Unit 7- Analysing the strategic position Flashcards
(151 cards)
1
Q
What is a mission statement?
A
It sets out a business’ overall purpose and focus or its reason for existence and is normally set out in a written statement
2
Q
Why is a mission statement important?
A
-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
3
Q
Factors affecting the mission statement
A
-The values of the founder
-A business’ strengths
-Extent the business demonstrates social responsibility
-The industry the business is operating in
4
Q
What are corporate objectives?
A
Medium to long term goals that inform decision making
5
Q
What are the common business objectives?
A
-Survival
-Profit {Profit Maximisation, Profit Satisficing}
-Growth
-Cash Flow
-Social
-Ethical
6
Q
Internal Factors affecting corporate objectives
A
-Business ownership (e.g sole trader, Ltd, Plc)
-Business culture (values and attitudes)
-Business performance
7
Q
External factors affecting corporate objectives
A
-Short termism
-PESTLE + C
8
Q
What is Short termism?
A
When a business priorities the short term rather than the long term performance.
9
Q
Factors for short termism
A
-Share holder pressure
-HR strategy & reward or remuneration method
-New leadership
10
Q
What is a strategy?
A
Long term plans to help achieve a firm’s objectives
11
Q
What is a tactic?
A
Short term actions to complete a strategy
12
Q
Who makes strategic decisions?
A
Corporate senior management or executives
13
Q
What is functional decision making?
A
Decisions made in departments: they must all work towards he same strategic goal which requires communication and coordination
14
Q
What is SWOT analysis?
A
A management tool that allows a business to assess its internal strengths and weaknesses and external opportunities and threats
15
Q
Benefits of a SWOT analysis?
A
-Unique to each business
-Regular updates (Dynamic)D
16
Q
Drawbacks of a SWOT analysis?
A
-Not guaranteed success:
-Poor implementation
- Fast environmental change
- Data can quickly become out of date
-Does not provide solutions
17
Q
How does a business measure financial performance?
A
Ratio analysis, which needs an income statement and balance sheet to be calculated.
18
Q
What is an income statement?
A
It shows the businesses revenue and cost over a period of time and therefore profit or loss over a period of time
19
Q
What is a balance sheet?
A
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)
20
Q
How will an income sheet be used?
A
-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
21
Q
What is ratio analysis?
A
It involves the comparison of financial data to gain insights into business performance
22
Q
What ratio is used to assess Liquidity? and what does it show?
A
Current ratio
It shows whether a business has sufficient cash to be able to pay it short term debts
23
Q
What ratio is used to assess Gearing? and what does it show?
A
Gearing Ratio
It shows the capital structure of the businesses, the proportion of debts relative to total equity (retained profit and share capital)
24
Q
What ratio is used to assess Profitability? and what does it show?
A
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
25
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
26
What is Liquidity?
It represents a business' ability to pay its day to day debts.
27
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.
28
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
29
How do you calculate current ratio?
Current assets/Current liabilities
30
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.
31
What is Gearing?
Gearing assesses whether a business is at risk from having too much debt.
32
What is non current liabilities?
Money that the business owes and will need to pay in the long term
-Bearing loans
-Bank loans
-Mortgages
33
What is Capital Employed?
Total equity + non-current liabilities
34
How do you calculate Gearing Ratio?
Non current liabilities/ Capital employed X 100
35
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.
36
How do you calculate Profit Margin?
Profit (gross,operating or net)/Revenue X 100
37
How do you calculate RoCE?
Operating Profit/Capital Employed X 100
38
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.
39
How do you calculate Inventory turnover ratio?
Cost of sales/Inventory = amount of times per year stock is replenished
40
How do you calculate receivables days ratio?
Trade receivables/Revenue X 365= Number of days taken by customers to pay the business
41
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
42
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
43
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.
44
Strengths of financial analysis
-They can show how well a business is performing
-Helps review historical trends on past successes
45
Limitations of financial analysis
-Only looks at financial elements
-Does not provide business with solutions
46
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
47
What is a core competency?
A core competence is something unique that a business has or can do better than its competitors.
48
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?
49
What are the uses of core competencies?
-Focus on core competencies to develop a strong competitive advantage
-Outsource non-core activities
50
What is the balanced scorecard?
The balanced scorecard model is a strategic planning tool that helps a business achieve its corporate objective
51
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
52
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
53
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)
54
What is the triple bottom line?
-Planet
-Profit
-People
55
What does Planet measure?
Measures impact if business on environment
More tangible- e.g. emissions, use of sustainable inputs
56
What does Profit measure?
Familiar to managers. Identified from income statement
Audited = reliable figure
57
What does People measure?
Measures extent to which business is socially responsible. Hard to calculate & report reliably & consistently
58
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.
59
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.
60
What political changes can occur?
Government policies:
The government policy includes:
Encouraging enterprise
Regulating key industries
Developing infrastructure
Setting environmental policies
Promoting international trade
61
How does encouraging enterprise cause change?
The government encourages enterprise: start up businesses & business growth by providing funding (grants) & support. Check Political and Legal change powerpoint.
62
How does Regulating key industries cause change?
Business decisions are scrutinised by the regulators & businesses can be fined for breaking the law, Regulators are ‘watchdogs’ appointed by the government to oversee some markets/industries. Regulators can cap price increases e.g. Ofgem can set the maximum price rise of 1 unit of gas.Check Political and Legal change powerpoint.
63
How does Developing infrastructure cause change?
Infrastructure projects paid by the government can represent an opportunity for some businesses. Check Political and Legal change powerpoint.
64
How does Setting environmental policies cause change?
The government environmental policies can represent threats & opportunities. Check Political and Legal change powerpoint.
65
How does Promoting international trade cause change?
The government policies on international trade can represent opportunities for businesses or threats. Check Political and Legal change powerpoint.
66
What are the 3 key areas of legislation for legal factors?
-Competition
-Labour Market
-Environment
67
How does Competition Law cause change?
Competition law protects customers & businesses against unfair competition practices e.g. colluding & dominant market position (monopoly).
The Competition & Markets Authority (CMA) is responsible for enforcing competition law and investigates mergers and takeovers.
Predatory pricing is a strategy in which a competitors deliberately lowers prices to force out the competition. Once the competitors have gone out of business, they raise their prices again. This practice is illegal under competition laws. Check Political and Legal change powerpoint.
68
How does Labour Law cause change?
The labour legislation is designed to prevent the exploitation of employees by businesses:
Labour legislation covers:
-The minimum wage & national living wage
-Working hours
-Maternity & paternity leave
-Sickness & holiday
-Discrimination in the workplace
Check Political and Legal change powerpoint.
69
How does Environment Law cause change?
Environmental law is designed to minimise the negative impact of business on the environment.
Pollution control:
-Air quality
-Water quality
-Waste management
-Contaminant cleanup
-Chemical safety
Resource sustainability:
-Impact assessment
-Water resources
-Mineral resources
-Forest resources
-Wildlife & plants
-Fish & game
Principles:
-Sustainable development
-Equity - future generations having the same opportunities
Check Political and Legal change powerpoint.
70
What does a strong economy mean?
A strong economy usually means high demand, more sales & revenues
71
What does a weak economy mean?
A weak economy usually means lower demand, fewer sales & revenues
72
What does GDP measure?
The Gross Domestic Product (GDP) attempts to measures business activity & the state of the economy in one number. It does this by measuring the value of all products & services produced in a country
73
What are the key phases in the business cycle?
The business cycle has key phases
Boom
Recession
Slump
Recovery
74
What happens during a boom?
During a boom:
Increase in prices & wages
Strong demand
Businesses try to produce more to meet demand
75
What is a recession?
A period of two consecutive quarters (6 months in a row) of negative growth - negative GDP figure e.g. - 2%
Fewer goods & services are being produced & sold
76
What happens during a recession?
During a recession:
Demand falls sharply for a prolonged period
Businesses are selling fewer products or services & revenue falls
Prices stop rising & may start falling
77
What happens during a slump?
During a slump:
Demand is at its lowest
Some businesses are not able to breakeven, making a loss & some may close down
78
What happens during a recovery?
During a recovery:
Demand starts picking up again
Businesses see an increase in revenue & start making a profit again
79
How will the impact vary?
It will vary depending on the type of good you sell
A normal good is a necessity & has an income elasticity between 0 +1
An inferior good is a product with a lower perceived value & has an income elasticity below 0 < YED
80
What is inflation?
Inflation is the measure of the average change in the price of goods & services as a %
81
What measures inflation?
The Consumer Price Index (CPI) is the name given to the inflation figure (which is %)
82
What is the inflation target?
Low inflation at 2% is also known as price stability
83
How does demand pull cause inflation?
Strong demand encourages businesses to put their prices up
84
How does cost push cause inflation?
Increase in costs pushes businesses to put their prices up
85
How does inflation affect the working person?
As prices of food, petrol, clothing, etc. increase they can afford less
They may be able to buy less & may need to cut their spending
They may ask for a pay rise to compensate
86
How does high inflation affect people's savings?
As prices increase savings lose their value
Savers are able to buy less with what they have saved
87
How does high inflation affect businesses?
Suppliers’ prices will increase, wages will increase & costs will go up
The business can increase its prices to maintain its profit margin but if -1
88
How can inflation be good for businesses?
Increase in prices should lead to increase in revenue & profit (if costs do not increase as much)
Long-term funding using debt (bank loan) becomes cheaper
89
What is the fiscal policy?
Fiscal policy explains taxation (how much tax people & businesses have to pay) & government spending
90
What is tax used for?
The government spends taxes to pay for public services (government spending)
91
What are the impacts of tax cuts?
Reduces businesses’ costs
Increases customers’ disposable income
Increases demand & revenue
92
What are the impacts of tax increases?
Increases businesses’ costs
Decreases customers’ disposable income
Decreases demand & revenue
93
What are some impacts of the fiscal policy?
Decreases businesses’ revenue (fewer contracts from the government)
And vice versa
94
What is an interest rate?
It is the cost of borrowing & the reward for saving money (expressed as a %)
95
Impact of borrowing on customers?
Impact on customers:
Cost of credit increases making large purchases less affordable
Reward for saving increases making saving more attractive
☛ Customers are likely to spend less leading to a fall in demand
96
Impact of borrowing on businesses?
Impact on businesses:
Debts on variable rates e.g. overdraft, could become more expensive
Customers spending less means lower revenue
☛ Lower revenue & higher financial costs = lower profits!
97
Why do interest rates fluctuate?
Banks set their own interest rates against the Bank of England’s base rate.
If the base rate is raised, banks are likely to increase their rates making borrowing more expensive & vice versa if the base rate is reduced, banks are likely to offer lower rates.
The Bank of England will do this as part of initiating the government’s monetary policy in order to ensure price stability (keep inflation at 2%).
98
what is an exchange rate?
An exchange rate is the price of one currency expressed in terms of another
99
What does it mean when a currency appreciates?
When a currency appreciate it means it increases in value
100
What does it mean when a currency depreciates?
When a currency depreciate it means it decreases in value
101
How does fluctuations in exchange rates affect businesses?
Fluctuations in exchange rates affect businesses’ costs & revenue
102
what is the impact of exchange rates fluctuations?
Fluctuations in exchange rates affect:
-Price set for products sold abroad
-Revenue from sales made abroad
-Costs of goods bought abroad
-Profit made overall from import / export
103
What does SPICED stand for?
Strong
Pound
Imports
Cheaper
Exports
Dear (Expensive)
A strong pound makes imports cheaper and exports more expensive
104
What are some protections from fluctuations?
-Holding amounts in different currencies
-Asking foreign customers to pay in pounds
-Asking to pay foreign suppliers in pounds
-Fixing the rate of currency at the time of placing or taking an order
-Producing in the country where the market is
105
Who is highly affected?
-Businesses importing & exporting
-Businesses affected by foreign competition at home & abroad
-Businesses in the tourism industry
106
Who is slightly affected?
-Domestic businesses e.g. hairdresser
-Businesses selling products with an inelastic PED e.g. petrol or luxury products
-Businesses in a monopoly market
107
What is international trade?
International trade is the exchange of goods & services between countries
108
What is free trade?
‘Open Trade’ or ‘Free Trade’ means no restrictions on the flow of goods & services between countries
Some countries have ‘agreements’ to have ‘free trade’ or reduced barriers to trade
109
What is a trading bloc?
A trading bloc is a type of intergovernmental agreement where regional barriers to international trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states, allowing them to trade with each other as easily as possible.
110
Who is the WTO?
The World Trade Organisation (WTO) is an organisation setting the rules of international trade
111
What is protectionism?
‘Protectionism’ are policies imposed by governments to restrict free movement of goods & services between countries
112
What are tariffs?
Taxes or duties imposed on imported goods and services. They increase the cost of foreign products, making them less competitive compared to domestically produced goods.
113
What are quotas?
Physical limits set on the number of units that can be imported into a country.
114
What are technical barriers?
Rules & regulations applied to products entering a country.
115
What are subsidies?
Financial support or incentives provided by governments to domestic industries, making their products more affordable or competitive in the global market. This can distort international trade by favoring domestic production over imports.W
116
What are the pros of protectionism?
Allows ‘infant’ industries to develop cost advantages
Protecting strategic industries
Protection from predatory pricing from overseas firms
117
What are the cons of protectionism?
Higher prices for consumers
Retaliation & trade wars
Limits of globalisation
118
What are demographic changes?
Demography is the study of the population, and changing demographic trends are leading businesses to adapt their strategies
119
What are the key demographic changes?
Age (ageing population)
Growth in population
Migration (movement of population between countries)
Urbanisation (people moving to towns & cities)
120
What are consumer lifestyle changes?
Health & wellbeing (concerns for health)
Holidays (demand for leisure & travel)
On-demand culture (demand for convenience)
Ready meals & eating out (increased demand)
Drive towards sustainability (vegan, ethical etc.)
Luxury (increased demand)
Single occupancy (growing number of households)
121
What are the results of online businesses?
Opportunities for small startups
Access to global market (using the internet)
Reduction in overheads (compared to bricks & mortar businesses)
Growth of direct delivery
122
What is Corporate Social Responsibility (CRS)
Corporate social responsibility (CSR) is businesses’ concerns for their social & environmental obligations - a consideration of all stakeholders.
123
What is Carroll's CRS Pyramid?
This pyramid illustrates the 4 layers of corporate social responsibility that a business has towards society (its stakeholders).
124
What are the 4 layers of the CRS Pyramid?
Philanthropic Responsibility
Ethical Responsibilities
Legal Responsibility
Economic Responsibilty
125
What are the pros of CRS?
CSR can provide a competitive advantage or USP
CSR can prevent government intervention & future legislation
126
What are the negatives of CRS
CSR increases costs, reduces profitability & competitiveness
127
What are Porter's Five forces?
Buyer Power
Supplier Power
Substitutes
Threat of New Entrants
Competitive Rivalry
128
What are the 5 forces about?
A framework for analysing the nature of competition within an industry
Helps understand & assess industry profitability & attractiveness
129
What are the environment in industries with low profitability?
Strong suppliers
Strong customers (buyers)
Low entry barriers
Many substitutes
Intense rivalry
130
What are the environment in industries with high profitability?
Weak suppliers
Weak customers (buyers)
High entry barriers
Few substitutes
Little rivalry
131
How can you manage threat of entry?
1. Use patents/copyright
2. Economies of scale to reduce prices
3. Create customer and brand loyalty
4. Exclusive rights to distribution
5. lobbyist to control regulations
132
How can you manage buyer power?
Differentiate products
Create buyer group to limit customer option
Find new customers and market segments
Increase marketing / price wars to decrease sellers
133
How do you manage supplier power?
1. Lock longer contracts
2. Make economies of scale
3. offer to merge as a FVI partner
134
How do you manage substitute power?
1. Brand loyalty
2. Better meet customer needs
3. cost leadership
4. Try lock customers into an ecosysytem
135
Rivalry power?
1. cost leadership
2. increasing marketing
136
What does investment appraisal mean?
Investment appraisal means assessing the financial value of an investment
137
What is the payback period?
How long will it take for the investment to be repaid?
Payback calculates the number of years & months it takes to recover the cost of an investment from its earnings.
138
What is the average rate of return (ARR)
What is the average annual interest rate returned by the investment?
ARR calculates the average annual profit as a % of the initial investment - helping to make comparisons between investment and the return from savings.
139
What is the Net present value (NPV)?
How much is the investment worth in today’s value?
Net present value (NPV) looks at how much an investment is worth in today’s money taking into account factors such as inflation or not receiving the returns.
NPV takes into account the monetary value now of the project’s future cash flow by using a discount factor.
the higher the discount factor %, the higher the risk of the project.
140
How do you calculate payback?
Work out the balance
Stop when the balance is less than net return the following year
Calculate the number of months:
Balance / Net return the following year x 12 months
141
Pros of payback?
Easy requiring little training
Focuses on cash flow and liquidity
Focus on time is useful in dynamic markets i.e. tech
142
Cons of payback?
Ignores total return and profitability
Fails to consider the impact of inflation on the real return
Encourages short-term safe investments only
143
How do you calculate ARR?
Step 1: Calculate the overall profit generated from the investment
Step 2: Divide by the number of years of the project to obtain the average annual profit/return
Step 3: Calculate what % this is of the initial investment
ARR (%) = Average annual return / initial cost of project (£) x100
144
Pros of ARR?
Enables an easy comparison between options
Takes into account the profitability of an investment
145
Cons of ARR?
Ignores the timings of the return, which could lead to cash flow and liquidity problems.
146
How do you calc NPV?
Calculation:
Step 1: Take each Net cash flow/ Return X the given discount factor
Step 2: Add up all the new Net present values
Step 3: Take away initial cost
= Investment NPV
147
What to do with the NPV results?
Positive NPV= Accept the project
Negative NPV= Reject the project
148
Pros of NPV?
Considers the time value of money
Gives a precise answer to aid decision making ( + go for it, - reject it)
Considers opportunity cost of the future
149
Cons of NPV?
Choosing the right discount rate for long projects can be hard - good projects could end up being rejected
Can be difficult to calculate
The choice of discount rate could be incorrect
150
What is sensitivity analyisis?
Sensitivity analysis is a technique which allows the analysis of changes in assumptions used in forecasts. A sensitivity analysis looks at what would happen if the assumptions were different?
151
Limitations of investment appraisals?
Investment appraisal methods only provide an assessment in financial terms. Other key factors should be considered when making an investment:
State of the economy (Business cycle)
Competitors’ actions
Corporate objectives
Consequences on different functions of the business
Sources of finance
etc.
