Unit 7: Analysing the Strategic Position of a Business
Corperate objectives: goals for the whole organisation rather than different elements of the organisation.
Internal influences
Can range from non profit or profit companies and ethical decisions. Often businesses are internally influenced on their decisions from resource constraints. This includes financial resources, human resources and physical resources.
External influences
Pressure for short-termism- where a business focuses on short-term profit objectives rather than long term. This is often a result of investors who are seeking to increase their funds.
Most significant influence: the external environment. This includes a change in economic policy( interest rates), environmental factors, demographic trends, actions of competitors
Balance sheet: Financial statement summarising assets, liabilities and equity. The purpose gains an understanding, shows significance of changes over time and finding net assets.
Assets: owned by an organisation. Non-current assets are long term and current are short term
Liabilities: debts which are owed by the business
Equity: the share capital and retained profit
Income statement: describes the income and expenditure over a year.
The competitive environment
Factors that make an environment competitive include other companies in the market, reliance the company has on other markets and level of demand
Porter's theory of 5 forces: Customer power, supplier power, threats of entry, rivalry and substitution.
Threats of new entry can impact competition by new technology. New technology may impact the level of staff that is needed to product match the market.
Customer power depends on how much the company relies on customers buying their products. Smaller businesses for example will likely lower their price when bargaining with a customer as they need the sale to survive.
Supplier power impacts competition by how dependent the supplier is to a company. For example, milk suppliers in tesco aren't paid until 90 days have passed. Due to the size of tesco the suppliers won't bargain with them as they are aware that tesco can just go somewhere else.
Rivalry impacts competition by how intense it can become against other companies.
Substitute threats impact competition because after patents expire companies can copy products for cheaper prices. Substitute threats can also limit competition as patents and copyrights last a long time.
Investment Appraisal
Core competencies
Payback Period
The payback period is only a prediction, it assumes that cash is received at a steady rate and ignores the issue of time value for money.
The amount of time it takes for a project to recover the cost of investment.
Method steps: add up net cash flows until you receive the money back, work out where its between and simplify the fraction down.
Payback period is easy to work out and the future in business is always uncertain so working out where money is coming in is very useful.
Average Rate of Return (ARR)
Measures the profitability of investment. This figure is wanted to be as large as possible, with the ideal figure standing at 15%. Important to note that ARR is more relevant when compared to other forms of investment appraisal. The 15% needs to be compared with other operations to determine whether its relevant.
Total net profit/ number of years
Net profit per year/ initial cost of investment
NPV
Calculation: work out cash flows, multiply each yearly cash flow by the discounted factors, add all cash flows together and take away from cost of investment
Advantages: only method that considers time value for money, comes out with a definitive answer.
Disadvantages: time consuming, most difficult method of investment appraisal and there is possible bias in choosing discount rate. For example, managers will choose higher discounts to make their numbers look better when they should use lower numbers to follow the worst case scenario.
Things that are unique to a business which can give them strategic advantage. Links closely with strengths in SWOT analysis.
Earnt from collective learning, integrating skills, delivering superior products and businesses becoming differentiated from competitors
To be considered a core competency- needs to provide consumer benefits, be leveraged widely and be difficult to copy.
Its suggested that to compete well would be to focus on core competencies and outsource any aspects that aren't core. Could lead to over-zealous outsourcing where you lose your competitiveness.
Only focusing on core competencies may suggest that the business is too complacent about their core so they don't invest in any others.
Corporate Social Responsibility
Triple Bottom Line
A way of assessing performance of the business based on people, planet and profit
The model suggests that there is more success to a business then just profit. Hence, it measures performance over a period of time based on financial (profit), social (people) and environmental (planet) factors.
People measures the extent to which a business is socially responsible. It is difficult to calculate- therefore reliability and consistency become problems when needing to report the data. Bad business rep and loss of suppliers and consumers- especially if their target demographic are people who are highly opiniated on human rights. May mean that the business needs to change their whole USP and target market which may cause a temporary loss of profits because rebranding increases costs.
Profit measures financial achievement based on their financial data.
Planet measures the impact of performance based on their environmental factors. These objectives are more tangible, meaning that the manager will be able to clearly communicate the objectives towards employees (for example low carbon emissions or use of sustainable inputs like renewable energy). Getting the message across will cause the objectives to effectively come across in the production or manufacturing process which can meet the demand of their demographic. Prioritising these will give them a competitive advantage.
This depends on the business' target market or whether they have the resources to do this. For example, their customers may not be focused on environmentally friendly products. Also, a small business may not have the cash to purchase environmentally good materials as they tend to be more expensive. Therefore, these types of businesses may want to focus on their profit or people objectives.
Specifically small businesses will want to focus on their profit objectives as there main objective is to survive.
Based on the concept of interdependence between businesses needing to contribute society and society needing businesses.
Main direction of debate on CSR
Free Market View: the job of the business is to provide wealth for for shareholders
CSR view: businesses should be concerned with social issues
Businesses may not be able to efficiently use their resources if they are restricted in how they can act because of social expectation. Not using all resources, or only using some resources can increase costs for the business. Furthermore, the business may lose customers who disagree with the CSR approach, believing that the only social requirement should be to provide wealth for shareholders, reducing their sales. From a reduction in costs and sales, the business in question may have reduced profit
If a business is operating with corporate responsibility, they are conducting their business in an ethical way that prioritises the wider issues in society
Taking a CSR approach means that businesses can achieve increased productivity. This is because one way that CSR is implemented into a business is through creating safe working conditions and fair pay. According to Maslow's hierarchy of needs, employees need to feel safe in the workplace (safety and security on the hierarchy) in order to achieve self actualisation, which, according to Maslow, is where employees reach their fullest potential. This can lead to increased productivity and as a result improved efficiency. Furthermore, a faster workforce may mean that jobs and tasks are completed faster, meaning managers can send employees home early. As a result, businesses have reduced labour costs, causing their variable costs to decrease. This means that profit can possibly be increased.
Conclusion: most important reason why businesses should invest in csr is because they tend to invest more into education services. By investing into more social industries, businesses may gain promotional opportunities, such as a school using a stationary companies pens. This gives competitive edge as businesses who are not csr focused do not gain this opportunity to further promote the business.
Why are balance sheets important to use: Every single transaction has an impact on both assets and liabilities. Businesses can identify trends in transactions that are most damaging or beneficial to the total costs. Therefore, the business can use the balance sheet as a way to accurately conduct budgets and limit the chance of getting an adverse vairance.
Balanced Scorecard
The framework is devised to have four categories: financial, customer, internal and capacity
Devised by Kaplan and Norton for firms to assess business performance based on both non- financial and financial data
Each firm should set a critical measure for each of these perspectives.
Example ways that they can be measured:
Customer- levels of satisfaction based on factors such as return rates and reviews
Financial- measures financial performance based on factors such as operating profit
Internal processes- measures business efficiency based on factors such as lead time and unit costs
Organisational capacity- measures knowledge based on factors such as employee retention rates
Advantages- gives a broad overview of the business and links the performance to the long term. Broad overview means that the business can recognise areas where they are slacking and improve so it doesn't damage the end goal. Also, if a business has a specific function they specialise in, such as csr, they can still ensure the other areas are up to par. Linking the performance to the long term means that the business stays focused on the mission and there is no confusion in the workforce.
Disadvantages- Needs to be updated regularly to be successful. This means it takes up a large amount of time and may become costly. Being too focused on one factor of the operation may cause opportunity costs that a competitor takes advantage of. Senior management may still be too invested in the financial performance so the other factors (that evidently determine financial performance) will be ignored. Despite gaining a larger overview, it can be difficult to balance the 4 different perspectives. It is subjective when deciding which one may be the most important which in turn can cause confusion over what should be focused on. Therefore, the focus of the mission may actually get lost in the process.
Conclusion: would not be a beneficial tool to use. The balance is too difficult to control so the time put into it would be wasted. It is too prone to missed out opportunities so therefore is too risky.
Legislation
Labour market legislation
Environment legislation
Competition legislation
Exchange rates
Price of a currency expressed in terms of another country
How much of one currency has to given up to afford another currency is expressed in this
£1= $1.50 which means that for every pound you can buy $1.50
Exchange rates influences
Exports between countries may be affected. This could determine the selling price. Link- it depends on point for pricing decisions, why a business may want to re-shore rather than off-shore
Costs of goods brought overseas- may influence concluded profits
Important to understand exchange rates so affordability of buying materials overseas. Not regarding exchange rates may mean that the business can't afford their resources when they have to pay their oversea supplier.
This means they may be giving more money than they thought they would have to- could damage profits and affect budgets (create an adverse variance)
Suppliers may view the company to not be a reliable investment that will provide them with the sufficient funds that they need so they move on to a different company
Due to reputations across suppliers they may find it difficult to find a suitable replacement cost wise or any replacement in general.
The laws and regulations that a business needs to comply with in relation to the competition in their market.
The main aims of competition legislation are to widen consumer choice for interest in goods and services, reduce anti-competition attitudes and ensure good price competition with suppliers.
There are laws within the UK that prevent competition called anti-competition agreements
Include: Directly or indirectly fixing purchases, prices or discount factors.
Price fixing can lead to businesses receiving serious fines. In regards to price fixing, businesses are not allowed to: agree prices with competitors, impose different minimum prices on different distributors or cut prices below costs in order to remove a smaller competitor out of the market.
Abusing dominant position
( a business becoming so large that they dominate the market that they are in). Competition legislation is used here to protect businesses from possible abuse of dominant position.
Includes: predatory pricing or imposing exclusivity
Businesses are becoming subject to increasingly environmental laws.
( can include extent of emissions, storing hazardous substances, packaging and the way that water is discharged)
Failing to comply with growing environmental laws can lead to serious fines and business reputation
This is not just subject to the law- consumers who idolise environmentally friendly products is increasing so reputation could be further damaged from this if environmental laws are reached.
Following the environmental law can also avoid damaging costs to a businesses such as the fines
These legislations focus on protecting the rights of employees and managing the relationship between employees and managers
Key areas include: equal pay, the minimum wage, discrimination and employee rights.
Employee rights include: being given reasonable notice before dismissal, available for taking time off to parent, redundancy and the request for flexible working
Legislations and unfair dismissal
Being protected from unfair dismissal, employers to recognise a union if more than 50% of employees are members.
Carroll's CSR pyramid
Framework used to help frame arguments for why and how businesses should augment their social responsibility.
Can be used in essay plans as a point for why businesses should go environmental: not following regulations and receiving fines may be more damaging than the costs of buying expensive environmentally friendly alternatives. There are some businesses though that don't have enough money to buy the products so taking the fine may be accommodable.
Economic- a business is only useful to society if it makes a profit. Before it can move on to any other "responsibilities" a profit needs to be made.
Once a profit has been made, the business needs to ensure that it fulfills its responsibility of following the law (link to legislation)
Ethical- the business can then move on to fulfilling the ethical responsibilities required. These go beyond the requirement of the law, such as treating employees and suppliers with moral regards.
Only once these have all been expressed can the business move on to fulfilling philanthropic responsibilities. This is where the business gives back to society through things such as charitable donations.
Why is the pyramid a useful framework?
Can ensure that a business doesn't become to over-ambitious when wanting to pursue csr- have they met all of the other requirements to be csr?
Lack of opportunity costs- all sectors are focused on before csr is met with philanthropic responsibilities. Therefore business can see if there are areas they need to prioritise before they work for csr.
A focus on receiving their profit (key to survival) is still regarded- ensures business doesn't become too ambitious with their csr goals and therefore loses a profit
May be a reason businesses strive to grow, could charge higher prices because of the dependency that the suppliers have on the company, (suppliers won't want to leave despite higher charges because tescos are so big they will alwys receive a profit- confidence that the supplier will always be paid back)
depends on the strategic positioning that the substitute product is being branded at. Low price for high quality may attract customers from the original company (or low price/low quality
Substitutes would not be a threat if they had been positioned at the same vantage point for the original company (customers wouldnt move) or low quality/ high price
Rivalry can increase if a competitor takes a risk- for example lowering a price or changing the brand to be more environmentally friendly/ socially responsible
Similar impact on suppliers as well- for smaller business the suppliers may have more power because they negotiate to give the suppliers a higher price.
can be seen as the biggest competition threat to businesses because new tech is continuously expanding
threats of new entry may also impact competition because with correct marketing or observing a gap they can overtake the market that the original company was operating in
Operating profit is the best form of finance to ensure that businesses keep control of their overheads (overheads being fixed expenses)
Exchange rates decreasing would make products more price competitive
Sensitivity Analysis
Analyses the changes of the assumptions that were put in place during forecasts
Assumptions need to be made by management when preparing for the important forecasts
Types of forecasts
Cash flow forecasts- timing and amount of inflows and outflows, receivables and payables days
Budgeted profit- sales volume, overheads, unit prices, GPM's
Investment appraisal- timing of cash flows, period project will run, amount of initial investment
Break-even analysis- selling prices and variable costs, fixed costs
Using sensitivity analysis helps guide businesses in directions that take into account how reliable the assumptions may be, what may happen if the reality is different and which are most significant to forecast
Advantage- using sensitivity analysis helps the business prepare a more robust forecast. This is done by identifying the most significant assumptions which will then need further attention. By doing so, predictions will have been focused on in clear detail by focusing on one variable at a time and therefore will be more accurate. A robust forecast is also generated because risk has been assessed and caused the business to be prepared for an adverse or less than favourable result
Depends on- the data that is used in the forecasts. Planning, detail, attention may be great- but its not significant if the data was originally poor
Disadvantage- may be a limited analysis. Considers one variable or assumption at a time which requires detail to garnered, but by doing this it may be missing out on opportunities. This is because some assumptions may be linked and not separate, and therefore the managers may be missing out on specific that can be associated between two aspects. For example in budgeted profits, it may be more efficient to forecast overheads and unit prices at the same time to manage cash more appropriately.
Depends on- skill of the manager. Sensitivity analysis is a complicated concept and not all managers may understand how to use it. Therefore not appropriate for specific situations in the business- manager that has just gone through a takeover may not understand because they are not familiar with the other businesses data patterns.
Technological change and strategy
Adapting new applications of sciences into commerce.
The biggest impact of technological change is that it has lowered the barriers to entry:
Business ideas have been able to enter the market because mobile and digital devices have allowed customers to be found, sales to be made and ventures to be funded
Advantage- technological change can lead to customers having more choice from the online websites and in store outlets. Having more product variety could lead to more demand for the companies products which means companies profits are likely to increase. Furthermore, businesses can sit comfortably when holding product variety because if one product is in high demand due to a demographic trend, when that trend is over they are still holding other products so cash inflows continued.
Depends on- the profitability of their other products
Disadvantage- it may be difficult to keep up to date with the latest technology. The need to remain up to date to meet competitors may cause high replacement costs on a regular basis. It may be difficult to know what technology needs to be purchased from the risk of it being outdated.
Depends on- what type of market that the business is in. Rapidly changing markets is where the outdated products will impact sales the most
Consumer lifestyle and buying behaviour
Social change which needs to be monitored and responded to as part of changes to the external environment
Consumer lifestyles
- 2019 it was found that over 8 million people in the UK live alone (15%) which is decreasing the population (less demand)
- Expectation for convenience has grown as teenagers have been influenced by the media by that they can receive anything from a push of a button
- Social conscience has increased where customers are more aware of where the products they buy come from and choose to buy the ones that don't have as much damage to the world
Buying behaviour
- Customers are much more informed when buying. They are subject to price comparison services and reviews that channel the buying process
- Customers are more in control of where and how they buy through multichannel distribution. It has been estimated that 80% of consumers research the product before they decide to buy in store or online
Urbanisation and Migration
Urbanisation
Moving people from the countryside to towns and cities
Migration
The movement of people between countries and regions:
- immigration- moving people into a country
- emigration- moving people out of a country
Countries like China and India have had mass urbanisation schemes in contrast to the UK- use if case study given is based in China or India
Impact that it has on changes for business
Rising population increases demand for goods and services
More urbanisation (point for China) results in more middle class consumers. May be more willing to pay higher prices so business can develop mass customisation for premium pricing
Population growing causes businesses to have a larger supply of labour so it is easier to recruit and not so threatening when other employees leave
Globalisation
The process of deeper integration between countries and regions of the world
- greater trade across borders
- greater use of offshoring and outsourcing in production for example the iphone which are now produced in China and Taiwan
- an increase in spending on capital investment, innovation and infastructure
Advantage- Increased awareness. Increased awareness occurs from consumers learning in more detail about climate change and income inequalities, making their demands more niche and specific for the business to hit well. Globalisation allows businesses to gain ideas and skills from other countries, increasing their awareness of what a worldwide spec of consumers are demanding. They can also augment where gaps in the market may be. Therefore, likely specific demands can be met.
Once all levels have been met, the business can argue to be sustainable
Appropriate for all businesses because the climate change awareness may positively impact already environmentally friendly businesses, but also motivate others to follow suit. Also, there will still be a minority who do not care for the environment so business who stick to original climate damaging methods may now be entering a niche market where they can charge for premium pricing.
Disadvantage- Can lead to dominance in markets. Globalisation may stifle competition because businesses with dominant brands can exploit the benefits of capital spending, innovation and infrastructure changes to take charge of key markets. This is likely achieved through their greater access to superior technology such as telecommunications. This gives other businesses in the market no chance at obtaining customers or growth benefits.
Half point- having dominant companies may also cause risk to that strong companies reputation. For example, they may accidentally break competition legislations by abusing the dominant position. This may be done through charging premium prices. If these legislations are broken then the government has access to help smaller businesses being attacked in the market which may make customers more inclined to buy from the new companies.
More people living alone- may be less willing to pay for luxury goods because necessities such as bills are more expensive
May lead to an increase in customer complaints because consumers may be easily dissatisfied by the "slow" service
More specific about what they buy and who they buy from- customers may be willing to pay higher prices for socially responsible products
Open trade and protectionism
Open trade involves the removal of barriers to international trade
Protectionism on the other hand involves an attempt to impose restrictions on open trade in a business
Protectionism is carried out to cushion businesses from overseas to prevent the outcome to be an interplay between free market sources of supply and demand. Therefore, it gives an opportunity for businesses with less dominance in the market to receive benefits
Fiscal and Monetary policy
Monetary
Involves the use of interest rates and changes to money supply to achieve the relevant economic objectives
The policy is controlled by the bank who make the decisions about interest rates and money supply- the aim they hold is to keep inflation low
Fiscal
Involves the use of government spending, taxation and government borrowing to affect the level of growth and demand in the economy. The two main parts of fiscal policy are taxation and government spending
Government spending
Taxation
Transfer payments- welfare payments made to benefit recipients such as state pensions
Current spending- spending on state-provided goods and services such as education and health
Capital spending- infrastructure spending such as new roads
Government spending is needed to keep provision of public and merit goods which facilitates welfare support for low income households
Raises revenue for government finance to be fulfilled
Addresses market failure and environmental targets- fe taxes may help correct market failures
Gearing
non-current liabilities/ capital employed x100
Measures the proportion of assets invested in a business that are financed by long-term borrowing
The higher level of gearing usually suggests that there are higher risks for the business since the payment of interest and debt repayments are not optional for the businesses
HOWEVER- gearing can be a financially sound structure for a business to have if they have regular cash flows
Generally high= 50%, generally low= 25%
Businesses should aim for a business between these two figures
Ways to manage gearing
Reduce gearing- repaying long-term loans, issue more shares, convert loans to equity
Increase gearing- convert short term debt into long term loans, buy back shares