Please enable JavaScript.
Coggle requires JavaScript to display documents.
Unit 7a -- Analysing strategic postioning - Coggle Diagram
Unit 7a -- Analysing strategic postioning
Key terms
Mission statement -- the purpose of the business.
Influenced by:
-- values of the founders of the business
-- values of the business employees
-- industry which the business is part of
-- society
-- ownership.
Vision statement -- this sets out the business's aspirations for the future.
https://docs.google.com/drawings/d/1YG88dWa1xRtP8O2csI--Ygo_PObMqKS1o4ygMhI9L78/edit
Corporate objectives -- meduim to long term goals, created to cordinate the business.
Strategic decisions -- judgements made by senoir managers that are long term, involve major commitments of resources and are hard to reverse.
Strategy -- long term
Tactical -- short term
Corportate objectives
These turn the mission statement into something real and quanitfiable, this is through them setting out a clear statement such as "increase market share by 15% of 2 years".
Think SMART obejectives
S
pecific
M
easurable
A
chievable
R
elevent
T
ime bound
Infleunces on coporate obejectives
The Business ownership
Pressures of short termism
Poor performance -- may provok a change
A new leader
Internal
Business culture
State of the economy
Prices on global market
External
Technological changes
SWOT analysis
S
trengths
Internal
W
eaknesses
O
pportunties
External
T
hreats
https://docs.google.com/drawings/d/1zv2-lrPCCZncwxfZ49HjM1RG1w5kHVrRIZ2LEY-JFxE/edit
SWOT analysis can be used to indeitify where the business needs to focus on, however for it to be effective is must be updated constatly.
Pros and Cons
Pros
Cheap.
Focuses on both internala and external.
Helps managment focus on both the current position and the future.
Helps identify risks/problems a business faces.
Can work well with other systems such as PESTEL.
Can be used in all parts of the business.
Cons
Doesn't adress two sided issue(factors that can be both strengths and weaknesses).
Provides infomation, but doesn't offer solutions.
Offers no help in wieghting the importance of different factors.
SWOT can be objective.
Data needs to be good and in date for it to be effective, but the data goes out of date quickly.
Financial statements
Business must submit two types of financial statements to Companies House.
Balance sheets
This records the assets and liabilites of a business on a particular day.
Assets
These are something a business owns, they are split into two catagories.
Current assets -- This is likely to be converted into cash within a year.
Non-current assets -- Assets that a business is expected to retain for more then a year.
Net assets
= (non current assets + current assets) - (non current liabilities + current liabilities)
Deprication is the reducation of value for an asset over time. Depriaction is shown for a few reasons:
Spread the cost of an asset over its useful life.
Show the true cost of production, by distributing the cost of the equipment over its working life.
Liabailities
These are the debts a business owes to other businesses, these are split into two catagories:
Current liabilities -- Debts that will need to be paid off within a year.
Non-current liabilities -- These are debts a business is not going to pay off within a year.
Commonly refered to as a snapshot of a business.
Balance sheets provide important infomation to a multitude of stakeholders.
Shareholders/potential shareholders
Use this to measure the state of a business.
Suppliers
Use this to asses the short term state of a business and whether they will get paid.
Managers
Use this as an indacation of business performance.
Balance sheets always balance, this is becuase each action on a balance sheet has an
equal and opposite reaction
.
Working capital is the money that is used to pay off the business day to day expensises. It is what remain of the current assets once all the current liabilites have been deducted from it.
Although a business wants enough working capital to pay off its debts day to day, working capital generates little to no income for a business (espically compared with other assets).
Deprication is the reducation of value for an asset over time. Depriaction is shown for a few reasons:
Spread the cost of an asset over its useful life.
Show the true cost of production, by distributing the cost of the equipment over its working life.
Income sheets
Two types of profit are used for income statements:
Gross profit
This is the profit after the costs of production are removed and this gives an indication to how sucessful a business is without adding in extra costs like overheads.
Net profit
This is the profit that a buisness has after all the costs for everything have been removed, this shows how much money the business will take home. Net profit is made up of three types of profit:
Trading/operating profit
Net profit before tax
Net profit after tax
Profit quality
This is split into two types of profit:
High quality profit
This is profit that is likely to contuine on into the future, such as an increase in sales.
Low quality profit
This is profit that is unlikely or can't be repeated, such as the sale of a non-current asset.
https://docs.google.com/drawings/d/1p3YGWnjJvpZHUSMaqw8oh9v6Bi_pYbQ8Iv7mEgEBQEw/edit
The problem with financial statements is that PLCs try to make them look as good as possible and there are a number of ways this can be done. (This is called window dressing).
Borrow money just before publishing the balance sheet to improve cash position.
Selling non-current assets and then leasing them back.
Over estimating the intagiable assets a business holds (for example brands a business owns).
Moving forward sales from one financial year to another.
Financial ratios
Types of ratios
Profitabilty ratios
Return on capital employed
= (operating profit/capital employed)*100
Gross profit margin
= (gross profit/ revenue)*100
Operating profit margin
= (operating profit/revenue)*100
Profit for the year margin
= (profit for the year/revenue)*100
Liquidity ratio
Current ratio
= current assets/current liabilities
What a good current ratio varies from business to business, business that hold stock that can go out of date (fast food, supermarkets) are going to very little current assets.
Gearing ratio
Gearing ratio
= (long term liabilities/capital employed)*100
Effiency ratios
Inventory turnover
= cost of goods sold/average inventories held
Recievables days
= (recievables/revenue)*365
Payables days
= (payables/cost of sales)*365
If payables days is lower then reciveables days this could create a cash flow problem as the business will be paying out its suppliers before they get paid.
The use of financial ratios is only useful when they are used in context such as:
When they are compared to the results from last year,
When they are compared to competitors.
When compared to business in a similar situation but in a different marker (for example to business growing rapidly).
When compared with the market that the business is competing in.
When compared to the position of the business within the market.
When compared with the economic enviroment.
Non-financial ratios
Operations data
Operations is the section of the business concered with planning and controlling the production system to make it as effiecent as possible. This data, therefore could be used to measure how effeciently a business is running.
Any operations data such as labour productivity and capacity utilisation can be used as measure of performance.
Human resources data
HR data can be used to measure the performance, quality and motivation of staff, this is particullary useful in labour intesive production.
Marketing data
Marketing data provides infomation on whether people know of a certian brand and if they know of it what do they think, this can help show data such as brand loyalty.
Core competencies
This is what a business is uniquely good at and is one of the best sources for sustainable competitive advantage.
Core competencies are created through a business' collective knowledge, production skills and technology.
How to know if it is a core competency?
Do they provide access to a wide range of markets?
This means that the core competency must enable a business to bring new products to markets.
Do they provide a benefit for the customer?
Core competencies must improve the qality of the product to the consumer, whether that is reducing price or increasing quality.
Are they difficult to mimic?
Core competencies must be unique and so if they can be copied by competitors it doesn't help the business much.
Core competencies are important because:
Enables the business to take full advantage of the available opportunities to enhance business performance.
Out sourcing functions that are not core competencies can help streamline a business and encrouge focus on what the business is good at.
Helps make the business more competitive.
Critisms of core competencies:
Over zealous outsoucring is not always the best approach as the business losses a lot of control of over itself.
The speed at which consumer demands are changing reduces the value of focusing on one thing alone.
Assessing long and short term performance
R&D
Comparing the amount of investment into R&D is a good way of measuring short term and long term performance.
A business that invests reletivly little in R&D may generate larger short term profits, but this will be at the expensive of long term gains. This is, becuase R&D is needed to remain competive and produce competitve products.
Profit quality
Profit quality is the measure of how valuable the profit that is being generated is for a business.
High quality profit is profit that should contuine on for a long time, ie: an increase in sales.
Low quality profit is profit that is unlikely to be repeated ie: selling off a large asset such as a builidng.
Business want high quality profit in the oong term as it can be repeated, but in the short term loq quality profit looks better and may make shareholders happeir.
Employee engagement
More engaged employees are believed to be willing to contribute more to a business and this has made employee engagement more important in recent years.
Business looking to gain long term growth are gowing to look into improving employee engamgement through soft HR policies.
Customer service
Providing good customer service can be costly in the short term, however, it should lead to increased brand loyalty and so in the long term can be very valuable.
Brand image and reputation
A business that is aiming for long term growth will aim to protect their brand image. A bad brand immage can be costly in the long run as it may deter customers.
Business focused on the short term, may take actions that could damage the brand image (such as using Chinese sweetshops), but will provide a short term increase in sales.
Sustainability
Sustainable business policies are policies that can be done for the long term, a business that is aiming to imporve its long term postion will want their policies to be sustianable.
Businesses focused on the short term, however, may make use of policies that are unstainable purely in the pursuit of short term profit.
Measuring business performance -- models
Kaplan and Norton's balanced scorcard
This aims to measure both financial and non-financail factors to asses how well the business is performing. It does this by ranking each factor on a score of 1 to 5, area with the lowest scores need improvement.
Factors used for the scorecard are decided by the business and the variables that the business use are called Key Performance Indicators (KPIs).
https://docs.google.com/drawings/d/1VwLTDpKkwfdMJOPXcV-hgwi0GNxNbUqyP_VQLjT61ts/edit
Success in one area of the KPIs does not mean success across the board.
The balanced scorecard's value lies in the fact that it is not merely a measurement tool, it can also be used as a framework within which a stretgy can be implemented.
Elkington's tripple bottom line
This system argues that instead of using the traditional bottom line theory (profit) a business should aim to be successful in all three bottom lines (people, profit and planet).
Profit
In a traditonal sense the tripple bottom line does accept that a business must make money to survive, it also argues that profit should help with the other two bottom lines those.
Planet
This aims to measure how much of an impact the business is having on the enviroment. This includes the idea that business should 'go green'.
People
This measures the impact a business will have on all the people around it and it is concerd with how socially responsible a business is.
People should take into account issues such as:
Health and safety
Fair pay
Fair trade and looking after smaller suppliers.
https://docs.google.com/drawings/d/1jOJK22Q29aQpIw-QEXXViTcARgu1gGnhAx7EQ8Ln7Ig/edit
TBL helps show business how socially responsible they are and makes managers think about their action to a greater extent then just "what will make us lots of money". This means it encrouges Corprate Social Responsibility (CSR)
However people and planet are very hard to measure.