External Influences, Business Strategy, Structure, and Financial Analysis for IB and Business Notes

Chapter 6: External Influences on Business Activity

  • Political and Legal Influences: A range of political decisions determine the business environment. For example, countries operate minimum wages, resulting in increased labour costs. Businesses face laws constraining activities, such as emissions of noxious gases and contributions to employees' pensions.

  • Privatisation: The process of transferring an enterprise or industry from the public sector to the private sector. This may involve the sale of government-held assets or the removal of restrictions preventing private participation.

    • Forms of Privatisation:

      • Complete sale of nationalized industries.

      • Partial privatisation (sale of part of the industry).

      • De-regulations: Lifting restrictions and lowering barriers to entry.

      • Contracting out.

      • Sale of previously government-owned land and property.

    • Arguments For Privatisation:

      • Financial Resources: Generates resources for the government through disinvestment.

      • Optimum Utilisation of Resources: Private sector efficiency often succeeds where the public sector fails.

      • Fostering Competition: Removes monopolies, forcing efficiency.

      • Reduced Fiscal Burden: Relieves the state of losses and reduces bureaucracy.

      • Economic Democracy: Attracts private sector resources and participation.

      • Better Industrial Relations: Workers as shareholders increase public vigilance.

      • Reduction in Political Interference: Reduces political meddling in management.

    • Arguments Against Privatisation:

      • Problem of Price: Government often wants to sell unprofitable enterprises that the private sector won't buy at an acceptable price.

      • Opposition from Employees: Fear of job losses and loss of patronage.

      • Problem of Finance: Developing countries with under-developed capital markets struggle to float shares.

      • Improper Working: Private sector may ignore cost reduction or quality in some contexts.

      • Independence on Government: Excessive regulation can prevent genuine competition.

      • High-Cost Economy: Private costs and product prices may be unduly high.

      • Widespread Sickness: Industries like Textiles or Chemicals may suffer widespread industrial sickness.

  • Nationalization: The action of a government taking control of a company or industry, generally without compensation for net worth loss.

    • Arguments For: Control of major industries, integrated industrial policy (e.g., water), prevention of monopoly exploitation, and economies of scale.

    • Arguments Against: Less profit motive/efficiency, political intervention in decisions, high cost of buying private companies, and inability to raise private finance.

  • Worker Protection:

    • Dismissal: Firing due to indiscipline or insubordination. Reasons include inability to do the job, negative attitude, or bullying. No financial benefit is given if it is the employee's fault.

    • Unfair Dismissal: Being fired for pregnancy, race, gender, religion, political affiliation, or trade union membership without prior warnings.

    • Redundancy: Occurs through no fault of the worker to save costs or because the job is no longer required (e.g., automation). Compensation is given. Firms often use the "Last-In-First-Out" (LIFO) method.

    • Unfair Discrimination: Treating a person differently based on gender, race, religion, etc. Relevant laws include the Gender Discrimination Act, Race Relations Act, and Disability Discrimination Act.

    • Health and Safety: Laws mandate protection from dangerous machinery, provision of safety equipment (overalls, shoes, helmets), ventilation, lighting, and hygienic facilities.

  • Wage Protection and Minimum Wage:

    • Minimum wage is the price floor below which workers may not sell labour services.

    • Advantages: Prevents exploitation of unskilled workers, encourages training, reduces voluntary unemployment, and improves standards of living.

    • Disadvantages: Increases production costs/prices, may lead to joblessness if unaffordable, and causes "wage drift" (higher-paid workers demand raises to maintain gaps).

  • Consumer Protection:

    • Weight and Measures Act: Goods sold must not be underweight.

    • Trade Description Act: Illegal to give misleading impressions of a product.

    • Consumer Credit Act: Consumers must receive copies of credit agreements and interest rate info.

    • Sale of Goods Act: Illegal to sell products with serious flaws; goods must match description.

  • Business Competition Law:

    • Restrictive Practices: Refusal to supply retailers, full-line-forcing (forcing stock of a whole range), price fixing, and predatory pricing.

    • Government Action: Anti-merger policies to control monopolies, patent/copyright laws to promote invention, and controlling import entries.

Chapter 8: Business Strategy

  • Business Strategy: A long-term plan (years) involving high resources and high risk, designed to achieve objectives. It is difficult to reverse.

  • Strategic Management Process:

    1. Analysis: Assessing current position and environment (internal efficiency, capacity, competition, technology).

    2. Choice: Deciding which strategy to pursue (which products, which markets).

    3. Implementation: Coordinating resources and leadership to execute the plan.

  • Blue Ocean Strategy:

    • Red Oceans: Known market space with defined boundaries and intense competition ("bloody" competition).

    • Blue Oceans: Unknown market space, competition is irrelevant, demand is created. Example: Groupe SEB’s Acti-Fry using only one tablespoon of oil.

    • Four Actions Framework: Raise (quality/service), Reduce (costly competitive factors), Eliminate (rivalry-competing factors), Create (new factors).

  • SWOT Analysis:

    • Internal: Strengths (positive attributes) and Weaknesses (negative factors).

    • External: Opportunities (market trends) and Threats (competitors, raw material costs).

  • PEST Analysis: Framework to track Political (policy, stability), Economic (growth, inflation), Social (demographics, beliefs), and Technological (innovation, infrastructure) factors.

  • Porter’s Five Forces:

    1. Competitive Rivalry: Strength and number of rivals.

    2. Supplier Power: Ease of suppliers driving up prices.

    3. Buyer Power: Ease of customers driving down prices.

    4. Threat of Substitution: Likelihood of finding different ways to do the same task.

    5. Threat of New Entry: Ease for others to get a foothold.

  • Ansoff Matrix (Growth Strategies):

    1. Market Penetration: Existing products in existing markets.

    2. Market Development: Existing products in new markets.

    3. Product Development: New products in existing markets.

    4. Diversification: New products in new markets (highest risk).

  • Network Analysis (Critical Path Analysis):

    • Earliest Start Time (EST): In a node, the top right value. EST=EST of previous node+durationEST = \text{EST of previous node} + \text{duration}.

    • Latest Finish Time (LFT): In a node, the bottom right value. LFT=LFT of next node−durationLFT = \text{LFT of next node} - \text{duration}.

    • Free Float: Free Float=ESTnext−ESTthis−durationFree \, Float = EST_{next} - EST_{this} - \text{duration}.

    • Total Float: Total Float=LFTthis−ESTthis−durationTotal \, Float = LFT_{this} - EST_{this} - \text{duration}.

    • Critical Path: The sequence of activities where total float is zero (EST=LFTEST = LFT).

Chapter 13: Organizational Structure

  • Organisational Chart: A graphic illustration indicating the framework of authority, chains of command, and official communication channels.

  • Types of Structure:

    • Functional: Split by responsibility (Finance, Marketing). Encourages specialization but can cause "tunnel vision."

    • Hierarchical (Bureaucratic): Vertical levels of authority. Clear roles but promotes one-way communication.

    • Matrix: Project teams cutting across functional departments. Excellent for high-tech but can lead to power struggles.

  • Authority versus Responsibility: Authority (power to command) can be delegated, but Responsibility (accountability) remains with the manager who delegated the task.

  • Centralisation: Decisions taken at the top. Consistent but rigid.

  • Decentralisation: Decisions passed to lower divisions or regions. Quick adapting but can lose control.

Chapter 34: Analysis of Public Accounts

  • Liquidity Ratios:

    • Current Ratio: Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}. Ideal is 1.5:11.5:1 to 2:12:1.

    • Acid Test (Quick) Ratio: Acid Test=Current Assets−InventoriesCurrent Liabilities\text{Acid Test} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}}. Ideal is 1:11:1.

  • Profitability Ratios:

    • Gross Profit Margin: Gross Profit Margin=Gross ProfitRevenue×100\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Revenue}} \times 100

    • Operating Profit Margin: Operating Profit Margin=Operating ProfitRevenue×100\text{Operating Profit Margin} = \frac{\text{Operating Profit}}{\text{Revenue}} \times 100

    • Return on Capital Employed (RoCE): RoCE=Operating ProfitCapital Employed×100\text{RoCE} = \frac{\text{Operating Profit}}{\text{Capital Employed}} \times 100

    • Capital Employed: Non-current Liabilities+Shareholders’ Equity\text{Non-current Liabilities} + \text{Shareholders' Equity}.

  • Financial Efficiency Ratios:

    • Inventory Turnover: Inventory Turnover=Cost of SalesAverage Inventory\text{Inventory Turnover} = \frac{\text{Cost of Sales}}{\text{Average Inventory}}

    • Trade Receivables Turnover (Days): Trade Receivables Days=Trade ReceivablesRevenue×365\text{Trade Receivables Days} = \frac{\text{Trade Receivables}}{\text{Revenue}} \times 365

    • Trade Payables Turnover (Days): Trade Payables Days=Trade PayablesCost of Sales×365\text{Trade Payables Days} = \frac{\text{Trade Payables}}{\text{Cost of Sales}} \times 365

  • Gearing Ratio: Measures reliance on debt. Gearing Ratio=Non-current LiabilitiesCapital Employed×100\text{Gearing Ratio} = \frac{\text{Non-current Liabilities}}{\text{Capital Employed}} \times 100. Over 50%50 \% is highly geared.

  • Investment Ratios:

    • Dividend Yield: Dividend per ShareMarket Price per Share×100\frac{\text{Dividend per Share}}{\text{Market Price per Share}} \times 100

    • Dividend Cover: Profit for the YearAnnual Dividends\frac{\text{Profit for the Year}}{\text{Annual Dividends}}

    • Price/Earnings (P/E) Ratio: Market Price per ShareEarnings per Share\frac{\text{Market Price per Share}}{\text{Earnings per Share}}

Chapter 35: Investment Appraisal

  • Payback Method: Time taken for an investment to pay for itself. Ignores returns after the payback period. 3133 \frac{1}{3} years = 3 years, 4 months.

  • Average Rate of Return (ARR): Measures profit as a percentage of capital outlay. ARR=Total Profit over life/yearsInitial Capital Outlay×100\text{ARR} = \frac{\text{Total Profit over life} / \text{years}}{\text{Initial Capital Outlay}} \times 100.

  • Net Present Value (NPV): Discounts future cash flows to today's value. Weighted more toward earlier years. NPV=Total Discounted Cash Inflows−Initial CostNPV = \text{Total Discounted Cash Inflows} - \text{Initial Cost}. If positive, the project is worthwhile.