unit 7 Flashcards
what is ratio analysis
involves the comparison of financial data to gain insights into business performance
ratio analysis help too answer questions such as…
- why is one business more profitable
than the other - what returns are being earned in
investment in a business - is a business able to stay solvent
- how effectively is a business using its
assets
where does the information for ratio analysis come from
- income statement
- balance sheet
what are included in an income statement
- revenues
- cost of sales
- gross profit
- operating profit
- profit for the year
what are included in a balance sheet
- current assets
- current liabilities
- inventions
- trade receivables & payables
- long-term liabilities
- capital & reserves
main groups of ratios
- profitability
- liquidity
- financial efficiency
what are the key users of profitability ratios
- shareholders
- government
- competitors
- employees
what are the key users of liquidity ratios
- shareholders
- lenders
- suppliers
what are the key users of financial efficiency ratios
- shareholders
- lenders
- competitors
how long does it take for a current asset to become a non-current asset
12 months
limitations of ratio analysis
- one data set isn’t enough
- reliability of data
- based on the past
- comparability
why might ratio data not be entirely reliable
- financial information involves making
subjective judgements - different businesses have different
accounting policies - potential for manipulation of
accounting information (window-
dressing
importance of effective comparison
- one ratio is rarely enough (needs to
compare with competitors, analyse
trends) - circus stances change over time
(markets/industries change, different
economic/market conditions)
what don’t ratios tell you
- competitive advantages (brand
strength) - quality
- ethical reputation
- future prospects
- changes in the external environment
why are ratios good
- very useful analytical tools
- widely used and understood
- identify issues (don’t solve problems)
- range of indicators of firm
performance
definition of balance sheet
a financial snapshot of the business at a moment of time
what does a balance sheet show
source of all capital invested in the business for it to be able to operate, and in what form that money currently is in within the firm (stock, debt)
purpose and users of company accounts
- shows the value and size of the
business - gives an indication of a firms liquidity
- helps bank to identify collateral for
loan requests - shows current borrowing levels
what is a non-current asset
what the business owns with a lifespan of then a year. They are used repeatedly as part of the firms operations and won’t regularly be sold
what is a current asset
assets owned by the business that are likely to be turned into cash within one year. These assets constantly change form
what are current liabilities
short-term debts of the business, will have to be repaid within one year
what or non-current liabilities
debts that need to be repaid, but not within one year. also known as: creditors falling due after a year
what do capital and reserves show on a balance sheet
how the assets and business have been financed
other name for net current assets
working capital
what is liquidity
firms ability to pay its hot-term liabilities (debts. Suppliers, baks and other creditors will be confident that they will be paid on time
what are tangible assets
non-current assets that exits physically
what are intangible assets
non-current assets that don’t have a physical presence but still has value
formula for net current assets
current assets - current liabilities
formula for net assets
total assets - total liabilities
formula for capital employed
total equity - non-current liabilities
what does liquidity mean
a firms ability to pay their short-term debts with their current assets
liquidity ratio
current assets
———————— : 1
current liabilities
what is an ideal ratio
1.5-2:1
what is gearing
measures the proportion of a business’ capital provided by debt
why is gearing useful
- shows what proportion of the capital
invested in the firm is loans - stakeholder view capital structure
- measure of financial health
is high gearing good or bad
bad
gearing ratio
non-current liabilities
——————————————- X 100
total equity + non-current liabilities
what percentage is seen as high and low for gearing
- 50% high
- 25% low
what does it men if you have high gearing
borrowed a lot of money
benefits of high gearing for a firm
- imply firm investing in growth to drive
company forward to stay ahead of
competition - loans are cheap when interest rates
are low - less need to raise finance through
share capital when loans are used,
less shareholder making it easier to
keep control of the firm and make
long-term strategic decisions - less dividend payments required as
share capital won’t be needed, when
firm makes high profit there’s more
retained profit for reinvestment
benefits of low gearing for a firm
- company will have lower interest and
loan repayments positively impacting
liquidity - firm more attractive investment to
potential shareholders - firm not as venerable to the cost
impacts of interest rate chargers - reduced risk as business has less debt
and fewer creditors who can liquidate
firm if debts not paid back - if shares sold as alternative, share
capital is permanent capital so doesn’t
need to be repaid unlike loans
what is ROCE
return on capital employment
ROCE formula
operating profit
—————————————— X 100
total equity + non-current liabilities
what does ROCE show
- firms efficiency in achieving this
objective and producing profit. - relate profit made by the firm to its
size - lets potential investors understand
how efficient the firm is - sides at running the firm and
controlling costs
what is inventory turnover
measures how often each year a business sells and replaces its inventory
what do financial efficiency ratios measure
how efficiently the firm manages its current assets and liabilities
what are the 3 main types of inventory
raw materials, work in progress, finish goods
how is inventory valued
cost price not selling price
types of industries with low inventory turnover
- construction
- engineering
- industrial distribution
industries with high inventory turnover
- supermarket retail
- fast-food
- motor vehicle production
how can inventory turnover be increased
- sell of or dispose of slow-moving
inventory - lean production
factors influencing inventory turnover
- popularity
- type of product
- type of business/industry
- changes in consumer tastes + fashion
- quality of research
- product portfolio
receivables days formula
trade receivables
————————- X365
revenue (sales)
payables days formula
trade payables
———————- X100
costs of sales
issues to consider with ratio analysis
- is the data reliable
- wether its historical data
- performance change regularly,
accounts may become outdated - hard to access accounts of rivals
- PESTLE (economic*)
- different companies have different
views towards risk and borrowing - firms may not pursue profit
maximisation but other objectives
what does inter-firm comparison mean
comparisons between different companies
what are objectives
Statements pf specific outcomes that are to be achieved
what are business objectives
- specific intended outcomes of
business strategy - targets which the business adopts in
oder to achieve its aims
the hierarchy of business objectives
- mission
- corporate/strategic
- functional
- team
- individual
(lower you are less strategic you are)
4 functions of a business
- operations
- HR
- financial
- marketing
example of a corporate objective
- market share 12%
definition of corporate objective
objectives that relate to the business as a whole
example of functional objective
sales per customer of £45
example of unit objective
shop sales if £500,000
purposes of corporate objectives
- provide strategic focus
- measure performance of firm
- inform decision-making
- set the scene for more detailed
functional objectives
key ares for corporate objectives
- market
- innovation
- productivity
- physical & financial resources
- profitability
- management
- employees
- public responsibility
what is offshoring
moving your factory production across seas e.g. China
example of corporate objective (context)
- Starbucks
- maintain as standing one of the most
recognised and respected brands in
the world - Premier Inn + Costa
- reach 85,000 uk rooms
- £2.5 billion system sales in Costa
what are functional objectives
set for each key business function and are designed to ensure that the corporate objectives are achieved
examples of how functional objectives might support corporate objectives
- increases sales
- reduce costs
- increase cash flow
- improve customer satisfaction
key internal influences on corporate objectives & decisions
- firm ownership
- attitude to profit
- ethical stance
- organisations culture
- leadership
- strategic position & resources
- stakeholder influence
key external influences on corporate objectives & decisions
- short-termism
- economic environment
- political/legal environment
- competitors
- social & technological change
definition of short-termism
where a business prioritises short-term rather than long term performance
why might businesses be concerned with short-term performance
- stock market
- reliance on bonuses on performance
- frequent changes in leadership +
strategy
possible indictors of short-termsim
- bonuses based on short-term
objective - low investment in R&D
- high divined payments rather than
investing profit - overuse of takeovers rather than
internal growth
what is synergy
two companies coming together and making more money
short-termsim may damage other measures of long-term performance
- market share
- quality
- innovation
- brand reputation
- employee skills + experience
- social responsibility + sustainability
case study of short-termism
BT - stopped graduate apprentice, saved money short term, lost long term, skill shortage
Land Rover Jaguar, kept it going, short term lost money, long term saved money
all in the pandemic
difference between strategy and tactics
strategy - how firm intends to achieve
objectives
- long-term
tactics - support achievement of
specific targets
- short-term
LAMB RIPPERS
Lean production
Acquisition
Marketing
Business
Relocation
Internationalism
Product innovation
Partnerships
Employee/employee relations
Re-shoring
scale of production
what is matrix structure
when people from all different sectors go and work together
types of lean production strategies (LAMB RIPPERS)
- JIT
- Zero defects
- Kaisen
- Benchmarking
- Team-working
- Quality circle
what is the difference between profit and profitability
profit is the difference between revenue and costs, whereas profitability is how well you can change profit into operating profit
what is acquisition (LAMB RIPPERS)
firm taking over another for so two become one (synergy)
what are companies called that own lots of businesses in different markets
conglomerates
what are the two types of acquisition
hostile (Kraft + cadbury)
friendly (Disney + 20th)
what is marketing (LAMB RIPPERS)
- marketing mix 7 PS
what is business restructuring (LAMB RIPPERS)
- people
- process
- technology
- structure
what is retrenchment
restructuring and going back to fix problems
what is relocation (LAMB RIPPERS)
- moving location to help your firm
- reduce costs or raise revenue
- increased brand perception
- help attract the right talent
- expansion
what is internationalisation (LAMB RIPPERS)
- selling goods or services into foreign markets
- good way of increasing revenue
what is product innovation (LAMB RIPPERS)
- brining a new idea to market
- (process innovation) making same product in a.
better different way
what is partnership (LAMB RIPPERS)
- firms join together
- strategic alliance and good relations with suppliers can all boost profits
what is employee/employee relation (LAMB RIPPERS)
- good employee-employer relations boost
productivity - bad employee-employer relations harm
productivity
what is re-shoring (LAMB RIPPERS)
- brining manufacture or production back to the
UK - could be because it has become too expensive
abroad or quality or time of day - Clarks, boots to Somerset from Asia
what does SWOT analysis mean
- strength (internal)
- weakness (internal)
- opportunities (external)
- threats (external)
limitations of financial date in assessing business performance
- financial ratios tend to look
backwards - at historical
financial performance - financial ratio focus on
measures that are possibly most
important to shareholders than
business management - financial data is not the best way
of understanding how a
business is performing in terms
of key competitive performance
key non-financial measures of performance
Operations:
- quality, break even, efficiency
HRM:
- labour turnover, job satisfaction
Marketing:
- market share, sale per employee
what are the other revenant non-financial measures
- environmental performance
- compliance regulation
- health & safety record
- social media reach
definition of core competencies
something unique that a. business has, or can do, strategically well
what are core competency
- collective learning within the business
- ability to integrate skills and
technologies - ability to deliver superior products
and services - ways a business is differentiated to be
competitive
what are the three key conditions in core competency
- does it provide consumer
benefits - is it easy for competitors to
imitate - can it be leveraged widely to
many product & markets
what is the criticism of core competency
- over-zealous outsourcing has
damaged business
competitiveness - difficult to identify core
competencies that are genuinely
unique - possible for. business to
become complacent about its
core competntenncies
definition of short-termism
where a business prioritises short-term rather than long-term performance
what performance measures does short-termisim emphasise
- share price
- revenue growth
- gross + operating profit
- unit costs + productivity
- return on capital employment
possibly at the expense of long-term performance measures
- market share
- quality
- innovation
- brand reputation
- employee skills & experience
- social responsibility & sustainability
what is the Mittelstand in Germany
Germany has more than 1,000 companies that have been in the same family for generations but can compete with the worlds best
these companies and over 99% of all German companies are part if the Midttelstand, contributing nearly 52% of the country’s economic output and employing more than 15 million people
key features of Mittlestand companies
- family ownership
- generational community
- long-term investment focus
- fiercely independent
- investment in workforce
- flexibility
- lean organisational hierarchies
- focus on innovation and customer
service - take corporate social responsibility
seriously
what is the triple bottom line
a way of assessing business performance based on three important areas: profit, people, planet
what does the triple bottom line suggest
it aims to measure the financial, social and environmental performance of a business over a period of time
what does profit in the triple both line mean
- familiar to managers
- identified from income statement
- audited = reliable figure
what does planet in the triple both line mean
- measure impact of business on
environment - more tangible - emissions, sustainable
what does people in the triple both line mean
- measures extent to which business is
socially responsible - hard to calculate & report reliably &
consistently
benefits and value pf the triple bottom line
- encourages businesses to think
beyond marrow measure of
performance (profit) - encourages CSR reporting
- supports measurement of
environmental impact & extent of
sustainability
drawbacks & criticisms of the triple bottom line
- not very useful as an overall measure of business performance
- hard to reliably and consistently
measure people & planet bottom-lines - no legal requirements to report it - so
take-up has been poor
what is business legislation
- a set of rules and regulations with
which a business has to comply - a constraint on action or a threat
- an opportunity
main roles of business legislation
- regulate the rights and duties of
people carrying out business - protect customers from harmful
business activity - sure employees are treated fairly and
not discriminated against - provide protection to investors and
creditors - deter and prevent unfair competition
key areas to consider in business legislation
- employment
- consumer
- environment
- competition
- health and safety
what are the two main labour market
- individual employment
- industril relations
what is the basic rule on pay - right to equality
- men and women entitled to equal pay
- contract, bonuses & pensions
- worker right to ask employer
information to check equality - if its unequal, they can the employer
to an employment tribunal
what is the minimum wage legalisation
- employers required by law to ensure they pay their workers at least the national minimum wage
- in the UK, for workers over 25, a top-up is applied to create the national living wage
- it makes no difference when a worker is paid (monthly, weekly, daily, hourly) the NMW still applies
what is employment legislation and discrimination
it is illegal for an employer to discriminate against employee on the basis of sex, pregnancy, race, age , religion, fixed-term or part-time
what are the key areas where discrimination laws apply
- recruitment
- employee contract terms & conditions
- promotions and transfers
- providing training
- deciding what fringe benefits
employees receive employee
dismissat
what is an employment right
something to which an employee is entitled which is protected by law
what is industrial relations
- protection from unfair dismissal
- employers must recognise union is
>50% of staff are members - regulation of procedures for industrial
action - role/powers of employment tribunals
- EU-works councils requirements
examples of employment rights in uk
- reasonable notice before dismissal
- right to redundancy
- right to a written employment
contract - right to request flexible working
- right to be paid national minimum
wage - right to take time off for parenting
what must a business ensure for consumer legislation
- goods fit tier description
- must be of satisfactory quality
- goods are fit for the purpose specific
what are types of ways consumers are protected
- not using misleading advertising
- customers have right of return and
full refund if goods don’t comply with
the law - services - price - repaired
- cooling off period
- distance selling regulations provide
further protection for consumers
against online businesses
what are the main consumer laws
- distance selling regulations
- the sale of goods act
- supply of goods and services act
- trade descirptions act
are legal changes always good for a business
- what change is to legislation
aims of competition policy
- wider consumer choice in markets for
good and services - technological innovation which
promotes gains in dynamic efficiency - effective price competition between
suppliers - investigating allegations of anti-
competitive behaviour with markets
which might have negative effect on
consumers
why do business need to be aware of competition law
- to ensure it doesn’t breach
competition law - to protect its position where
competition law is breached by a
competitor
main elements of competition policy
- ANTI-TRUST & CARTEL
- eliminations of agreements that
restrict competition including price
fixing by firms who hold a dominant
market position
- eliminations of agreements that
- MARKET LIBERALISATION
- on trudging competition in
previously monopolistic sectors such
as reneger supply, retail banking,,
postal services, mobile
telecommunications + air transport
- on trudging competition in
- STATE AID CONTROL
- policy analyses state aid measures
such as airline subsidies to ensure
that such measures don’t distort
competition in the single market
- policy analyses state aid measures
- MERGER CONTROL
- investigation of mergers and take-
overs between firms which could
result in their dominating the market
- investigation of mergers and take-
examples of anti-competitive behaviour
- price fixing and market sharing
- predatory pricing and limit pricing
- charging excessively high prices
- refusal to deal/discrimination
- patent misuse
- protectionist policies limiting overseas
trade
examples of prohibited agreements
- agreements which directly or
indirectly fix purchase or selling
prices, or any other trading condition - agreements which limit or control
production, markets, technical d
development or investment - agreements which share markets or
sources of supply
what is the competition act
aims to prevent companies from acting in ways that distort, restrict or privet competition. Attempts to take action against firms that use restrictive practices such as collusion, price fixing, agreeing to limit supply to drive up prices, sharing information
what is the completion and markets authority responsible for (CMA)
prosecuting such firms who engage in these activities, and can levy fines up to 10% of their annual UK turnover for every year in which a violation has taken place up to a maximum of three years.
what isn’t allowed in price fixing
- agree prices with competitors
- share markets or limit production to
raise prices - impose minimum prices on different
distributors such as shops - agree with competitors what purchase
price will be offered to suppliers - cut prices below cost in order to force
a smaller or weaker competitor out of
the market
examples of abuse of dominant position
- imposing unfair trading terms, such as
exclusivity - excessive, predatory or discriminatory
pricing - refusal to supply or provide access to
essential facilities - tying (stipulating that a buyer wishing
to purchase one product must also
purchase other products)
what is abuse of dominant position
- UK competition law prohibit
businesses with significant market
share unfairly exploiting their strong
market positions - a dominant share is 50% or more
- having a dominant position doesn’t
itself breach competition law - it is the abuse of that position that is
prohibited
what are the penalties for getting caught abuse of dominant position
- up to 10% of annual turnover
- criminal prosecution
- disqualification as directors
- civil action by those affected
examples of regulators in the uk
- water monopolies
- CMA
- telecoms & broadcasting
- financial services
- rail regulator
- general energy markets
what do competition regulators actually do
- monitor and regulate prices
- standards of customer service
- open up new markets
- the ‘surrogate competitor’
what is the ‘surrogate competitor
regulation can act as a form of surrogate competition - attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets
key areas where a business must comply to environmental legislation
- emissions into the air
- storage, disposal & recovery of
business waste - storing and handling hazardous
substances - packaging
- discharges wastewater
health and safety regulation
health and safety is about preventing people from being harmed at work or becoming ill, by taking the right precaution and providing a satisfactory working environment
health and safety responsibilities
- an employer has important
responsibilities for health and
safety - its not just about protecting staff
health and safety applies to
many people who come into
contact with business
what does health ad safety apply to
- employees working at the
business premises, from home
or at another site - visitors to the premises - eg
customers or subcontractors - members of the public - even if
they are outside the business
premises - anyone affected by products
and services the business
designs, produces or supplies
examples of H&S industry issues
- food processing (hygiene)
-hotels (guest safety,hygiene) - chalice production (waste disposal)
- air travel (passenger and crew safety)
- tour operators
what is exchange rates
- the price of one currency expressed in
terms of another currency - the exchange rate determines how
much of one currency has to be given
up in order to buy a specific amount
of another currency
examples of a currency that devalued due to war
Russian ruble after Ukraine war
what are the concept links to exchange rates
- international trade
- business costs
- pricing
- competitiveness
- PED
ways exchange rates impact business activity
- price of exports in international
markets - cost if goods bought from overseas
- revenues and profits earned overseas
- converting cash receipts from
customers overseas
what might cause an increase in the exchange rate
- increasing demand for exports =
higher demand for the currency - lose demand for imports = lower
demand for the currency - 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 into the
country = higher demand for the
currency
factors affecting the significance of exchange rates on businesses
the impact of changes in exchange rates on businesses will depend on:
- how much they export to other
economies
- whether domestic businesses face
strong competition from overseas
firms in their markets
- how much a business relies on
importing goods and services from
overseas in order to operate
- the price elasticity of demand for a
business products
what does SPICED mean
strong
pound
imports
cheap
exports
dearer
what is inflation
a sustained increase in the average price level of a economy
concept links to inflation
- gross profit margin
- PED
- selling prices
- business costs
- exchange rates
how is inflation measured
- measured by annual percentage
change in the level of prices as
measured by the consumer price
index - a sustained fall in the general price
level is called deflation - in this
situation, the rate of inflation
becomes negative
effects of inflation on consumers
- money loses its value and people lose
confidence in money as the value of
savings is reduced - inflation can get out of control, price
increases lead to higher eafe demands
people try to maintain their living
standard - consumers on fixed incomes
what is the consumer price index (CPI)
- main measurement of inflation for the
UK - government has set the Bank of
England a target for inflation of 2% - the aim of this target is to achieve a
sustained period of low and stable
inflation - low inflation is also known as price
stability
why was the rate of inflation so low in the UK
- falling global commodity prices
including oil - slow wage growth in labour market
- falling food prices (supermarket price
war) - sustained price deflation in
technology products - slower real economic growth - falling
towards 2% - still some pare capacity on the supply-
side of the economy
why did inflation rise in 2022
- rose ot 11.1%
- higher energy costs, wages
- external shocks - war, oil, wheat
two main causes of inflation
demand pull - where there is excess
demand
cost push - when costs rise
demand pull inflation
- occurs when there is excess aggregate
demand in the economy or market - businesses respond to high demand
by raising prices to increase their
profit margins - demand-pull inflation is associated
with the boom phase of the business
cycle
possible causes of demand pull inflation
- an appreciation of the exchange rate
decreases the price of imports - a reduction in direct or indirect
taxation - consumers have more
disposable income causing more
demand - rising consumer confidence and an
increase in the rate of growth of
house pricers - faster rates of economic growth in
other countries - providing a boost to
UK exports over seas
coast push inflation
- occurs when costs of production are
increasing
causes: - external stocks
- depreciation in exchange rates
- acceleration in wages
what happens - firm raise prices to protect their profit
margins - better able to do this when
market demand is price inelastic - wages often follow prices
- a rise in inflation can lead to rising
inflationary expectations
inflation costs and consequences
- money loses its value and people lose
confidence in money as the value of
savings is reduced - inflation can get out of control - price
increases lead to higher wage
demands as people try to maintain
their living standards. this is known as
a wage-price spiral - consumers and businesses on fixed
incomes lose out because their real
incomes falls - employees in poor
bargaining positions lose out - inflation ca favour borrowers at the
expense of savers - because inflation
erodes the real value of existing debts - inflation can disrupt business
planning and lead to lower capital
investment - inflation is a possible cause of higher
unemployment in the long term -
because of a lack of competitiveness - rising inflation is associated with
higher interest rates - this reduces
economic growth and can lead to a
recession
is inflation good for business
- industry-wide price rises enable
revenues to grow - growing revenues + constant gross
margin = higher gross profit - makes using debt as a source of
finance cheaper in real terms
what are the two types of government policy
- monetary
- fiscal
what is fiscal
taxation and spending money of the government
what is monetary
use of interest rates and money supply to influence the level of economic activity
what are the three main types of taxes
- income tax
- corporation tax
- VAT
what is budget surplus
where taxation is greater than government spending
what is budget deficit
government spending is higher than taxation
what is balanced budget
taxation is equal to government spending
what is direct taxes
taxes taken directly from a persons income or a firms profit
e.g. national insurance, income tax
what is indirect taxes
taxes on products and spending not directly taken from income
e.g. VAT, road tax, fuel tax
examples of taxation
- income tax
- national insurance tax
- capital gains tax
- customs duties
- excise duty
types of taxation
- proportional tax
- progressive tax
- regressive tax
progressive tax
a larger proportion of income taken depending on the individuals or firms earnings, e.g. income tax brackets
proportional tax
the same proportion of someone’s income regardless of how much they earn, eg a 20% rate
regressive tax
A tax that takes a larger percentage of income from low-income groups than from high-income groups
why does the government tax
take money from rich and give to poor
- NHS
- Teachers
- Benefits
- raise revenue
- manage aggregate demand
- changing the distribution of income
and wealth
- market failure and environmental
targets
main types of government spending
- transfer payments - pension
- current spending - NHS
- capital spending - roads
why ova government spending
- direct government provision of
public goods, merit goods - provide welfare support for low
income households/unemployment - government spending is also a means
of redistributing income within society
e.g. to reduce the scale of relative
poverty - government spending ca also be used
as a tool to manage aggregate
demand (GDP) as part of
macroeconomic
what is monetary policy
- the us of money supply and/or the
interest rate to influence the level if
economic activity, inflation the
balance of payments and the
exchange rates
what 4 factors influence business investment
- actual & expected demand
- expected profit ad business taxes
- interest rates + availability of business
finance - business confidence
what happens when interest rates fall
- cost of servicing loans/debt is reduced
boosting spending power - consumer confidence should increase
leading to more spending - effective disposable income rises -
lower mortgage costs - business investment should be
boosted - housing market effects
- exchange rate and exports
what’s money supply
the narrow majority definition of the money supply is a measure of the value coins and notes in circulation and other money equivalents that are easily convertible into cash such as short term deposits in the banking system
what is quantitive easing
a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary policy that came into wide application after the 2007–2008 financial crisis
what is free trade
goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange
what is protectionism
government policies that restrict international trade to help domestic industries
what is open trade
- opposite of protectionism
- involves the removal or reduction of
barriers to international trade
examples of protectionism
- legislation impacting foreign firms
- tariffs
- quotas and licenses
- tax breaks
- biased legal systems and a lack of
intellectual property protection - subsidies
- loans and grants with favourable
repayment conditions
legislation impacting foreign firms
quality restrictions, limits o the industries that foreign businesses can operate in, restrictions on the ownership of domestic firms by foreign companies.
tariffs
additional payments on imports grids causing higher prices to be charged
quotas and licenses
limits on amount of products that can be imported
subsidies
payments to domestic firms to encourage them to produce particular products and to help cover costs to enable lower prices ti be charged than foreign rivals
types of trade blocks
EU, ASEAN, NAFTA
cons of protectionism
- harms people its mean too help
- undermines opportunities for new
competitors to enter the scene - often leads to trade wars where
everybody loses - consumers have less choice
- higher prices from tariffs hit lower
incomes consumers the hardest - free trade creates more jobs than it
destroys - consumer has to pay higher prices
- causes of war, American revolution
due to British tariffs and taxes
what is globalisation
the geographic dispersion of industrial and service activities (trading between nations, either free or for cost)
how can a firm expand and operate internationally
- offshoring - apple
- exporting
- setting up base overseas
- internal growth (organic)
- external growth (integration)
- joint ventures
- technical cooperation
- franchising
- licensing
what is joint ventures
two or more companies collaborating which is increasingly popular for companies expanding into Asia. EU firms provide cash, machinery skills; Host firm provides staff, land, buildings
what is technical cooperation
allows co-prodcuction and joint assembly
what is franchising
selling the right to use brands and patents to another firm in exchange for an initial fee and share of future profits
what is licensing
permission to make a product in a certain country granted by the original manufacturer in exchange for a free, e.g. Carlsberg, Coca-cola. Useful to pass on many costs such as transportation and manufacture to another firm
key points about globalisation
- globalisation is a process in which
economies have become increasingly
integrated and inter-dependent - globalisation is dynamic rather than
an end state - globalisation is not inevitable - it can
reverse, indeed the growth of world
trade in goods and services slowed in
recent years following the global
financial crisis
key characteristics of globalisation
- greater trade across borders in goods
and services - increase in transfers of capital
including the expansion of foreign
direct investment 51% of the largest
economies in the world are
corporations. The top 500 TNCs
account for nearly 70% of world trade - greater use of outsourcing and
offshoring of production. E.g. iPhone -
part of a complex global supply chain.
Designed in Silicon Valley, enhanced
software - engineers in India.
Assembly China and Taiwan - high levels of labour migration both
within and between countries - new nations joining the trading
system, for example Russia joined the
world trade organisation - a shift in the balance of economic and
financial power from developed to
emerging ebonies and markets - increasing spending on capital
investment, innovation and
infrastructure across large parts of the
world - globalisation is a process of making
the world economy more connected
and inter-dependant - many emerging countries are winning
a rising share of world trade.
emerging countries now account for
more than 57% of global GDP. The EU
has a share of global GDP of less than
17%
factors contributing to globalisation
- containerisation
- technological change
- economies of scale
- difference in tax systems
- less protectionism
- growth of MNC/transnational Co’s
benefits and gains from globalisation
- encourages producers and consumers
to benefit from deeper division of
labour and economies of scale - competitive markets reduce
monopoly profits and incentives
businesses to seek cost-reducing
innovations - enhanced growth has led to higher
per capita incomes - and helped many
of poorest countries to achieve faster
economic growth and reduce extreme
poverty measured as incomes - advantages
connect links to emerging markets
- economic growth
- international trade
- market development
- globalisation
- growth strategy
definition of emerging market
used to describe an economy in the process of rapid growth and industrialisation
common features of emerging markets
- economies making a transition
- rapid industrialisation (secondary +
tertiary sector development) - have potential to become developed
economies - faster long-term economic growth
than most developed economies - many inhabitants still in poverty,
though economic growth is taking
many out of poverty - businesses struggle to access global
markets (trade barriers)
what is BRICs
- Brazil
- Russia
- India
- China
example of emerging markets
- Bangladesh
85% of exports are driven by the textiles industry, is forecast to see the strongest growth in Asia. In fact, over the last 30 years, the country of 170 million people has not had a single year of negative growth
170 million population
perceived business threats from emerging markets
- increasingly large pool of skilled, but
low-cost labour - undervalued currencies make their
exports cheaper - inadequate protection of brand and
other intellectual property - state subsidy of industries to make
them more competitive
business opportunities in emerging markets
- growing numbers of educated middle
class consumers = growing consumer
spending - cultural shifts - e.g. higher demand for
personal products, private education
and healthcare - demand for infrastructure and other
products and services from developed
economies - source of high-skilled but low-cost
labour (outsourcing/offshoring) - great potential for joint ventures and
acquisitions
key risks and threat of emerging markets
- political instability
- cultural differences/sensitivities
- variable approaches to financial and
legal dealings - corruption and bureaucracy still an
issue - emerging markets becoming major
exporters - low-cost production makes developed
economies competitive in some
markets
multinational have led investment into emerging markets
- most important reason for expansion
into emerging markets - global brands need operate
globally - by definition they need to be active
in fast-growing emerging markets as
well as having established market
shares in developed economies
why emerging economies are likely to continue to enjoy his growth rates
- urbanisation process continues
- industrialisation - E Asia and S
Africa - population growth
- per capita income growth, rise of
middle classes and consumer society - workforce will continue to improve
skills and be more productive - technological innovation in many emerging markets (China, India, Korea)
concept links of corporate social responsibility
- business ethics
- sustainability
- shareholders
- stakeholders
- profit
other names for corporate social responsibility
- corporate citizenship
- corporate responsibility
- corporate sustainability
- sustainable business
- social responsibility
is CRS the same as business ethics
- clearly an overlap
- both concern values, objectives and
decision based on something other
than the pursuit of profit - socially responsible firms must act
ethically - the difference:
- ethics concern actions which can be
assessed as right or wrong by
reference to moral principles - CSR is about the organisations
obligations to all stakeholders - and
not just shareholders
- ethics concern actions which can be
ethics 2019 survey - which business areas need addressing
- 33% copra tax avoidance
- 29% executive pay
- 28% environmental responsibility
- 18% exploitative labour
- 18% work-home balance for
employees
what is CSR
- the extent to which a business
addresses the concerns and
obligations to its wider stakeholders - the actions a business takes over and
above the minimum required by law
in addressing societal needs and
wants
CSR is based on the idea that the needs of business & society are interdependent
society needs business
- employment & wages
- investment & innovation
- profits and taxes
business needs society
- create demand
- public assets & infrastructure
- legal protection
how can businesses meet society needs and improve them
- protect environment
- education
- protect consumers
- financial security
- better nutrition
- better health
- help the ageing
the stakeholder concept
- firms don’t have an unquestioned
right to operate in society - those managing business should
recognise that they depend on society - business relies on inputs from society
and on socially created institutions - there’s a social contract between
business and society involving mutual
obligations that society and business
recognise that they have to each other
concept links to CSR pyramid
- sustainability
- shareholder concept
- stakeholder concept
- economic environment
- legal environment
- business ethics
the four responsibilities of carols CSR pyramid
- economic
- legal
- ethical
- philanthropic (firms that promotes
welfare of others for public good)
basics of the CSR pyramid
- a simple approach for how businesses
should approach CSR - CSR is built on the foundation of profit
- it must come first
- then comes the need for a business to
ensure it complies with all laws &
regulations - before a business considers its
philanthropic options, it also needs to
meet its ethical duties
ECONOMIC
responsibility of business to be profitable
Only way to survive and benefit society in long-term
LEGAL
responsibility to obey laws and other regulation e.g. employment, competition, health and safety
ETHICAL
responsibility to act morally and ethically
go beyond narrow requirements of the law e.g. treatment of suppliers & employees
PHILANTHROPIC
Responsibility to give back to society
Discretionary but still important
e.g. charitable donations, staff time on projects
strengths of carols CSR pyramid
- easy to understand
- simple message - CSR has more than
one element - emphasises importance of profit
weakness of carols CSR pyramid
- perhaps too simplistic
- should ethics be at the top
- businesses don’t always do what they
claim when it comes to CSR
technology and marketing opportunities
- new markets
- new products
- new ways to sell those products
technology and selling to customers
- easier to communicate with
customers - more people are spending more
time on the internet = opportunity
for promotion - distribution - Spotify, Netflix
- cost savings
- collection of consumer data
technology and operations management
- affect how businesses operate
- new businesses have been created
process innovation
- new methods of production
- lower unit costs
- CAD
- CAM
- 3D computing
- High tech goggles
disruptive technology
the information of a new product or new process that radically changes the competitive advantage of an existing market.
what is M-commerce
use of mobile devices to conduct commercial transactions
1/3 of shopping is now done via phones
what is S-commerce
shopping via social media
what is omnichannel
multichannel approach to sales that seeks to provide the customer with a seamless shopping experience whether the customer is shopping online from a desktop or mobile device, by telephone or in a bricks and mortar store.
- use some channels to reach customers
implications for business strategy
- price of technology is falling - no
longer just for developed nations - breakthrough to mass markets is
taking a shorter amount of time - business will have to adapt strategies
to embrace the technology - new strategies - based on four key
startegies
implications for business strategy
- social media - persuade and
communicate - mobile technology - use of
smartphone to change the way they
operate - data analysis - data handling used to
identify trends ‘big data’ - cloud computing - use of remote
servers to store and analyse
information
concept links to porters five forces model
- economics of scale
- disruptive innovation
- efficiency
- market share
- competition
what is porters five forces model
- a framework for analysing the nature
of competition within an industry - helps understand & assess industry
profitability & attractiveness
reasons why competitive rivalry (and profits) vary between industries
- size
- structure
- distribution channels
- customer needs and wants
- profitability
- growth
- product life cycle
- alternatives for the customer
example: why profits are high in soft drinks
- a ‘licence to print money’
- customers and suppliers have little
power - high brand awareness & loyalty = less
desire for substitutes - high barriers to entry (economies of
scale)
how porters model links with industry with profitability
low industry profits associated with:
- strong suppliers
- strong customers (buyers)
- low entry barriers
- many opportunities for substitutes
- intense rivalry
high industry profit associated with:
- weak suppliers
- weak customers (buyers)
- high entry barriers
- few opportunities for substitutes
- little rivalry
porters 5 forces model
intensity of rivalry within industry
- bargaining power of suppliers
- threat of new entrants
- bargaining power of buyers
- threat of substitute products
threat of new entrants
- if new entrants move into an industry
they will gain market share & 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
and vice versa
examples of barriers to entry
- economies of scale
- vertical integration
- brand loyalty
- access to the best technologies
- expertise & reputation
investment appraisal
never used in isolation, only as a tool to help to aid decision making
concept links for payback
- cashflow
- investment
- risk & return
- NPV
- ARR
investment appraisal definition
the process of analysing whether investment projects are worthwhile
three main methods of investment appraisal
payback period:
- time it takes for a project to repay its
initial investment
average rate of return:
- looks at total accounting return for a
project to see if it meets the target
return
discounted cash flow: (NPV)
- net present value (NPV) calculates the
monetary value now of the projects
future cash flow
what are the results of each method measured in
payback period:
- time in days
average rate of return:
- % return
discounted cash flow: (NPV)
- monetary value £
how to calculate payback
- identify the net cash flow for each
period (e.g. year) - keep a running total of the cash flow
- initial investment = an outflow
- when’d ours the running total move
from negative (outflow) to positive
(outflow)? - when the total net cashflow becomes
positive, that is the end of the
payback period
payback formula
revenue generated in the next year
benefits of using payback period
- simple and easy to calculate + easy
to understand the result - focuses on cash flows
- emphasis speed of return; good for
markets which change rapidly - straightforward to compare.
competing projects
drawbacks of using payback period
- ignores cashflows after payback has
been reached - takes no account of the “time value of
money” - may encourage short-term thinking
- ignores qualitative aspects of a
decision - doesn’t actually create a decision for
the investment
what is the annual rate of return (ARR)
annual percentage return on a investment project based on average returns earned by the project
drawbacks of using ARR
- ignores the timing of returns
- focuses on profits rather than cash
flows - doesn’t adjust for the time-value of
money
benefits of using ARR
- simple to understand and easy to
calculate - focuses on the overall profitability of
an investment project - easy to compare ARR with other key
target rates on return to helpmate a decision - use all the returns generated by a
project
concept links to NPV
- risk
- investment
- cashflow
- ARR
- payback
what is net present value
net present value (NPV) calculates the monetary value now of a projects future cash flow
what is discounting
method used to reduce the future value of cash flows to reflect the risk that they may not happen
time value of money
- better to receive cash now rather than
in the future - future cash flows are worth less
- use discount factors to bring cash
flows back to their present value - relevant discount factor determined
by required rate of return
calculation for the present value of a future cash flow
cash flow x discount factor =
benefits of using NPV
- considers all future cash flows
- reflects the risks that future cash
flows will not be as expected - different levels of risk can be
accounted for by adjusting the
discount rate - create a straight forward decision -
positive NPV suggests project should
go ahead
drawbacks of using NPV
- the most complicated method
compared with payback & ARR - choosing the discount rate is hard,
particularly for long projects - result can be influenced/manipulated
using the discount rate
key factors influencing investment decisions
financial factors:
- investment criteria
- total returns and sensitivity
- alternative investments
- financial position of the business
non-financial factors:
- corporate objectives
- organisational culture & attitude to
risk
- management confidence in the
investment appraisal data
- business image ad reputation
importance if investment criteria
- criteria = measures by which an
investment will be judged - a target percentage rate of return is
most common in business - this target return can be compared
with the ARR, or used as bias for the
discount rate in NPV calculations - often larger businesses require
investments to satisfy more than one
criteria
investment decisions & organisational culture
- all investment decisions involve an
element of risk-taking - the culture of a business is likely to
significantly influence attitude to risk-
taking - the ways in which management are
rewarded or accountable for
investment decisions will also be
important
