Unit 7- Analysing the strategic position Flashcards
What is a mission statement?
It sets out a business’ overall purpose and focus or its reason for existence and is normally set out in a written statement
Why is a mission statement important?
-It communicates the purpose and values of an organisation to its stakeholders
-It informs the strategy adopted by an organisation
-It enables SMART goals and objectives to be identified
Factors affecting the mission statement
-The values of the founder
-A business’ strengths
-Extent the business demonstrates social responsibility
-The industry the business is operating in
What are corporate objectives?
Medium to long term goals that inform decision making
What are the common business objectives?
-Survival
-Profit {Profit Maximisation, Profit Satisficing}
-Growth
-Cash Flow
-Social
-Ethical
Internal Factors affecting corporate objectives
-Business ownership (e.g sole trader, Ltd, Plc)
-Business culture (values and attitudes)
-Business performance
External factors affecting corporate objectives
-Short termism
-PESTLE + C
What is Short termism?
When a business priorities the short term rather than the long term performance.
Factors for short termism
-Share holder pressure
-HR strategy & reward or remuneration method
-New leadership
What is a strategy?
Long term plans to help achieve a firm’s objectives
What is a tactic?
Short term actions to complete a strategy
Who makes strategic decisions?
Corporate senior management or executives
What is functional decision making?
Decisions made in departments: they must all work towards he same strategic goal which requires communication and coordination
What is SWOT analysis?
A management tool that allows a business to assess its internal strengths and weaknesses and external opportunities and threats
Benefits of a SWOT analysis?
-Unique to each business
-Regular updates (Dynamic)D
Drawbacks of a SWOT analysis?
-Not guaranteed success:
-Poor implementation
- Fast environmental change
- Data can quickly become out of date
-Does not provide solutions
How does a business measure financial performance?
Ratio analysis, which needs an income statement and balance sheet to be calculated.
What is an income statement?
It shows the businesses revenue and cost over a period of time and therefore profit or loss over a period of time
What is a balance sheet?
A balance sheet represents a snapshot of a business’ financial position at any given time. It shows the businesses assets and liabilities (including shareholder’s equity or money)
How will an income sheet be used?
-Managers will use the info to help them inform future decisions
-Shareholders will use it to decide whether to buy or sell shares
-Tax authorities can use it to calc the amount of tax a business should pay
What is ratio analysis?
It involves the comparison of financial data to gain insights into business performance
What ratio is used to assess Liquidity? and what does it show?
Current ratio
It shows whether a business has sufficient cash to be able to pay it short term debts
What ratio is used to assess Gearing? and what does it show?
Gearing Ratio
It shows the capital structure of the businesses, the proportion of debts relative to total equity (retained profit and share capital)
What ratio is used to assess Profitability? and what does it show?
Return On Capital Employed Ratio (RoCE)
Shows the % of profit generated from each £ borrowed by the business
Profit Margins
Show the percentage of profit generated form each £ of revenue
What ratio is used to assess Efficiency? and what does it show?
Inventory turnover ratio
Measures how often each year a business sells & replaces it’s inventory
Receivables days ratio
measures the average length of time taken by customers to pay amounts owed
Payables days ratio
measures the average length of time taken by a business to pay amount it owes to suppliers
What is Liquidity?
It represents a business’ ability to pay its day to day debts.
What are current assets?
Represent the funds that a business can use to pay is day to day bills.
-Cash
-Inventores
-Trade receivables
Current assets represents already available cash plus cash that will be received in the future.
What are current liablities?
Represent the money the business owes and will need to pay within a year.
-Trade Payables
-bank overdrafts
-Short term money owed
How do you calculate current ratio?
Current assets/Current liabilities
What should the current ratio ideally be?
2:1
this means that it has £2 for every £1 of debt it has to pay in the short term.
What is Gearing?
Gearing assesses whether a business is at risk from having too much debt.
What is non current liabilities?
Money that the business owes and will need to pay in the long term
-Bearing loans
-Bank loans
-Mortgages
What is Capital Employed?
Total equity + non-current liabilities
How do you calculate Gearing Ratio?
Non current liabilities/ Capital employed X 100
What should the Gearing ratio ideally be?
It should be ideally under 50%. Anything over 50% is considered highly geared and therefore at risk of not being able to pay of its debt and at risk of rising interest rates.
How do you calculate Profit Margin?
Profit (gross,operating or net)/Revenue X 100
How do you calculate RoCE?
Operating Profit/Capital Employed X 100
What should RoCE ideally be?
The higher the percentage figure the better. needs to be compared with previous years to see if there is a trend rising or falling.
How do you calculate Inventory turnover ratio?
Cost of sales/Inventory = amount of times per year stock is replenished
How do you calculate receivables days ratio?
Trade receivables/Revenue X 365= Number of days taken by customers to pay the business
How do you calculate payables days ratio?
Trade payables/Cost of sales X 365 = Number of days taken by the business to pay its suppliers
What should the inventory turnover ideally be?
It depends on the business, business selling perishable goods will have a higher inventory turnover compared to business’ selling expensive goods. Easier to sell bread than a ferrari
What should the receivables days ratio/payables days ratio be?
receivables days ratio needs to be compared with the payables days ratio. Ideally the receivables days ratio needs to be shorter than its payables days ratio. Money owed by customers should be paid before the business has to pay money out to its suppliers. This protects the business’ cash flow or working capital.
Strengths of financial analysis
-They can show how well a business is performing
-Helps review historical trends on past successes
Limitations of financial analysis
-Only looks at financial elements
-Does not provide business with solutions
What is window dressing
Window dressing relates to actions taken by organisations to make their financial results appear better than they are. They can do this by:
One-off events such as the sale of assets to improve the profit figure (but this is ‘low quality profit’)
Using intangible assets such as branding to created inflated value of the business
Using short-term borrowing to artificially improve the liquidity position
What is a core competency?
A core competence is something unique that a business has or can do better than its competitors.
What are the 3 criteria for a core competency?
1.Does it provide consumer benefits?
2.Is it easy for competitors to imitate?
3.Lead to creation of many products & access to new markets?
What are the uses of core competencies?
-Focus on core competencies to develop a strong competitive advantage
-Outsource non-core activities
What is the balanced scorecard?
The balanced scorecard model is a strategic planning tool that helps a business achieve its corporate objective
How does the scorecard balance?
Four key business perspectives: financial, customer, internal processes and innovation.
-How the organisation sees itself and how others see it.
-The short term and the long term
-The situation at a moment in time and change over time
What are the benefits of the balance scorecard?
-Helps achieve long-term objectives & strategy
-Offer an all-round view of the business (not just finance)
-Ensures the sustainability of the business
What are the drawbacks of the balance scorecard?
-Some KPIs can be conflicting e.g. profits vs R&D budget objectives
-Too many KPIs may be confusing
-At times, finance may be the most important objective (survival)
What is the triple bottom line?
-Planet
-Profit
-People
What does Planet measure?
Measures impact if business on environment
More tangible- e.g. emissions, use of sustainable inputs
What does Profit measure?
Familiar to managers. Identified from income statement
Audited = reliable figure
What does People measure?
Measures extent to which business is socially responsible. Hard to calculate & report reliably & consistently
What does the triple bottom line aim to do?
The “Triple Bottom Line” suggests there is more to business success than profit.
It aims to measure the financial, social and environmental performance of a business over a period of time.
What is the use of the triple bottom line?
It helps the business see what areas it can focus on that is not just financial. Can help the business grow its social objectives and sort out its environmental impacts.
What political changes can occur?
Government policies:
The government policy includes:
Encouraging enterprise
Regulating key industries
Developing infrastructure
Setting environmental policies
Promoting international trade
