3.7 Analysing the strategic position of a business

Mission

The core purpose of the business and the reason for its existance.

Corporate objectives

Goals set for the business that lead to the misson.

Internal influences on corporate objectives

- Business ownership
- Business culture
- Business performance

External influences on corporate objectives

- Pressures for short-termism
- Changes in the economy
- Environmental
- Technology
- Demographic

Strategy

Plan of action to achieve a long term goal.

Tactics

Short term actions to achieve the strategy.

Function decision making

Decisions made within the functional areas of a business
E.g. marketing, finance, operation and HR

SWOT analysis

Internal strengths and weaknesses
External opportunities and threats

SWOT analysis benefits

- Identify core competencies
- Focus on the future
- Source of strategic planning
- Redefine and set overall objectives

Financial performance

Key element to firms achieving their mission which is normally done through ratio analysis.

Balance sheets

Show what the business owns (assets) and what it owes (liabilities)

Non-current assets

Assets that remain in the business for longer than 1 year.
E.g. land, buildings, machinery, vehicles, equipment

Intangible assets

Patents, trademarks, copyright, brand names and goodwill.

Current assets

Assets owned for less than 1 year.
E.g. Inventories, receivables and cash.

Current liabilities

Debts of a business that will be repaid within 1 year.
E.g. ayables (creditors), overdrafts, corporation tax and dividends due for payment.

Non-current liabilities

Debts of a business that will be repaid in more than 1 year.
E.g. bank loans, mortgages and debentures.

Shareholder equity

The money attributable to the business owners

Important figures drawn from balance sheets

- Working capital (money available for day to day operations)
- Net assets / net worth of a business (overall worth of business)
- Capital employed (total money invested into business)
- Assets employed

Income statement

Measures a company's financial performance over a specific accounting period.

Main elements of an income statement

- Revenue (turnover)
- Cost of goods sold
- Gross profit
- Expenses
- Operating profit
- Finance income and expenses
- Profit before tax
- Taxation
- Profit after tax

How profit is used

- Retained profit
- Distributed to shareholders

Profitability (ROCE)

Operating profit / Total equity + non current liabilities

Liquidity (current ratio)

Current assets / current liabilities

Gearing

Non current liabilities / Total equity + Non current liabilities x 100

Payables days

Payables / cost of sales x 365

Receivables days

Receivables / revenue x 365

Inventory turnover

Cost of sales / average inventories held

Value of financial ratios

- Comparisons (to prev years / other businesses)
- Historical nature (past results not always future)
- Window dressing (made to look better than they are)
- Limited focus (only focus on finance, ignoring other market areas)

Core competencies

Combination of pooled knowledge and technical capacities that allow a business to be competitive.

Benefits of core competencies

- Difficult for competitors to replicate
- Provide opportunities for a business to expand into new markets
- Provide significant benefits to customers

Negatives of core competencies

- In order to focus on core competencies, firms lose control over other areas affecting overall performance.
- Business needs to be prepared to move with the changes in time. E.g. Nokia

Kaplan and Norton's balance scorecard

Strategic planning and management system used to align the acitivities to their mission and strategy..

Benefits of the scorecard

- Broader view detecting weaknesses early
- Employees see their importance in an organisation therefore acting as a motivator

Drawbacks of the scorecard

- Complex
- Difficult to quantify
- Achieving the right balance can be difficult

Elkington's triple bottom line

Assesses organisation's performance through three dimensions of performance: people, planet, profit

Competition law

Promote economic efficiency and healthy competition.
Prevent business taking advantage of a dominant market share position, forming cartels or price fixing to exploit customers.

Competition Act 1998
Enterprise Act 2002

The labour market

Prevents exploitation of employees by businesses by regulating the relations between workers, employees and trade unions.

Equality Act 2010
Minimum Wage Act 1998
The Employments Rights Act
The Health and Safety at Work Act
The Working Time Regulations Act 1998

Environmental legislation

Minimise the negative impact of business on the environment.

Pollution:
Environmental Protection Act 1991
Environmental Act 1995

Climate Change:
Climate Change Act 2008
Energy Act 2013

Challenges of legislation on business

- Increases bureaucracy and red tape
- Adds to costs (minimum wage and environmental)

Benefits of legislation on business

- All businesses are treated the same so, level playing field
- Some firms already operate using these standards

Enterprise

Government encourage this.
It is the willingness to take initiative and to be innovative in setting up / taking on a business project.

The role of regulators

Protect the public through imposing requirements, restrictions and conditions.
E.g. Regulators of privatised industries like Ofwat (water and sewage)

Infrastrucuture

Basic physical systems of a country that allow the economy to run smoothly (transportation, communication, utilities)
Investment in infrastructure is essential for economic development and quality of life.

The environment

Show a commitment to the protection of the environment.
Through green belt areas and renewable energy systems.

International trade

The exchange of goods and services between countries and is essential to maintaining the standard of living.
E.g. Some goods can't be produced in the UK so those countries have competitive advantage.

GDP

Measure of a nation's overall economic activity and represents the value of all finished good and services produced.

Can be used to compare one country with another

When does GDP level become negative

In a recession

Expansion

- Rising incomes
- Rise in output, encouraging expansion
- Charge higher prices
- Technology to replace expensive labour
- Invest in fixed assets
- Operate nearer full capcity

Boom

- Rise in inflation
- Unable to satisfy levels of demand as consumption rises.
- Profits high
- Pressure to raise prices
- Methods to increase output
- Managers plan for falling levels of demand

Recession

- Consumers' disposable incomes start to fall
- Demand falls
- Financial problems
- Excess stock
- Emphasise price competitiveness in advertising
- Market development
- Lay off some workers

Trough / slump

- Bankruptcies
- Bad debts
- High unemployment levels
- Offer basic products at bargained prices
- Target new markets
- Diversify product range
- Reduce wage levels

Taxation

Used to fund government expenditure

Indirect taxes

Taxes on expenditure

Direct taxes

Taken from individuals' or organisations' income.

Income tax

Paid on all income earned over the personal allowance.
Income from employment, investments and pensions.

Corporation tax

A tax on company profits

National insuranc payments

Tax paid jointly by both employees and employers.

Value added tax (VAT)

Consumption or spending tax. Tax added to goods and services you buy.

Excise duty

Tax on the sales of specific goods.
E.g. alcohol, tobacco and fuel.

Green taxes

Paid by consumers for products that are not considered environmentally friendly.
E.g. Air transport tax.

Exchange rates

Price at which the currency of a country can be exchanged for another country's currency.

Rising exchange rate

- Exports from UK are more expensive
- UK exporters are less competitive, depending where raw materials sourced
- Imports to UK less expensive

Falling exchange rate

- Exports cheaper
- UK exporters more competitive, depending where raw materials sourced
- Imports more expensive

Inflation

Rate at which generla level of prices for goods and services is rising.
Main measure for this is using the consumer price index (CPI)

Problems with inflation

- Cost pressures (higher borrowing costs & pressure on wag rates from employees)
- Reduced sales (lower demand due to lower disposable income. People save more)

Fiscal policy

The government adjust the spending levels and tax rates to monitor and influence the country's economy.

Monetary policy

Process by which the monetary authority controls the money supply and interest rates in order to achieve healthy economic growth.

Free trade

Purchase and sale of goods and services between countries without the imposition of constraints.

Protectionism

Where constraints are used to restrict the purchase and sale of goods and services between countries.
E.g. Tariffs (taxes on imported goods that increase the price)
Quotas (physical restrictions on number of goods imported)
Non-tarrif barriers (rules and regulations that make importing difficult)

Globalisation

Interdependence of economies, industries and markets around the world.

Reasons for greater globalisation

- Improved transport (containers, air travel and ships bigger = cheaper and more efficient)
- Technology (quicker & easier to share info and trade)
- More open trade (reduced tariff barriers)
- Multinational companies (global presence so more opportunities for economies of scale)

Positives of globalisation

- Freer trade (greater sales & profit. Specialise in producing goods leading to economies of scale)
- Free movement of labour (allowed UK businesses to fill jobs E.g. NHS)
- Increased investment (benefitted from direct inward investment E.g. Nissan / Toyota)

Negatives of globalisation

- Greater competition (pressure on costs and prices)
- Takeovers (large multinationals taking over domestic businesses E.g. Kraft foods taking over Cadbury)
- Global economy (UK businesses affected by events elsewhere)

Emerging markets

Countries/ economies becoming more advanced and in the process of rapid growth and industrialisation
BRICS = Brazil, Russia, India, China

Importance of emerging economies

- Large and growing markets
- Growth of middle classes
- Low-cost locations

Strategies for businesses entering emerging markets

- Knowledge (understanding of the market)
- Local partners (local partner aids success)
- Well made & locally tailored products (middle class want known brands and high quality or tailored to them)

E.g. Tesco Fresh&Easy failed.

Demographic changes

UK:
Longer life expectancy
Increasing immigration

Affects the type of goods demanded and structure and training of workforce needs to be adapted.

Migration

The movement of people between countries.

Net migration

Difference between the numbers leaving and the numbers arriving in the UK.

Urbanisation

Movement of people from the countryside to the cities

Problems with urbanisation

- Traffic congestion
- Over crowding
- Lack of suitable housing
- Inequalities

Why consumers tastes change

- Changing fashion & increased awareness of alternative lifestyles.
- Rising incomes which afford more opportunities
- More leisure time - increased opportunities
- Advances in tech - increase communication

Changes in lifestyle

- Organic and fair-trade produce
- Health
- Holidays
- Ready meals and eating out

How a business can achieve full potential

- Good product
But also...
- High quality, user friendly website
- Carefully targeted audience
- Personalised content
- Integrated sales channels

Technological changes

Innovation in services produced, products manufactured or processes of production

Benefits of technological change

- Lower costs
- Improved communication (more responsive to customer needs)
- Increased sales
- Working environment (cleaner, quieter and safer)
- Quality (CAD and CAM have increased quality and reliability)

Problems with technological change

- Pace of change (costly trying to stay ahead of competition)
- Competition (more competitive market)
- Security (hackers. Need high security systems adding to costs)

Corporate Social Responsibility (CSR)

Behave ethically and contribute to economic development, while improving the quality of life other the workforce and their families.

Positives of CSR

- Cost savings (less packaging / energy)
- Brand differentiation (competitive advantage)
- Customer and employee engagement
- The 'right thing to do'
- Resources (if you have the right resources)
- Prevent government intervention (remove need to government intervention)

Negatives of CSR

- Profit (has a cost / let gov deal)
- Customer perception (somet willing to pay more, others not)
- State of the economy (not in a recession)
- The market
- Stakeholder views (they could have different views)

CSR increases shareholder value

- Treating employees well increases engagement
- Higher quality products = customers more likely to buy
- Socially responsible image = likely to buy

4 layers of corporate social responsibility

1. Economic (profitable, return to shareholders, create jobs, contribute useful products)
2. Legal (obey laws relating to customers, employees and environment)
3. Ethical (do the right thing, waste, recycling, working environment)
4. Philanthropic (good corporate citizens, improve lives)

Pressures for greater social responsibility

- Pressure groups
- State regulation
- Drive towards self-regulation
- The media
- Consumer perception

Porters 5 forces

1. Threat of new entrants
2. Bargaining power of buyers
3. Bargaining power of suppliers
4. Threat of substitute products / services

Barriers to entry

- Cost of entry
- Government barriers / legislation
- Patents (holder a competitive advantage)
- Economies of scale
- Access to suppliers

Buyer power

Impacts the customer has on the business
Fewer the customers and the more numerous suppliers, the stronger the buyer will be.

Supplier power

The suppliers' ability to influence the prices they charge for supplies.
They are more powerful if a business uses a single supplier & high costs to switch.

Factors influencing rivalry

- Number and size of firms
- Low levels of product differentiation
- Slow market growth
- High exit costs

Threat of substitute

Giving customers the ability to choose an alternative product offering similar benefits.

Cost leadership strategy

Aims to gain a competitive advantage by having the lowest costs in the industry