competition currently exists within the market. The greater the competition, the less attractive the market may be to other businesses. How intensely Coca-Cola and PepsiCo compete would be covered in this force.

Answer 95

Porter’s five forces model allows businesses to understand the competitiveness of a market and make decisions about their own competitiveness. Porter’s five forces model allows new entrants to consider how profitable a market may be. It is a good framework to identify strengths, weaknesses, opportunities and threats.

Answer 96

People use it and most other frameworks have died out - Argyris & McGahan (1993) It provides a checklist for thinking through what matters for a business. It is useful for big businesses that are at the top of an industry, but not for tiny businesses. It is only good for big businesses because they can affect the 5 Forces - Brandenburger (2002)

Answer 97

Businesses, especially Japanese businesses don't have a single strategy. The 5 Forces oversimplifies strategy - Pascale (2006) The 5 Forces focus too much on your current industry. The framework would not have driven Apple to develop the iPhone, or Facebook to develop Virtual Reality. They are too focused on 1 small industry.

Answer 98

Barriers to entry Rivalry between existing competitors

Answer 99

The process of appraising or working out, whether an investment is likely to meet the business’ project objectives

Answer 100

To work out whether an investment is profitable enough, or whether it pays back quickly enough. Compare one project with another project and decide which project is the most suitable for the business’ needs.

Answer 101

Investments carry risk for businesses as all investments require a financial commitment. Investments involve taking risks in the hope of a possible reward, or profit. Investment appraisal allows businesses to decide whether any potential return is worth the risk associated with an investment.

Answer 102

Net Present Value Average Rate of Return Payback

Answer 103

Net Present Value is expressed using a real value in pounds and pence. A negative NPV suggests that a project will not make a business any money whereas a positive NPV suggests that a project will produce a return for the business.

Answer 104

Average Rate of Return is expressed as a percentage and is calculated using: (Average net return ÷ investment) × 100 The higher the ARR percentage, the higher the project return in comparison to the original investment. The ARR can be used to compare the project with other projects, including investing the money in a bank account and accruing interest.

Answer 105

Payback is expressed as a period of time. It is the amount of time for cash flow to be equal to the initial cost of a project. The shorter the payback, the quicker the business recovers its original investment. The payback period can be used to compare the project with other projects and businesses with liquidity concerns may choose a project with the quickest payback.

Answer 106

The average net return is £38,000,000 ÷ 6 = £6,333,333.33. The investment was £15,000,000, so (£6,333,333.33 ÷ £15,000,000) × 100 gives an ARR of 42.22%

Answer 107

As short a time as possible