3.7 Analysing the strategic position of a business

3 types of business environment

* increased costs
* delay on products / services
* staff shortages

PESTLE

* **P**olitical
* **E**conomic
* **S**ocial
* **T**echnology
* **L**egal
* **E**nvironmental

General features of the UK and EU competition policy:

* seeks to improve the competitive nature of markets

Monopolies

* own at least 25% market share
* need to be regulated to avoid exploitation of customers

Barriers to entry of a monopoly

* higher costs
* economies of scale

Duopoly

* only 2 firms in the market

Barriers to entry of a duopoly

* no price competition
* potential for collusion

Oligopoly

* exists where there are only few firms in the market

Barriers to entry of oligopoly

* usually through advertising
* low price responses to competition

Monopolistic competition

* exists where there are large numbers of firms in the market selling differentiated products

Barriers to entry of monopolistic competition

* low hence stronger competition
* branding is highly important

Perfect competition

* exists where there are a large number of firms in the market selling similar products
* firms in this industry have no influence on price

Barriers to entry for perfect competition

* none

Collusion

* when 2 or more firms agree to limit competition

Competitions and Market Authority (CMA)

* responsible for strengthening competition / reducing anti-competitive behaviour

Consumer price index

* inflation is measured by the consumer price index

High inflation

* businesses will increase their prices
* consumers have less purchasing power

Fiscal policy

* government spending and tax policies

Monetary policy

* interest rates and money supply

How do low interest rates stimulate the economy?

* more business likely to take out loans
* consumers more likely to spend

How do high interest rates stimulate the economy?

* businesses less likely to take out loans
* consumers less likely to spend

Taxation

* percentage of personal income or business profits that must be paid to government

Businesses

* high profit = high tax
* low profit = low tax

Consumers

* higher income = more tax
* low income = less tax

State 3 types of taxation

* income
* VAT
* corporation

Define globalisation

* process through which an increasingly free flow of ideas, people, goods, services and capital leads to integration of economies and societies

What are trade blocs?

* a group of countries that act together to make trading easier

Methods of protectionism

* tariffs
* domestic subsidies
* quotas
* other non-tariff barriers

Reasons for restrictions on free trade

* protect infant industries
* to retaliate
* raise tax revenue
* ensure employment protection

What are tariffs?

* a tax imposed on imports

What is the human resource flow?

* assessing future workforce needs so that the objectives of the business can be met

What are intra-business comparisons

• compare between businesses (e.g. performance or to benchmark)

What are inter-business comparisons?

• comparing within a business

What is return on capital employed?

• a measure of how efficiently a business is using capital employed to generate profits

What is ratio analysis?

• allows for a more meaningful analysis of published accounts

Return on capital employed (formula)

• operating profit/ (total equity + non-current liabilities) x 100

Fixed assets

• Cannot be turned into cash as quickly (i.e. cars)

Current assets

• can be turned into cash quickly (i.e. physical cash)

Long term liabilities

• loan

Short term liabilities

• overdraft

What are expenses?

• day to day cost

What is profitability?

• how profitable is the business

• a figure that tells you the ROI (yield)

• saving = low risk/low yield

• investing= businesses, markets, rental property

Liquidity (current ratio)

• business’ ability to survive in the short term (i.e. pay debts and day to day expenses)

  = current assets/current liabilities

Ideal liquidity ratio

• 1.5-2:1

  (i.e. 2:1 means 2 assets to repay every £1 owed)

Low liquidity

• business with low liquidity is in danger if short term creditors demand payment quickly

Ways to improve low liquidity

• switch to long term sources of finance (i.e. loan)

• sell assets no longer in use

• monitor debtors to avoid bad debts (debtors who don’t pay you back)

What is gearing?

• measures what proportion of a business's capital is funded through long-term loans

• >50% debt= highly geared

Gearing (formula)

• non-current liabilities / (total equity + non current liabilities) x 100

Debt/loan

• keep control 100%

• a stable industry so returns (profits) are modest

• older/ more established industry

• have to be repaid

Share capital

• no obligation to repay

• Volatile, risky with high potential- profits will be high, losses will also be high

• loss of control

• younger industry

What are reserves?

• cash from previous gears

What are efficiency ratios?

• assess internal management of a business

• looks at management of cash and inventory

What are payable days?

• when a business pays suppliers for supplies purchased on credit

• may want payable days to ratio each cash flow- short payable days may result in discounts

Payable days (formula)

• payables /cost of sales x 365

Cost of sales (formula)

• (opening stock + purchases) - closing stock

What are receivable days?

• measure of when a business is paid by debtors/customers

Receivable days (formula)

• receivables / sales revenue x 365

What is inventory turnover?

• measures how quickly a business gets rid of stock (sell)

Inventory turnover (formula)

• cost of sales / (average inventory held)

Average stock (formula)

• (opening stock + closing stock) ÷ 2

Value of financial ratios when assessing performance

• provides a tool for the interpretation of accounts

• aids decision making

  structure for which comparisons can be made:

• overtime with targets

• with other businesses

Limitations of financial ratios when assessing performance

• time consuming

• need to consider reason behind ratios

• accounts may have been made to look better

How to calculate payback

• find difference between year 1 and initial cost

• then ÷ by how much year 1 would make per month

  (year 1 ÷ 12= per month)

What does average rate of return calculate?

• average profit as a % of the cost of the initial investment

Average rate of return (formula)

• total net cash flow ÷ number of years

How to calculate average rate of return

• calculate average annual profit

• then calculate average rate of return (annual output ÷ initial investment x 100)

ARR (advantages)

✅the higher the ARR the better the proposed investment

✅allows for easy comparison with other forms of investment

ARR (disadvantages)

❌no consideration given to timings of the inflow

What does Net Present Value (NPV) calculate?

• total return on an investment taking into account the the value of money

• discounts the return each year to recognise that £1 today is not the same as £1 in 3 years’ time using a discount factor

How to calculate net present value

• multiply each net cash inflow by relevant discount factor

• add up all annual NPV to calculate total return on investment

What does a positive NPV imply?

• implies a worthwhile investment, but its big enough return to justify the risk

• takes into account the time value of money, but discount factors a prediction

What are the two ways that data can be analysed?

• over time

• in comparison

How can a business analyse data over time?

• annually

• year to month

• monthly

• tends over long time periods

How can a business analyse data in comparison?

• benchmark within the business

• benchmark against competitors

• industry average

What is important about having core competences?

• combined expertise

• collective learning

• competitive advantage

• unique business character (difficult to imitate)

How does investment in R&D affect short term performance?

• high expenditure

• low profit margin

• risk of no success

How does investment in R&D affect long term performance?

• new product development

• increased differentiation

• premium price

How does increased capacity affect short term performance?

• lower capacity utilisation

• high unit costs

How does increased capacity affect long term performance?

• increased market share

• achieve growth objective

How does training employees affect short term performance?

• time away from workplace

• additional costs

How does training employees affect long term performance?

• greater employee engagement

• lower labour turnover

What is Kaplan & Norton’s balanced scoreboard?

• a strategic system used to plan and manage a business’ activities in relation to its mission statement

What 4 areas do Kaplan & Norton say a business looks at?

• finance

• internal business processes

• learning and growth

• customers

What is Elkington’s Triple Bottom Line?

• a model designed to encourage sustainability

What 3 components does ETBL focus on?

• profit

• people

• planet

What does ETBL force businesses to do?

• consider its corporate social responsibility (CSR)

ETBL: profit

• is a business’ economic responsibility

• shareholders kept happy, employees kept employed, suppliers paid on time

• business need to operate legitimately

ETBL: people

• is a business’ social responsibility

• customer needs met, employees employed, suppliers paid

ETBL: planet

• is a business’ environmental responsibility

• recycling, use of plastic

Are models such as ETBL and K&N effective?

• time consuming

• how effective are they in reference to business results

How do entrepreneurs and SMEs (small,medium enterprises) affect businesses

An example of the consequences of not regulating

• Financial crash 2008

Advantages of regulation

✅ensure quality and choice are maintained

✅protect customers

✅creates environment for business to strive for efficiency through reduced costs

What does privatisation lead to?

• monopoly power: more firms privatised operate in markets with barriers to entry

What is deregulation?

• opening up of markets to new competition through removal of regulations that provide barriers to entry

Advantages of deregulation

✅greater efficiency: reducing costs to compete effectively (decreased costs—>better quality)

✅less government intervention allows firms to produce to market needs

How do the government improve infrastructure to help businesses run more effectively?

• transportation: easy, quicker connections

• provision of utilities

• provision of information: access to fast info

How do the government use policy to benefit the environment?

• pollution permits: buying rights to pollute

• tradable permits: if not used can be given to those who pollute above allowance

• provides financial incentive for businesses to reduce pollution

How does government’ policies on international trade impact businesses?

• identifies opportunities: network globally, advising

• UK Trade & Investment helps to export to foreign markets, helps foreign companies to set up in the UK

How does competition law impact businesses?

• promotes fair competition

• anticompetitive practices are illegal (i.e. price fixing