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7 - Analysing the strategic position of a business (The impact of changes…
7 - Analysing the strategic position of a business
Influences on the mission of a business
Philosophy and values
Philosophy
-
set of beliefs and principles that a business works towards and explains its overall goals and purpose
. It will also outline the
values
of the business.
Philosophy may be
influenced
by the
size
of the business, its
ownership
and the
activities
undertaken.
The environment in which it operates
This relates to the
external environment
in which the business operates and includes factors such as
state
of the
economy
, the
level of competition
and
government regulation.
Internal and external influences on corporate objectives and decisions
Corporate objectives are the goals set for the business as a whole that will lead to the achievement of the mission.
Link:
Internal factors
Business culture
:
refers to the beliefs and behaviours that determine how a company's employees and management interact.
To implement decisions successfully, they must
align
with business culture.
Business performance
: this affects decision-making as it
affects resources available
. This is typically
associated
with
finance
available and
access to finance.
Business ownership
: e.g.
sole traders
and
ltds
will not be subject to the
pressures
of short
term-ism
and can focus more on the
long-term value creation
of the business.
Profit or non-profit
also influences decisions.
External factors
Pressures for short termism
:
short termism refers to an excessive focus on short-term results (profit) at the expense of long-term impacts.
Causes
of this may be down to
pressure
from investors for
short-term outcomes
, the fact
directors positions
are
dependent
on shareholders and the
frequency
of financial
reporting
and
scrutiny
of the media.
Other
external factors
may include:
Environmental factors
Demographic trends
Government policy
Competitors' actions
Changes in the economy
Technology
The distinction between strategy and tactics
A
strategy
is a
plan of action to achieve a long-term goal
. It relates to what needs to be achieved. WHEREAS... A
tactic
relates to the short-term actions necessary to achieve the plan or strategy.
Diagram of distinction between strategy and tactics:
The links between mission, corporate objectives and strategy
Overall mission/purpose set --> long-term targets set --> mission able to be achieved --> strategies can be devised aimed at meeting targets set --> mission fulfilled.
The impact of strategic decision-making on functional decision-making
Functional decision-making
: decision-making within the functional areas of business: marketing, finance, operations and human resources.
Read the bottom of page 116 and start of page 117 for examples.
The value of SWOT analysis
SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is an analytical tool used in decision-making that examines the internal strengths and weaknesses of a business as well as the external opportunities and threats.
Diagram of SWOT analysis:
Once a SWOT analysis has been undertaken
Organisation should have a
reasonable idea
of what it is good at and the opportunities that might exist, as well as its weaknesses and threats.
Managers can
develop strategies
that
build on the positives
whilst
alleviating
the
negatives
.
Summary of its value...
Helps identify its core competencies, enabling it to build on its strengths.
Helps focus on the future, given its past and present condition.
May identify opportunities to focus on to achieve maximum gains.
Source of strategic planning as well as marketing.
Helps redefine and set overall objectives.
How to assess the financial performance of a business
Income statements
Definition: a
financial statement that measures an organisation's financial performance over a specific accounting period.
Main elements...
Operating profit
: measure of profit or loss resulting from day to day business operations (earnings before interest and tax - EBIT).
Finance income and expenses
: interest received on accounts that are held and interest paid out on loans.
Expenses
: costs not directly related to production, such as marketing or general administrative costs.
Profit before tax: arrived at after adjusting operating profit for financial income and expenses.
Gross profit
: difference between revenue and cost of goods.
Taxation
: corporation tax paid to the government.
Cost of goods sold
: direct costs of production.
Profit after tax
- final profit (or loss) figure, referred to as the bottom line.
Revenue
: amount received from sale of goods during trading period.
Link to the structure of an income statement:
Profit utilisation
:
retained
profit - profit kept
within the business
to fund
expansion
plans or
capital
investment.
Distributed to shareholders
- paid in the form of dividends.
Profit quality
:
the degree to which profit is likely to continue in the future - the sustainability of profit.
Financial ratios
Ratio analysis
: a
tool used in financial analysis to express relationships between an organisation's accounting numbers in order to establish trends and comparisons.
Profitability
: the
capacity of a business to make profit.
Profit margins show the profit generated from each £ of revenue. Another ratio is the return on capital employed (
ROCE
). It measures how
efficiently
a business
generates profit
from the capital employed.
ROCE = (Net operating profit / capital employed)
100*
Liquidity
: a
measure of the extent to which an organisation can meet its immediate short-term financial obligations.
Current ratio = Current assets / Current liabilities
Gearing ratio
: a
measure of an organisation's leverage and shows the extent to which its operations are funded by loans rather than equity.
Gearing ratio = (non-current liabilities / total equity + non-current liabilities)
100*
Efficiency ratios
: used to
analyse
how well a business uses its
assets
and
liabilities internally.
There are
three ratios
in this area...
Receivables
days: Shows the number of
days
it takes to
convert
receivables into
cash
-
(receivables / revenue)
365*
Inventory
turnover: calculates the number of
times per period
a business
sells
and
replaces
its
entire
stock
of inventory -
(cost of goods sold / average inventories)
Payables
days: Calculates the
average
number of days a business takes to
pay
its
bills
-
(payables / cost of sales)
365*
Balance sheets
Definition:
a report that summarises all of an organisation's assets, liabilities and equity at a given point in time.
Link to a balance sheet and its structure:
Assets
Assets: anything that a business owns, benefits from or has the use of in generating income.
Non-current
(fixed) assets: e.g. land, buildings, vehicles, machinery and equipment. They
remain in a business > 1 year.
Tangible
v
intangible
assets: examples of
tangible
assets are
physically touchable
such as
land, buildings and machinery
. Examples of
intangible
assets are
non-physical
assets such as
patents, copyrights and goodwill.
Current
assets: owned for
< 1 year
and include
inventories, receivables and cash
. Inventories include any stock, work in progress and finished products not yet sold.
Liabilities
Liabilities: what a business owes, the legal debts or obligations that arise during the course of business operations.
Non-current
liabilities: debts that will be
repaid in more than 1 year
and include
bank loans, mortgages and debentures.
Shareholders' equity:
money
attributable to the business
owners, including the
money invested
by shareholders together with any
reserves
and
retained earnings.
Current
liabilities:
debts
of a business that will be
re-payed within 1 year
and include
payables, overdrafts and any corporation tax or dividends due for payment.
The usefulness of balance sheets
Number of important figures are indetified:
Working capital
: a
measure of an organisation's short-term financial health, calculated as currents assets less current liabilities.
Net assets of a business
: shows the
overall worth of a business
to its shareholders and is the
difference
between
non-current assets
and
working capital less non-current liabilities.
Can be used to work out the following:
Capital employed
: value of
total equity plus non-current liabilities
and is the
total
amount of money
invested into the business.
Assets employed
: value of
non-current assets plus current assets.
The value of financial ratios when assessing performance
Comparisons
: they allow analysts to judge if a business is doing
better
,
worse
or about the
same
as in
previous
years. It can then be
compared with other businesses
in the
same industry.
Historical
: any
calculated ratios
are
based on past results
so they are
not
necessarily an
indicator
of future performance. This is because of a
potential
change
in the economy or
advancements
in technology.
'
Window dressing
': relates to the
actions
taken by organisations to
improve
the
appearance
of their financial
statements
.
Limited focus
: ratio analysis
ignores
other
areas
such as the market and position of the business which can have an
impact on a business.
How to analyse data other than financial statements to assess the strengths and weaknesses of a business
Operations data
Productivity, unit costs and capacity utilisation and measures of quality
can assess a business's
performance
.
Human resources data
Marketing data
Data on areas such as consumer behaviour, the market itself and competition are what a business's performance can be judged against.
The importance of core competencies
Core competencies
: the
combination of pooled knowledge and technical capacities that allow a business to be competitive in a market place.
There are
criticisms
of core competencies, such as problems associated with outsourcing.
Outsourcing the the sub-contracting of non-core activities of an organisation in order to free up cash, time, personnel and facilities, thereby concentrating on other areas in which it has a competitive advantage.
Assessing short- and long-term performance
Short term
There is an
excessive focus
on short-term
results
, especially the
measure of financial performance.
In
fast-changing industries
such as social media and technology, this might
not
be a problem as it's
essential
to keep
up to date.
Long-term
Arguments
state that businesses should be acting in the
interests
of
all stakeholders
, not just
shareholders
.
Businesses should be
looking
for long-term,
sustainable
shareholder
value
and not just short-term
profit
.
For example, investment in research and development of new products and processes, focusing on achieving customer satisfaction and loyalty and employee engagement and loyalty.
The value of different measures of assessing performance
Kaplan and Norton's Balanced Scorecard Model
Definition: a
strategic planning and management system that is used in organisations to align their activities to their mission and strategy.
There are
four dimensions
that need to be
measured
,
analysed
and
improved
together. If you were to
ignore
any one dimension the business could
lose balance
and
fail to thrive.
Less popular as it is complex.
Link to the model:
Elkington's Triple Bottom Line
Definition: it
assesses an organisation's performance through three dimensions of performance: social, environmental and financial.
Profit
terms - the
economic value
of the business in relation to the
benefit
to the
surrounding
community and society.
People
terms -
fair practices
in labour
employment
and in the
community
in which it
operates
.
Planet
terms - the use of
sustainable
environmental
practices
and the
reduction
of environmental
impacts
.
Link to the model:
The impact of changes in the political and legal environment on strategic and functional decision-making
Competition law
Objective is to
promote economic efficiency
through the sound
development
of the
market economy
and to
protect
the consumer from
excessive
market power.
This has resulted in a number of laws to promote
healthy competition
and
prevent anti-competitive practices.
These laws
prevent
businesses taking advantage of
dominant
market
position
or
cartels
(
where businesses or countries act together as a single producer in order to influence prices, production and marketing of certain goods or services
).
Both the
Competition Act 1998
and the
Enterprise Act 2002
are supported by the
Competition and Markets Authority
(CMA): a
non-ministerial government department responsible for strengthening business competition and preventing and reducing anti-competitive activities
.
The labour market
UK labour legislation is designed to
prevent the exploitation
of employees by businesses by
regulating
the
relations
between workers, employees and trade unions.
It seeks to ensure
reasonable working conditions
and
prevent exploitation
and
discrimination
(
bias or prejudice resulting in denial of opportunity or unfair treatment regarding the selection, promotion or transfer of employees
.)
Acts
Minimum Wage Act 1998
- the minimum hourly rate employees over a certain age are entitled to.
Employment Rights Act
- set employees' statutory rights in relations to pay and conditions of work.
Health and Safety at Work Act
Working Time Regulations 1998
- limit the hours an employee can be legally required to work to a maximum of 48.
Equality Act 2010
- discrimination in the workplace.
Environmental legislation
Designed to
minimise
the
negative impact
of business on the
environment
. It falls into
two
main categories:
pollution
and
climate change.
The Environment Agency is a public body established in 1996 to protect and improve the environment and promote sustainable development.
The impact of UK and EU government policy
The role of regulators
Regulatory bodies exercise a regulatory function within a wide range of industries and professions.
Primary role:
protect
the public through
imposing requirements
,
restrictions
and
conditions
; setting
standards
in relation to any activity; and ensuring
compliance
and
enforcement
.
Infrastructure
Infrastructure
: the
basic physical and organisational structures needed for the operation of society or enterprise.
Enterprise
Enterprise
: the
willingness to take initiative in setting up or taking on a project or business venture.
We can
encourage enterprise
by
reducing
the amount of red tape faced by businesses, particularly
new
and
small
ones.
The UK has one of the
lowest rates of corporation tax
in the EU and schemes such as the
Patent Box
allow further
relief
to be gained.
Patent Box is a special tax regime for intellectual property revenues that businesses have been able to elect to enter.
The environment
Governments like to show a commitment to the protection of the environment and is evidenced through schemes such as the
establishment of green belt areas
around cities, the
granting of subsidies
for those installing renewable energy systems.
Commitment
to the environment faces many
conflicts and challenges,
such as those surrounding
building new roads
, runways and nuclear power stations and the
increased demand for housing.
International trade
The exchange of goods and services between countries.
The impact of changes in the UK and the global economic environment on strategic and functional decision-making
GDP
GDP (Gross Domestic Product): the measure pf the value of all goods and services produced within a country over a specific time period and as such provides a primary indicator of a country's economic wealth
Used to
compare countries
, such as how different countries are coping with the aftermath of global financial crisis.
The
rate of economic growth varies
and sometimes becomes
negative
- these are times of
recession
.
Regular
fluctuations
in the GDP are known as the
business cycle
- shows the
fluctuations in economic activity, as measured by GDP, that an economy experiences over time.
Link to the stages of the business cycle:
Link to a table explaining businesses and the business cycle:
Taxation
Direct
taxes: taken
directly from individuals' or organisations' income.
Indirect
taxes:
taxes on expenditure.
Main taxes used in the UK and their impact on businesses
Income
tax:
changes in personal allowance
level and
rates of income tax
affect
disposable income
so therefore affect
level of spending
.
Corporation
tax: tax on
business profit
. Rate at which it is charged can
affect the attractiveness of the UK
as a
business location.
National insurance payments
: changes in these rates can
affect the disposable income
of both
businesses
and
consumers
.
Value added tax
(VAT): consumption/spending tax. Changes in these rates can
affect spending
as it has a
direct impact on goods prices.
Excise duty
: tax on the sale of specific goods such as
alcohol, tobacco and fuel.
Green taxes
: paid by consumers for products or services that
aren't considered environmentally friendly.
Exchange rates
The
exchange rate is the price for which the currency of one country can be exchanged for another country's currency.
Rise in exchange rates
=
exporting goods
from UK is more
expensive
which may
reduce competitiveness
of UK-producing businesses.
Importing materials for production
=
cheaper
and possibly
offset increase
in export price.
Falling exchange rates
=
exports cheaper
but
more expensive imports.
Inflation
Inflation
: the
general increase in prices and the fall in the purchasing power of money.
The objective of the Bank of England's
Monetary Policy Committee
is to
deliver price stability
and
low inflation.
The MPC
regulates interest rates
in an attempt to
maintain economic stability.
Fiscal and monetary policy
Fiscal policy
: the
means by which the government adjusts its spending levels and tax rates to monitor and influence the country's economy.
Link to the effects of increases and reductions in taxation:
Link to the fiscal policy and levels of economic activity.
The
level of consumer spending
is affected by the
monetary policy
- the
process by which the monetary authority controls the money supply and interest rates in order to achieve healthy economic growth.
More open trade v protectionism
Free trade
: the
unrestricted purchase and sale of goods and services between countries.
The
EU
provides one of the
biggest free trade areas
in the world.
Protectionism
: the
policies and actions by governments to restrict or restrain international trade, such as import tariffs, quotas or subsidies to local businesses.
Examples of constraints...
Quotas
:
physical restrictions
on the
number of goods imported
into a country.
Non-tariff barriers
: might include
excessive rules and regulations
that make
importing difficult
, and
exacting standards
or specifications.
Tariffs
: taxes on
imported goods
that
increase
the price, making the
import less competitive.
Reasons for greater globalisation of business
Globalisation is defined as the process of deeper economic integration between countries and regions of the world.
Reasons
...
More open trade
Multinational companies
Technology
: improvements have made it easier and quicker to communicate, share information and trade across the world.
Improved transport
: rapid growth of air transport = movement across the globe is more easier. Bigger ships = cheaper and more efficient transport.
The importance of globalisation for business
Positive reasons
Freer trade
-
increased sales and profit,
countries and businesses can
specialise
in producing goods and services where they have a
comparative advantage.
Free movement of labour
- allowed UK businesses to
fill job vacancies with migrants
such as nurses and doctors.
Increased investment
- UK has
benefited from direct inward investment
from
multinational companies.
Negative reasons
Greater competition
-
lower costs and prices
, might put
pressure on domestic firms
if they cannot compete.
Takeovers
Global economy
The importance of emerging economies for business
Emerging market
: a
national economy that is progressing towards becoming more advanced through rapid growth and industrialisation.
There are a number of reasons that they are important...
Growth of middle classes
: growing economy means a wealthy middle-class with aspiration for more up-market and high-quality goods.
Low-cost locations
- for producing products.
Large and growing markets
Strategies for businesses entering emerging markets
Knowledge
:
understanding
of the market and its consumers, suppliers and competitors is
crucial
.
Local partners
: having these
eases entry
to a market and
aids success.
Well-made and locally tailored products.