3.7 ANALYSING THE STRATEGIC POSITION OF A BUSINESS Flashcards
(321 cards)
1
Q
Define Assets
A
What the business OWNS
2
Q
Define Liabilities
A
What the business OWES
3
Q
Define Non-current Assets
A
Assets that provide a benefit for the business in the long-term (Over a year)
4
Q
Give an example of non-current assets
A
Buildings and machinery
5
Q
Define Current Assets
A
Assets that will be used up or sold in the short-term and the cash balances kept within the business LESS THAN A YEAR / WITHIN A YEAR
6
Q
Give an example of current assets
A
Raw materials
7
Q
Define Current Liabilities
A
What the business owes in the short-term LESS THAN A YEAR / WITHIN A YEAR
8
Q
Give an example of current liabilities
A
Short-term debts
9
Q
Define Non-current Liabilities
A
What the business owes in the long-term MORE THAN A YEAR
10
Q
Give an example of non-current liabilities
A
Long-term debts
11
Q
Define Working Capital
A
Cash available to pay short term debts/liabilities
12
Q
Equation for Working Capital
A
Current Assets - Current Liabilities
13
Q
Define Net Assets
A
Value of assets overall
14
Q
Equation for Net Assets
A
Net Current Assets + Non-current Assets - Long-term liabilities
15
Q
What is Net Assets equal to?
A
Capital Employed
16
Q
Define Capital Employed
A
Amount of long-term money put into a business
17
Q
Define strategy and tactics
A
Strategy: how we do things, medium/long term plan of action, put in place to achieve a business objective. Tactics: short term that helps to achieve a strategy - daily activities such as sending emails
18
Q
Influences on the mission of a business
A
Size, What it’s about, Target market, £££, Owners, PESTLE (external factors)
19
Q
Internal influences on Corporate Objectives
A
Business ownership, Attitude to profit, Ethical stance, Organisational culture, Leadership, Stakeholder influence
20
Q
External influences on Corporate Objectives
A
Economic environment, Political / legal environment, Competitors, Social and technological changes
21
Q
Define Strategic Position
A
Concerned with the way in which a business as a whole distinguishes itself in a valuable way from its competitors. A firm’s decisions on how to serve customers and compete against rivals
22
Q
Define ‘short-termism’
A
For survival, Up to 1 year, An excessive focus on short-term results
23
Q
Disadvantage of ‘short-termism’
A
Can mean forget about long term measures and not focus on them
24
Q
Why may a business be concerned about the short term?
A
Stock market actions, Reliance on bonuses based on short-term performance, Changes in leadership and strategy
25
Give a contextual example of a business that has a long-term perspective
Unilever - doesn't publish data to analysts and media
26
How would you evaluate the ROCE of a business?
The higher the percentage figure, the better. Compare with the ROCE from previous years to see if there is a trend of ROCE rising or falling. Based on snapshot of business' balance sheet
27
What does 'return on capital' tell us?
Measure of return, How good a business is at converting money invested to profit, Provides way of comparison, Speculate opportunity cost - what a business could have done if they invested elsewhere
28
What does 'SWOT' stand for?
Strengths (Internal), Weaknesses (Internal), Opportunities (External), Threats (External)
29
Define 'SWOT' analysis
Method for analysing a business, its resources and its environment. Focuses on the internal strengths and weaknesses of a business (compared with competitors) and the key external opportunities and threats for the business.
30
What does 'SWOT' aim to cover?
What the business does better than the competition, What competitors do better, Whether it is making the most of the opportunities available, How a business should respond to changes in its external environment
31
Mention examples of strengths of a business | SWOT
Reputation for high quality products, Seen as innovative, Very profitable in comparison to other organisations
32
Mention examples of weaknesses of a business | SWOT
Reputation as poor employer, Product portfolio full of declining products, High levels of staff turnover / absenteeism
33
Mention examples of opportunities of a business | SWOT
Main competitor having financial difficulties, Government encouraging more spending, Fall in exchange rates, helping exporters
34
Mention examples of threats of a business | SWOT
High levels of competition in a market, Innovation / USP from competitors, Increased interest rates, Products becoming obsolete
35
Define 'opportunities' (SWOT)
What a business can take advantage of
36
Give examples of an internal strategy (method of achieving a goal or target)
Delayering, Expansion, Retrenchment
37
Give examples of an external strategy (achieving a goal or target)
Analysing trends, Being aware of laws, Being aware of technical advances, Viewing economic conditions
38
Define an 'incremental strategy'
Bit by bit
39
Give examples of an incremental strategy (achieving a goal or target)
Kaizen, Lean production, Streamlining: improvement of the efficiency of a certain process
40
Give examples of a disruptive strategy (achieving a goal or target)
Adapting to digitalisation: modern world, Adjusting to Covid-19, Becoming more environmentally friendly to ward off pressure groups
41
Why is change valuable?
Out the old, in with the new, To innovate products: Netflix going online, Expansion: target new markets, Become more efficient
42
What does the Lewis Forcefield Model suggest?
Forces for change vs. Forces restricting change. Whichever is higher has a stronger influence
43
Advantages of 'Lewis Forcefield Model'
Easy to observe / make, Identifies both sides of the predicament, Identifies negative forces so the business can strategise how they can get around this
44
Disadvantages of 'Lewis Forcefield Model'
Requires participation: Reliant on people scoring individually if they are 'for' or 'against' - bias, Could cause conflict between for and against
45
Define 'ethics'
Moral principles or standards that guide the behaviour of a person / business. Being ethical = doing the right thing!
46
What makes a business ethical?
Responsibility for mistakes, Making customers aware of origins/change of products, Less waste, Following laws, No sweatshops
47
Advantages of a business being ethical
Gains more customers: e.g. vegans, Builds positive reputation through good press/media, MAY BE WORTH INVESTMENT
48
Disadvantages of a business being ethical
Higher cost
49
Define 'core competencies'
Unique strengths of a business that cannot be easily replicated by competitors. Should be adapted to meet demands of the market. Must focus on them when developing strategies
50
Difficulties a business could face when using non-financial methods to analyse performance
Time consuming, May be unreliable as doesn't look at finances which could pinpoint certain issues with cashflow, May be opinion based, BIAS? Disruption in accuracy
51
Common reason for short-termism
Survival, External environment (PESTLE) - COVID-19, Stock market's influence, Reliance on bonuses from employees, Frequent changes in leadership and strategy
52
If a business focuses too much on the short term, what may happen?
Long term becomes less important, which could cause future issues, Distract them from overall aim of the business
53
How can you tell if a business is short-termism?
FINANCIAL INCENTIVES BASED ON THE SHORT-TERM, seem to be throwing all money away, Short-term bonuses (e.g. sell 20 houses in next 4 months for a bonus), High dividends rather than reinvesting profits - satisfy shareholders - REINVESTING IS LONG-TERM TO GROW, Take-overs rather than internal growth - increase customers quicker and easier
54
Define 'long-termism'
Tendency for management to focus on long-term gains (1 year+), Shows business' ability to sustain/grow, e.g. staff training (build productivity overtime) / building core competencies
55
Advantage of 'short-termism'
Tackles issues promptly
56
What is the 'Kaplan and Norton's Balance Scorecard'?
Highlights range of influences on the success of a business beyond that of the traditional view of looking at profit. Combines non-financial measures with financial measure (CREATES BALANCE!). Top-down approach. Identifies key performance indicators
57
What is the 'Kaplan and Norton's Balance Scorecard' made up of?
FOUR MAIN PERSPECTIVES (FT. KEY PERFORMANCE INDICATORS) Spider diagram with 'Vision and Strategy' in middle, then around it… Financial, Internal processes, Organisational capacity, Customer
58
Advantages of 'Kaplan and Norton's Balance Scorecard'
Provides broader view of business performance, Provides specific targets that can be MONITORED, Tailored to business, accurate, Involves all stakeholders in the business, Highly flexible - KPI' chosen by business
59
Disadvantages of 'Kaplan and Norton's Balance Scorecard'
Can get complicated, Requires a lot of data - time / money, Too many KPI's to manage, Balancing is not easy, Needs updating regularly: admin costs / extra tasks for staff
60
Suggest a focus of financial performance ('Kaplan and Norton's Balance Scorecard')
Financial performance
61
Suggest a focus of customer ('Kaplan and Norton's Balance Scorecard')
Customer satisfaction
62
Suggest a focus of internal processes ('Kaplan and Norton's Balance Scorecard')
Business efficiency
63
Suggest a focus of organisational capacity ('Kaplan and Norton's Balance Scorecard')
Knowledge and innovation
64
Suggest a KPI of financial ('Kaplan and Norton's Balance Scorecard')
ROI
65
Suggest KPI's of customer ('Kaplan and Norton's Balance Scorecard')
Levels of returns, service rating
66
Suggest KPI's of internal processes ('Kaplan and Norton's Balance Scorecard')
New product lead times, unit costs
67
Suggest KPI's of organisational capacity ('Kaplan and Norton's Balance Scorecard')
Employee retention, Flow of new product development ideas
68
Define 'The Political Environment'
The government actions that impact on the strategic and functional decisions made by a business. Can be by local, national or international authorities. Impact heavily on the competitive environment and the infrastructure that allows businesses to operate effectively
69
Define 'legislation'
Involves creating and enacting laws in order to protect individuals, businesses and society
70
Define 'legal environment'
Collection of legislation that impact on activities of organisations
71
Scope and effects of the UK / EU law related to competition
Promote fair competition - stop MONOPOLY happening
72
What is an 'anti-competitive product'?
ILLEGAL. Doesn't promote fair competition in the market. e.g. price fixing between businesses
73
Governments impact on mergers and takeovers | WITH CONTEXT
They are monitored and will not be allowed if it is deemed that they significantly reduce competition. e.g. TUI and Thomas Cook not allowed to merge - monopoly empire. Markets that are not competitive will be investigated
74
What does the 'competition law' not allow businesses to do?
Firms are not allowed: To agree prices with competitors, To limit production in order to reduce competition, Partition markets or customers between each other (TERRITORY) - e.g. geographically where each firm takes a different region to avoid competition
75
General features of UK and EU Competition Policy
Seeks to improve the competitive nature of markets - Seeks to alleviate market failure to protect the interests of consumers and society as a whole
76
How can the government make sure that 'competition law' is successful?
Curtailing monopoly power and protecting competitive markets, Restricting mergers and prohibited cartels, Creating fairness in markets for both businesses and consumers
77
Define 'cartel' (Competition Law)
Businesses working together to only supply certain businesses, to benefit them 'We are not going to use you unless you stop supplying to…'
78
Define 'monopoly'
COMPLETE DOMINANCE OF MARKET. There is only one business in the market. Government refers to any business that has at least 25% market share as having monopoly powers
79
On what condition will CMA regulate markets for 'monopoly power'?
When they have 40% market share
80
Define 'market power'
Ability to set price above those that would be charged if there were competition
81
How can 'monopolies' exploit consumers? And why may this enforce regulation?
Charging high prices as customers have NO other choices… therefore they are regulated, to stop this happening. FREE AND FAIR COMPETITION MUST BE ACHIEVED
82
Benefits of UK and EU 'Competition Policy'
Lower prices, Improved quality, Innovation, Competitive advantage
83
What does the 'competition policy' allowing more room for innovation benefit the most?
New / small businesses to grow, Consumers gaining better products
84
Define 'labour market' / 'employment legislation'
Aims to ensure that employees and employers act fairly in dealing with each other by defining their rights and obligations
85
What aspects come under the 'Equality Act 2010'
Age, Disability, Gender reassignment, Marriage and civil partnership, Pregnancy and maternity, Race, Religion and/or belief, Sex, Sexual orientation
86
What is the main disadvantage of having the 'Equality Act 2010'?
Difficult to regulate
87
What are all of the rights given to employees?
Employment Relations Act, Employment Act, Children and Families Act
88
Define 'Children and Families Act'
Allows maternity / paternity leave, Allows flexible working for all employees
89
Define 'Employment Relations Act'
Allowing trade union membership
90
Define 'Employment Act'
Dispute resolution. Mediate the relationship between workers, employing entities, trade unions and the government
91
Define 'Labour Market Law' and what it covers
Designed to protect the worker from discrimination within the workplace and to make it easier for businesses to recruit workers. Covers: Wage discrimination, Discrimination, Labour market reforms
92
Should the national living wage be increased? | ARGUMENTS FOR
Reduces inequalities, Increases demand in the economy (GDP), Improves standard of living, Less pressure groups, Makes staff more productive and satisfied
93
Should the national living wage be increased? | ARGUMENTS AGAINST
INCREASE IN BUSINESS COSTS, May create unemployment, Lower supply of goods and services, Price for everything else goes up
94
What does the UK and EU law related to the environment relate to?
Water + Land
95
What does the 'environmental law' enforce? And specify…
Ensures businesses don't have negative impact on environment. Limits to emission levels to sea, rivers and air. Guidelines, limits and bans on waste disposal. Quotas on use of finite resources. GOVERNMENT CAN INSPECT AND FINE
96
Why was introducing a cost to plastic bags a good strategy by the UK government?
Changed the way you think about using them. Anything of a cost makes customers think
97
Main disadvantage of following 'environmental laws' for a business
Compliance can often increase costs
98
What are the two types of environmental law?
Environmental Protection Act, Environment Act. BOTH PUT COSTS UP
99
What is the 'Environmental Act' (Environmental Law)
A business must clean up any contaminated sites that it owns. Environment Agency able to oversee environmental protection.
100
Businesses being environmentally friendly
New environmentally friendly production. New products that meet higher environmental standards. Greater use of recycling.
101
Why do the government promote enterprise in the economy?
Creates jobs. Leads to economic growth.
102
Reasons why the government support start-ups
Provide employment and large businesses of the future. Future tax receipts, increasing government income. More environmentally-friendly future. Support moves into export markets, helping UK businesses to become globally competitive THEREFORE BRINGING MORE MONEY INTO UK ECONOMY.
103
Over the pandemic, how did the government use grants?
Survival, kept employment and businesses alive.
104
Where is the finance for 'grants' sourced from?
Tax money (from public).
105
The government can provide training to start up businesses in a variety of areas…
Financial (e.g. small business accounts). Marketing (e.g. how to target market segments). Operations management (advice on location). People (how to recruit a suitable workforce).
106
What are the 3 types of grant?
Local. National. European Government.
107
What is an SME? And defined by what?
Small and medium size enterprises. Defined by number of employees, turnover and net worth shown on balance sheet.
108
What makes up a medium enterprise?
No. Employees: < 250. Turnover in Euros: < 50m. Net worth shown on balance sheet: < 43m.
109
What makes up a small enterprise?
No. Employees: < 50. Turnover in Euros: < 10m. Net worth shown on balance sheet: < 10m.
110
What makes up a micro enterprise?
No. Employees: < 10. Turnover in Euros: < 2m. Net worth shown on balance sheet: < 2m.
111
How do entrepreneurs and SME's impact on the economy?
Provide employment. Pay taxes. Create competition. Supply goods and services.
112
What are 'regulators' and their role?
Watch over the actions and choices made in a market. Complaints should be made to regulators (OFCOM - TV&Media Faye Love Island). Monitor prices. Maintain high standards of customer service.
113
Why does the government undertake regulation?
Create competitiveness in the market. Greater choice of lower prices. Ensure fair environment in all sectors. To create conditions for continued investment.
114
Define 'regulation'
Creation of rules and sanctions within an industry to modify the economic behaviour of firms.
115
Why does privatisation lead to monopoly power?
Most firms privatised operate in markets with barriers to entry. This can be countered through regulation and deregulation.
116
Arguments for regulation
Protecting consumers against the abuse of monopoly power that would lead to higher prices. To create an environment that will encourage businesses to strive for efficiency through reduced costs: achieved through CAPPING PRICES. To ensure quality and choice are maintained.
117
Define 'de-regulation'
Opening up of markets to new competition through the removal of rules and regulations that created barriers to entry. 'Fishermen can fish anywhere' > Costs decrease > Benefit the customer.
118
Arguments for 'de-regulation'
The creation of competitive markets will lead to greater efficiency: Businesses strive to reduce costs in order to compete effectively. Businesses strive to meet consumer demand by reducing price and providing a greater range of products. Less government intervention allows businesses to produce to the needs of the market, FLEXIBILITY.
119
Examples of infrastructure
Transport network (e.g. rail, road and air). Provision of utilities (e.g. gas and water). Provision of information (e.g. broadband).
120
Contextual examples of the government improving infrastructure
HS2. Heathrow 3rd runway.
121
Advantages of Heathrow 3rd Runway being built (CONTEXT)
Needed to trade / transport more people. Facilitates increase in air travel in UK. More employment.
122
Disadvantages of Heathrow 3rd Runway being built (CONTEXT)
More pollution (environmental). Destruction of homes / houses (previous infrastructure) to make space.
123
What is a 'pollution permit'?
Allows businesses to produce a legal level of pollution every year. THESE ARE TRADEABLE ON THE MARKET.
124
What is 'UKTI'?
UK Trade and Investment. Helps businesses export to foreign markets and helps foreign companies in setting up production in UK. Identifies opportunities around the globe, providing advice and networks for UK businesses. This might include overcoming issues such as cultural and language problems.
125
Define 'Elkington Triple Bottom Line'
A way of assessing business performance based on three important areas: Profit (Internal), People (Internal), Planet (External). FOCUSES MORE ON OTHER STAKEHOLDERS (Bigger Picture). Profit will come when sustainable.
126
Define 'people' ('Elkington Triple Bottom Line')
Measures extent of which business is socially responsible. Hard to calculate and report reliability and consistency.
127
Define 'profit' ('Elkington Triple Bottom Line')
Familiar to managers identified from income statement.
128
Define 'planet' ('Elkington Triple Bottom Line')
Measures of business’ impact on environment.
129
Where is 'Elkington Triple Bottom Line' used? (Marketing and Operating)
Used in marketing to market a product in a sustainable way, increasing sales as a business meets all criteria. Used in operations so a business can operate in a sustainable way, becoming more ethical which will create a better brand image. Strategic planning tool for the future – long term approach.
130
Context for 'Elkington Triple Bottom Line'
SPORTSDIRECT: have a lack of use of Elkington’s Triple Bottom Line as they focus mostly on a singular stakeholder, in their shareholders, rather than other stakeholders such as employees which causes a lack in employee morale as they focus on maximising profits through the exploitation of staff. Therefore, there is an imbalance between all features. Make no action to work towards a more improved environment.
131
What does 'Elkington Triple Bottom Line' suggest and aim to achieve?
SUSTAINABILITY. There is more to a business’ success than profit. Aims to measure the financial, social and environmental performance of a business over a period of time.
132
Benefits & value of the triple bottom line
Encourages businesses to think BEYOND narrow measure of performance (profit). Encourages corporate SOCIAL RESPONSIBILITY. Can improve brand image if becoming more ethically sustainable through improving these factors.
133
Drawbacks of 'Elkington Triple Bottom Line'
Not very useful as an overall measure of business performance, only focuses on three factors out of many. Hard to reliably and consistently measure People and Planet bottom lines, expectations constantly changing. No specific guidelines on what a business should report on.
134
Define 'globalisation'
Process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integration of economies and societies worldwide.
135
What should a business consider when considering an investment? And what is this concept called?
Investment Appraisal – 1. What are the total profits likely to be earned by the investment in the foreseeable future 2. How quickly the investment will cover its costs
136
What does the 'Payback (period)' calculate? And what does it involve?
Time taken for an investment to generate sufficient returns to pay for its initial cost – Involves subtracting net returns gained from investment each year until nothing is left to pay of the initial investment
137
Ideal 'Payback' figure
Shortest possible
138
How to work out the precise 'payback' (Months and Years)
1. Work out how many cumulative you need to reach 0 2. Look at net cash flow from the next year 3. Divide (1) by (2)
139
Advantages of 'Payback'
Simple to calculate – Quick screening tool for analysis – Early return is especially important when liquidity is more important than profitability
140
Disadvantages of 'Payback'
Disregards all cash flow beyond the payback period so fails to measure overall profitability – Ignores the time value of money – Discriminates against projects that involve a long payback period
141
Advantage of calculating GDP
Calculated in real time, adjusted so inflation is ignored
142
Define the term 'economic environment'
Consists of key economic factors that influence the behaviour of businesses and their customers
143
What is economic growth proportionate with?
A good economic environment
144
How can economic growth be supported by the government?
Cutting interest rates – Government spending/investment – Lower taxes – More grants – More exports/imports – Supporting small businesses
145
How can economic growth be supported by businesses?
Change objectives to growth – Training/development of staff: increasing quality of labour
146
Positive effects of economic growth on businesses
Growth in GDP = higher revenues and higher profitability – Gives potential for economies of scale – Increased business confidence: supporting plans for the future (strategic decisions)
147
Negative effect of economic growth on businesses
If growing too fast, can lead to recession
148
Contextual examples of GDP increasing
After COVID-19 lockdown, people spend their savings – Recovery from recession – 'Eat out to help out', encouraged GDP increase to combat recession
149
How is GDP measured?
Quarterly (every 3 months)
150
What is the expected growth rate for an economy?
0.6 per quarter or 2.4% per year
151
What may consumer spending influence?
Business confidence
152
What may consumer confidence affect?
Business confidence
153
How will times of economic growth impact a business' functional decision making? (Short to medium-term)
Maximise shareholder return – Pay off debts from recession – HR, more staff needed
154
How will times of economic growth impact a business' strategic decision making? (Long-term)
Improve product portfolio – More capital available for investment and retained profit: more likely to invest/expand – Build relationship with suppliers over time – Marketing – Training schemes
155
Define 'functional'
Short/medium term or Departmental
156
Define 'strategic'
Long term
157
Define 'exchange rates'
The price of one country's currency, in terms of other currencies
158
When must a business consider exchange rates?
When businesses export/import goods
159
How do exchange rates impact business activity?
Impact if they bring goods into the country – May only sell in selected countries: as fluctuating exchange rates may reduce business confidence – May influence domestic businesses (in own country)
160
Define 'appreciation'
An increase in the value of a currency is called an appreciation. This means the currency is worth more (e.g. £1 = $1.60)
161
What does 'SPICED' stand for?
Strong Pound: Imports Cheaper, Exports Dearer
162
What does 'WPIDEC' stand for?
Weak Pound: Imports Dearer, Exports Cheaper
163
What does 'SPICED' suggest?
Business that import will be able to buy cheaper raw materials and finished goods – Business that export may see less demand as it looks less attractive to customers
164
What does 'WPIDEC' suggest?
Greater demand from abroad for UK goods – Input prices increase if raw materials are imported – If the business has a price inelastic product, it can pass the increase in costs onto the consumer
165
Define 'exchange rate uncertainty' (with context)
UK exchange rates are determined by supply and demand, meaning they fluctuate regularly
166
What issues can 'exchange rate uncertainty' give international businesses?
Hesitant to invest – Low business confidence
167
How can international businesses overcome 'exchange rate uncertainty'?
Consider loans to get through a few months – Slightly reduce spending/costs to minimise risk – Pull out of international market altogether – R&D to find best nations
168
Define 'inflation'
General rise in prices or a fall in the value of money – A sustained increase in the average price level of an economy – As prices go up, money is worth less
169
What does the 'rate of inflation' show?
How prices have changed based on the same period a year earlier – An indication of the cost of living changing
170
What are the two measurements of inflation?
Retail Price Index – Consumer Price Index
171
Define 'Retail Price Index' (RPI)
Measurement of 'basket' of goods and services representative of what people buy in the UK
172
Define 'Consumer Price Index' (CPI) and how it's measured
Picks 600/700 of most commonly purchased goods/services from UK households, classes them as a 'basket'. Compares current from last measurement to find the CPI which measures inflation
173
The two causes of inflation
Cost push inflation – Demand pull inflation
174
Define 'Cost push inflation'
Occurs when production costs increase (e.g. wages, raw materials, fuel, taxation), causing firms to raise prices
175
Define 'demand pull inflation'
Prices rise due to excess demand in the economy – Increased demand leads to higher prices
176
Define 'inflationary expectations'
Views about what will happen in the future, regarding inflation
177
Advantage of 'inflationary expectations'
If aware in advance what will happen regarding inflation, a business can plan ahead and avoid recession
178
Disadvantages of 'inflationary expectations'
Could be wrong – Only a prediction
179
Define 'deflation'
Opposite of inflation – When there's not enough demand (GDP decrease), companies reduce their prices
180
What can 'deflation' cause?
Fall in productivity – Lower prices – Rise in unemployment (cutting costs to lower prices)
181
Impacts of low inflation on UK economy
Business confidence increase – Business more successful – Imports/exports successful – Low prices: increasing consumer morale – Employees earn more: increasing motivation
182
Impacts of high inflation on UK economy
Lack of confidence (both business and consumer) – More unemployment – Wages decrease, less motivation – Cost of living rises – Prices rise (encourages saving) – Business struggles with imports/exports
183
Define the 'fiscal policy'
Sets tax rates – Sets government spending
184
Contextual example of 'fiscal'
Government's
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What is 'monetary' control?
Interest rates
186
List 3 types of tax
Income tax – Corporation tax – VAT
187
Define 'income tax'
Tax on how much someone earns (their income)
188
Define 'corporate tax'
Taxes paid by a business
189
Define 'VAT'
Tax paid on a product or service
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How does an increase in 'income tax' affect GDP?
People have less money, so GDP goes down as they spend less
191
How does a decrease in 'income tax' affect GDP?
People have more money, so they spend more, which boosts GDP
192
How does an increase in 'corporation tax' affect a business?
May put them into a phase of retrenchment
193
How does an increase in 'VAT' affect GDP and business confidence?
Prices go up to cover VAT, so customers spend less – Business confidence and GDP go down
194
What must the government do when considering the 'fiscal policy'?
Balance spending and tax!
195
How will raising taxes affect a business?
May have to change objectives – Decrease confidence (consumer + business) – Borrow more or less money?
196
How will cutting taxes affect a business?
Increase spending (GDP) – Increase confidence
197
How is 'Fiscal Policy' used to achieve objectives?
Keep inflation on target (2%) – Stimulate economic growth and employment – Maintain stable economic cycle
198
How does the government spend its money?
NHS – Education – Infrastructure – Aid abroad – Grants + support – Emergency services – Defence
199
Benefit of government spending
Help areas of economy that the current business environment can't help
200
Disadvantages of government spending
Might not benefit everyone – Expensive to cover
201
Define 'expansionary fiscal policy'
Helps to lower unemployment, cutting taxes – more money to spend – May cause inflation
202
Define 'contractionary fiscal policy'
Reduces government spending and increases taxes to control inflation – Reins in economic growth sustainably
203
How does the 'monetary policy' work?
Monetary Policy Committee meets monthly to decide interest rates – Considers GDP, unemployment, exchange rates
204
Define 'more open trade'
International trade – Free trade with no restrictions or government interventions
205
Benefits of 'More Open Trade'
Cheaper costs (no tariffs) – Job creation – Economic growth – Access to international customers
206
Define 'protectionism'
Government protects domestic businesses via subsidies and tariffs/quotas on imports – Encourages local sales and boosts GDP
207
Define 'non-tariff barriers'
Subtle government controls such as regulations or limiting entry points for imports
208
Define 'embargos'
Forbidding trade with a particular country
209
Advantages of 'protectionism'
Develops local industries – Adds jobs – Boosts economic growth – Helps small businesses
210
Disadvantages of 'protectionism'
Import prices rise – Domestic prices rise – Risk of retaliation
211
What is liquidity all about?
Cash flow
212
What is needed to evaluate liquidity?
Balance sheet
213
How is liquidity determined?
Relationship between current assets and current liabilities (current ratio)
214
What is the minimum acceptable liquidity? (current ratio)
1.5 – 2.5
215
What is considered a low current ratio? And what could this mean?
Below 1 – Liquidity problems
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What would a high current ratio suggest?
Too much working capital tied up in inventories and debtors
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Why is it important to look at trends in the current ratio?
Ratio differs between businesses – trends give clearer picture
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Define 'acid test ratio'
Like current ratio, but removes the hardest asset to convert to cash
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Effects of inflation on consumers
Inflation reduces money value and saving – Higher wages demanded – Fixed income groups (e.g. pensioners) lose out
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Positive effects of inflation on businesses
Prices rise industry-wide, boosting revenue – Cost increases can be passed onto customers
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Negative effects of inflation on businesses
May not pass costs onto customers – Disrupts planning – Higher interest rates – Reduced demand – Challenging decisions
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Why has globalisation increased?
Increased population – Rise in internet – Infrastructure – Competition – Higher demand – Containerisation
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Define 'emerging economies' with examples
Developing countries with fast-growing economies – China, India, Brazil, Russia
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Advantages of 'emerging economies'
Cheaper labour – Create jobs – Reduce poverty – Boost economic activity
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Define 'CSR'
Corporate Social Responsibility – Going beyond legal requirements to help society, workforce, and environment
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Importance of CSR
Public awareness – CSR expected as part of business culture
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Context of CSR
McDonald's Planet Champion Program trains staff to reduce environmental impact
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Advantages of CSR
Better brand image – Confidence – Morale – Talent – Positive publicity
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Disadvantages of CSR
Expensive – Cost passed to customers – Harder for small businesses
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CSR and survival objective
CSR is first to cut when survival is at stake
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Five areas of 'The Stakeholder Concept'
Employees – Community – Government – Suppliers – Customers
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What does 'The Stakeholder Concept' do that Elkington's Triple Bottom Line doesn't?
Sees all stakeholders as equally important
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Define 'The Shareholder Concept'
Focused on shareholders – Objectives: profit – Higher profits = dividends – Good performance = share price and capitalisation up
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What do 'The Stakeholder Concept' and 'The Shareholder Concept' have in common?
Both define ethical approach – Who is important to the business
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Describe the layout of Carroll's Pyramid of CSR
Top = Philanthropic – Ethical – Legal – Bottom = Economic
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Define Carroll's Pyramid of CSR
A model showing society's expectations from a business, across four responsibilities
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'Business is the main driver of globalisation' - Argue for this statement
• Going multi-national means increase sales, profit and shareholder value • Barrier to international business are lower and falling, meaning easier to become international • Government want to encourage domestic businesses to expand, to improve UK economy
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Define 'market liberalisation'
Markets freeing up, less communism
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Ways of 'going global'
• Establish production sites overseas • License technology and other IP (intellectual property) • Joint ventures (mergers/takeovers) • Franchising • Offshoring / outsourcing
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Define 'licensing technology'
Allowing other organisations to use your technology
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Advantages of 'Globalisation'
• Gain better understanding of global markets • Tax evasion • Increase brand image • Higher profits and stronger position • Unit costs lower in poorer countries • Extend life of obsolete products in poorer countries • Opportunities for staff to work abroad • More intense competition • Access cheaper goods/services from emerging countries • More investors available • Creates jobs abroad
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Disadvantages of 'Globalisation'
• Initial cost is expensive • Takes time, don’t focus on other tasks • Have to change products for other cultures • Increased transport/tariffs • Can create unemployment in UK • More CO2 emissions
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Define 'tariffs' (Globalisation) and what does it cause
• Tax on imports/exports by a government • Causes level of imports to fall
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Define 'quotas' (Globalisation)
Restriction by government on amount/number of goods/services that may be exported within a period
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Define 'TradeBloc' (Globalisation)
Intergovernmental agreement where trade barriers (tariffs etc.) are reduced/eliminated
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Define “balance sheet”
A snapshot of the business’ assets and liabilities on a particular day/time
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Define “depreciation”
The fall in value of an asset over time
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Why may a business produce a financial statement?
• Overview of business value • Notice financial issues • Make quick decisions • Forecast investments
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What does an “income statement” show?
Shows revenues and costs, thus profit and loss
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Define a “ratio”
How much there is of something compared to something else
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List all “financial ratios”
• Current ratios • Gearing • Return on capital employed • Payable days • Receivable days • Inventory turnover
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Define “ratio analysis”
Technique for analysing financial performance using data from accounts
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Define “liquidity” and the ratio used for it
Firm’s ability to pay short term debts
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What does “current ratio” measure? And suggest ideal measurement
Ability to meet short-term debts
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What does a firm with a high current ratio suggest?
May not be investing enough in non-current assets to expand
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When will firms often experience poor liquidity?
When growing due to extra costs
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What is the gearing ratio measured in? (units)
%
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What does 'high gearing' suggest?
Firm has borrowed a lot compared to total capital
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What does “gearing” show? And suggest ideal figure
• Proportion of capital from loans • No ideal figure
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What is judged as 'high gearing'?
Above 50%
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What is judged as 'low gearing'?
Below 25%
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What does 'low gearing' suggest?
Firm used alternative finance
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Benefits of 'high gearing'
• Less need for share capital • Fewer shareholders • Easier long-term decisions • Less dividends • More retained profit
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Benefits of 'low gearing'
• Lower interest/loan payments • Attracts shareholders • Less risk from interest rate changes • Fewer creditors = less risk of liquidation
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What does “ROCE” measure?
• Relative profitability • Evaluate performance • Efficiency of profit vs. capital invested
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What does “Inventory (stock) turnover” measure?
How quickly stock converts into sales
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What is 'inventory (stock) turnover' measured in? And what does the figure represent?
• As a number • Represents how many times/year average stock is sold
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Ideal 'inventory (stock) turnover' figure
Higher is better
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Factors influencing inventory (stock) turnover
• Product popularity • Product type (e.g. perishables) • Type of business • Consumer tastes • Research quality • Product portfolio
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What does “receivables (debtors) days” show?
Number of days to convert receivables into cash
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What is 'inventory (stock) turnover' measured in? (units)
Days
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How will firms get HIGHER receivable days?
TRADE CREDIT
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How will firms get LOWER receivable days?
Deal in cash or no credit sales
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What does “payables (creditors) days” show?
Number of days to pay suppliers
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What is 'payables (creditors) days' measured in?
Days
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What is a firm's preference to payables and receivables?
Prefer high payables > receivables
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What does 'GDP' measure?
Gross Domestic Product
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Define 'economic environment'
Key economic factors influencing business and customer behaviour
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How can economic growth be supported by the government?
• Gov spending • Cut interest rates • Export more than import • Training/university incentives • Lower taxes/more grants
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Positive effects of economic growth on businesses
• Higher GDP = higher revenues/profit • Economies of scale • Boosts confidence/plans • Supports strategies
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Negative effect of economic growth on businesses
If too fast, leads to recession
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How is GDP measured? And how much should the economy grow by per quarter?
Quarterly
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What contextually helped boost GDP?
'Eat out to help out' (COVID-19)
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Describe the 'business cycle'
1. Boom 2. Recession 3. Slump 4. Recovery
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Define 'business confidence'
Forward-looking expectations of firms
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Describe 'boom' ('business cycle')
High GDP, consumer spending, business confidence, profits, investment, rising costs, full capacity
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What factors does 'boom' ('business cycle') lead to?
• Higher dividends • Resource shortages • High overheads = higher prices • Higher GDP
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Describe 'recession' ('business cycle')
Falling demand, profit, confidence, less investment, unemployment, GDP falls 2 quarters
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How is a national recession measured?
GDP falls for 2 consecutive quarters
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What does 'recession' ('business cycle') lead to?
• Lower income • Lower demand/prices • Closures • Low investment • Survival mode • No confidence
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Describe 'slump' ('business cycle')
Very low demand, investment, confidence, rising business failure and unemployment
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What does 'slump' ('business cycle') lead to?
• Deflation • Low GDP • High unemployment • Redundancies • Low demand
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Describe 'recovery' ('business cycle')
Demand, investment, confidence start rising
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What does 'recovery' ('business cycle') lead to?
• More production • More employment • Confidence rises • Resource/material shortages
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How will times of economic growth impact a business' decision making?
• Hire more staff • Maximise shareholder returns • Pay recession debts • Strong supplier relations • More capital for investment
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Ideal business confidence figure
0.95
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What does the 'Average Rate of Return' do?
Compares avg yearly profit from investment with its cost (%)
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Advantages of 'Average Rate of Return'
• Balance risk • Justify investment • Choose best opportunity
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Disadvantages of 'Average Rate of Return'
Based on forecast
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Ideal 'Average Rate of Return' figure
High as possible
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What are the top 2 responsibilities of 'Carroll's Pyramid of CSR' known as?
Voluntary capacity | Philanthropic and Ethical
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How can 'Carroll's Pyramid of CSR' be used?
Analyse business decisions and assess whether they are made out of necessary (economic and legal responsibilities) or in a voluntary capacity (ethical and philanthropic responsibilities).
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What are the bottom 2 responsibilities of 'Carroll's Pyramid of CSR' known as?
Necessary | Economic and Philanthropic
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What does 'Net Present Value' (NPV) show us?
The true value of an investment, taking into account the impact of inflation and interest rates on the time value of money.
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What aspect of an investment does interest rates and inflation affect?
The returns it generates over time
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Suggest step-by-step how to calculate the NPV (Net Present Value)
1. Add up discounted cash flow | 2. Subtract cost of investment
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What does the discount factor suggest on the 'NPV' (Net Present Value) chart?
Shows the impact of inflation and a loss of interest has a value on the revenue generated from investment.
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What does 'Year 0' suggest on the 'NPV' (Net Present Value) chart?
Shows cost of the investment
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Define a 'demographic change'
Change in the structure of a country's population over time, in terms of factors such as: age, sex and race.
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What is a diverse range of races and religions within a country proportionate to?
A diverse range of cultural businesses being introduced… emerging markets
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What market especially benefits from an increased population?
Housing market
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Benefits of demographic and population movements within a country
• Higher demand | • Diverse workforce
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Contextual example of a business benefiting from an ageing population
Saga = over50's cruises
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Threats of demographic and population movements within a country
• Lack of new employees which bring new ideas and innovative ideas | • Resistant to change/adapt within the business | • Increased competition, targeting new markets
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How can migration changes and increased global population alter GDP?
Increased GDP in country moving to, but decreased in country they came from.
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How can businesses exploit migrant workers?
Pay them less as they're used to receiving less (depending on where they came from). This is evidence of exploitation and may harm brand image as a result.
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What % of the world lives in cities? (Urbanisation)
0.5
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Positive aspects of urbanisation
• Community spirit | • Increased footfall | • Brings more skilled workers | • Easier/Cheaper access to infrastructure | • Job opportunities | • Higher income
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Negative aspects of urbanisation
• Increase in emissions (environmental) | • Rural businesses lose out | • Crime and poverty increase | • Over-population (Mumbai)
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Ways that businesses can respond to urbanisation
• CSR pyramid | • Supporting low skilled workers (training) | • More offices in rural areas as will be cheaper
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Contextual example of a business using modern technology
AmazonGo
