Unit 7 Flashcards
What is a mission statement?
sets out the purpose of a business
What is the purpose of a mission statement?
- allows everyone in a business to know what they are doing
- used to motivate employees
- make decision making easier
What is a vision statement?
sets out what the business wants to do in the future
What will influence a business’s mission?
- the values of the founders of the business
- the values of the business’s employees
- the industry of which the business is part
- society’s views
- the ownership of the business
What are corporate (strategic) decisions?
long term goals
- turn the mission statements into something more quantifiable
What is meant by short-termism?
the pressure to deliver quick results which may harm longer term development
What is the difference between strategy and tactics?
strategy is a long term
tactics is short term
What is functional decision making?
is taken by managers responsible for one aspect of the business
What does SWOT analysis mean?
strengths weaknesses opportunities threats
What is SWOT analysis?
is a method of strategic analysis which considers the internal and external environment of the business
What can SWOT analysis help do?
support managers to develop strategies which reduce threats and weaknesses.
What are the benefits of SWOT analysis?
- low cost
- easy to use for all types of businesses
- encourages management teams to develop plans that are logical
- helps minimise threats
What are the limitations of SWOT analysis?
- only cover issues which are classified as strengths, weaknesses, threats and opportunities. Some issues might cover 2 of these
- offers a lot of information but no resolutions so requires further analysis
What is the political environment?
is the actions taken by local, national or international authorities that affect the activities of a business
What are some examples of how political environment could affect business’ activities?
- encourage enterprise
- regulation of markets
- country’s infrastructure
- environmental issues
- international trade
What does the government do?
encourages people and organisations to develop their ideas as well as to establish and expand their businesses
What is the aim of the government?
to promote enterprise and reduce the degree of risk.
How could we check whether enterprise is being promoted?
self-employment figures
What are the examples of financial support available for small businesses?
- Enterprise allowance
- Funding for lending
- Enterprise finance guarantee (EFG)
What are the examples of non financial support available for small businesses?
- Finance and cash flow
- Recruiting and developing staff
- Improving leadership and management skills
- Marketing, attracting and keeping customers
- Making the most of digital technology
How else does the government also support enterprise?
- reducing the number of regulations which constrain business activity
- range of schemes to develop new products and processes
- work directly with schools and colleges to encourage the use of schemes
What are regulations?
is the enforcement of principles or rules from of law
What are regulators?
are there to support those they regulate to comply with the rules in a variety of different business activities
How does regulation affect businesses?
- Create free and fair competition between businesses
- Regulate high profile industries - banking and financial services
- Privatised monopolies to protect consumers and other businesses
- Self regulation by businesses
How can regulation create free and fair competition?
- Imposing ‘windfall’ taxes
- Controlling prices - limiting price rises in line with inflation
- Restricting rates of return on capital invested by businesses - they can’t set excessively high prices, could lead to higher prices as no incentive to reduce costs
- Unbundled access - allows new entrants to a market access to the facilities of existing producers to encourage competition
What are windfall taxes?
taxes on excessive profits and occur for businesses with too much market power
What impact will regulation have on UK businesses?
- Stops them maximising profits by charging higher prices
- Bad publicity if fined or other sanctions
- Take a range of functional and strategic decisions to reduce the impact of any threat - make lower risk decisions
- Avoid tightly regulated markets
- Provides a stable long term environment to operate
- Reduces barriers to entry - provides competitive opportunities for new entrants
What is infrastructure?
transport, communications and energy supply
What are the types of non-financial data?
- big data
- data about competitors
- environmental data
- marketing data
What is big data?
large data sets which shows the trends in consumer behaviour
What can big data be used to measure?
- capacity utilisation
- measure of quality
- productivity of labour and capital
What is single factor productivity?
measure output in relation into single inputs e.g capital and labour productivity
What is multifactor productivity?
measure output in relation to all inputs
How can quality be measured?
- customer satisfaction
- repeated sales
What are the environmental issues?
- emissions to land, water and air
- use of sacre and non-renewable resources
What is environmental data used?
to compare to official guidelines and regulatory limits
What are core competencies?
basics in order to gain a competitive advantage
Why are core competencies important?
- competitive advantage
- enhances the businesses performance
- adds value
- market power - distinct products
What are the 2 issues with core competencies?
outsourcing
outdated
What are the other ways of assessing performance?
Elkington’s triple bottom line
Kaplan and Norton’s balanced scorecard
What are the 4 perspectives in the balanced scorecard?
- financial performance - revenue
- internal processes - productivity
- organisational capacity - training
- customer value - loyalty
What is the aim of the balanced scorecard?
is to align the businesses activities to the vision and strategy of the business
- also to improve internal and external communications
- monitor performance against strategic goals
What are 3 components of Elkington’s triple bottom line?
people planet profit
What is profit in Elkington’s triple bottom line?
broader the community the business operates in
What is people in Elkington’s triple bottom line?
social impacts and responsibilities
What is planet in Elkington’s triple bottom line?
impacts on the environment
What economic factors affect a business?
- fiscal policy
- monetary policy
- taxation
- exchange rate
- interest rate
- inflation
- GDP
What are some external influences of corporate objectives and decisions?
state of the economy
global prices
technological changes
migration
What are some internal influences of corporate objectives and decisions?
poor performance
ownership
What does financial statements help do?
assist stakeholders in assessing their performance and to inform decision making
What are the 2 types of financial statements?
balance sheet
income statements
What does a balance sheet represent?
a business’s financial position at a give time
what does a balance sheet show?
What a business owns (assets) and what it owes (liabilities)
What are some examples of assets?
cash in bank, vehicles and property
What are some examples of laibilities?
loans and mortgages
What are the 2 categories which assets can be split up in?
non-current assets and current assets
What are non-current assets?
are turned into cash in over a year e.g property and land
What are current assets?
are turned into cash in under a year e.g inventories
What is a liabilitiy?
a debt owed by the business
What are current liabilities?
debt settled in less than a year
What are non-current liabilities?
debt settled in more than a year
What is working capital?
is the amount of money a business has available for its day-to-day operations e.g wages
What is the problem of having too high working capital?
means that there is a insufficient use of resources as cash is just sitting in a bank account
What is net assets?
the overall worth of the business to it’s shareholders
What factors would influence how much working capital a firm holds?
- Volume of sales
- Amount of trade credit offered by the business
- Whether or not the firm is growing
- The length of the operating cycle - time between paying for raw materials and receiving payment from customers
- The rate of inflation
What does the balance sheet work out?
net current assets/ liabilities capital employed assets employed net assets working capital
What is capital employed?
the total amount of money invested into the business
What is the calculation for capital employed?
total equity + non-current liabilities
What is assets employed?
represents what the business has invested on
What is the calculation for assets employed?
current assets + non-current assets
What is depreciation?
decrease in value of an asset over time
What are the 2 types of profits identified in a income statement?
gross profit and net profit
What is ratio analysis?
compares 2 pieces of financial information
What are the 4 categories for ratios?
liquidity
profitability
gearing
efficiency
What is gearing?
the relationship between external and internal finance
What are the 3 profitability ratios?
gross profit margin
operating profit margin
net profit margin
How is gross profit calculated?
Revenue - Direct costs (COGS) = Gross profit
How is gross profit margin calculated?
GP/Sales revenue x 100
How is operating profit calculated?
Gross profit - Indirect costs
How is operating profit margin calculated?
OP/Sales revenue x 100
How is profit for the year calculated?
operating - remaining costs
How is operating profit margin calculated?
NP/Sales revenue x 100
What is ROCE (returns on capital employed)?
compares the profit earned with the amount of capital employed
What is the calculation for ROCE?
operating profit / total equity + non-current liabilities x 100
What do liquidity ratios allow?
the managers to monitor the business’ cash position. It looks at what they own that can be easily converted into cash.
What is the liquidity ratio calculation?
current ratio = Current assets / Current liabilities
What does the gearing ratio measure?
the long term liquidity of a business. It looks at how a firm has raised its long-term capital
What are the 2 types of long term finance?
total equity
non current liabilities
What is total equity?
selling shares and increasing the value of the business
What is the gearing ratio calculation?
non-current liabilities / total equity + non-current liabilities x 100
What are the 3 efficiency ratios?
inventory turnover
receivable days
payable days
What do the efficiency ratios measure?
the effectiveness with which management controls the internal operation of the business
What does the inventory turnover measure?
a company’s success in converting inventories into sales
What are the 2 calculations to work out inventory turnover?
costs of sales / average inventory held
or
inventories / cost of sales x 365
What does receivables days measure?
the time taken by a business to collect the money it is owed
What is the calculation to work out receivable days?
receivables / revenue X 365
What does payable days measure?
the time taken by a business to pay the money it owes
What is the calculation to work out payable days?
payables/ cost of sales X 365
What is good about ratio analysis?
gives an insight to stakeholders of the businesses performance, but to get the most interest it needs to be compared with:
- The results over previous years
- The results with other businesses in the same industry
- The results from other industries
What is bad about ratio analysis?
Only considers the financial aspect of a business’s performance, without accounting for other elements such as:
The market in which the business is trading
The position of the firm in the market
The quality of the workforce and management team
The economic environment
What are the 3 elements of the legal environment we have to consider?
- competition
- employment of labour
- environmental issues
What are the 3 competition laws?
- competition act 1998
- enterprise act 2002
- enterprise and regulatory reform act 2013
What are the 3 things that the competition act looks at?
cartel activity
abusing a dominant market position e.g unfair prices
other anti-competitive practices e.g limiting production
What is cartel activity?
agreements between businesses to not compete against each other
What is the competitive environment made up of?
- rivals and their power
- suppliers influence
- customers influence
What is Michael Porter’s five factor model?
is a framework for assessing and analysing the competitive strength and position of a business
What are the 5 factors from Porter’s model?
- bargaining power of suppliers
- bargaining power of customers
- threat of substitute products
- threat of new entrants
- competitive rivalry
When does the power of suppliers arise?
- number of suppliers - fewer means more power
- cost of changing supplier - if it expensive and difficult supplier has more power
- the availability of substitutes - if there are no substitutes or resources produced are scarce then supplier has power
When does the power of buyers arise?
- when they can find substitutes as products are similar to others
- products have high PED
When is the threat of substitutes high?
- the price of that substitute falls, making it more attractive
- if it easy for customers to switch between substitutes
Why should the threat of new entrants be considered?
- decrease customer loyalty
- how quick new business might be able to benefit from EOS
- whether the new entrants have access to supplier
What impact does changes in the competitive environment have?
- seek new entrants
- develop new product ranges
- seek alliances or mergers
- suppliers - changes in production process and change its reliance on the product sold by the supplier, taking over the supplier or negotiating favourable deals with smaller rivals
- power of buyers - reducing prices, enhanced credit terms, selling in new markets
- substitutes - increase (emphasise) degree of differentiation heavy investment in R&D
