3.7 analysing the strategic position of a business

• PESTLE Analysis

  A framework for assessing the key features of the external environment in which a business operates
• Political factors

  • Competition policy
  • Industrial regulation
  • Government spending and tax policies
  • Business policy and incentives
• Economic factors

  • Interest rates
  • Exchange rates
  • Consumer spending and income
  • Economic growth (GDP)
• Social factors

  • Demographic change
  • Impact of pressure groups
  • Consumer tastes and fashion
  • Changing lifestyles
• Technological factors

  • Disruptive technologies
  • Adoption of mobile technology
  • New production processes
  • Big data and dynamic pricing
• Legal factors

  • Employment law
  • Minimum/living wage
  • Health and safety laws
  • Environmental legislation
• Environmental and ethical factors

  • Sustainability
  • Tax practices
  • Ethical saving (supply chain)
  • Pollution and carbon emissions
• Internal influences on corporate objectives

  • Business ownership
  • Attitude to profit
  • Ethical stance
  • Organisational culture
  • Leadership
  • Strategic position & resources
  • Stakeholder influence
• External influences on corporate objectives

  • Short-termism
  • Economic environment
  • Political/legal environment
  • Competitors
  • Social & technological change
• Business strategy

  Mainly concerned with the longer-term, focused on the long-term business plan, what needs to be done to achieve corporate objectives, and what resources the business needs and how to obtain and use them
• Business tactics

  Tend to be focused on short-term issues, responding to opportunities & threats, often influenced by functional objectives and decision-making
• Mission

  The overriding goal of the business and the reason for its existence, providing a strategic perspective and a vision for the future
• Corporate Objectives

  Those that relate to the business as a whole, usually set by top management, providing the focus for setting more detailed objectives for the main functional activities
• Mission statements

  Inform corporate objectives which then inform the strategy for the firm and then the tactics
• Strategic decision making

  Most are made by middle-ranking executives based on a combination of a recommendation from decision trees and investment appraisal, while even though strategic decisions can be worth millions or even billions they often are made by managers that have very little to go on
• Strategic decision making

  When a strategic decision is made, new objectives need to be set that will affect functional departments, with each department getting its own objectives to meet the wider objectives of the business
• Functional strategies

  Medium to long term plans for meeting objectives, resulting from a careful process of thought and decisions throughout the business, with key decisions almost always made at the top, using a 'scientific decision making' approach
• SWOT Analysis

  A method for analysing a business, its resources and its environment, focusing on the internal strengths and weaknesses of a business (compared with competitors) and the key external opportunities and threats for the business
• Balance Sheet

  Shows the assets (what a business owns) and liabilities (what a business owes) at a particular time throughout the financial year, with assets and liabilities having to equal each other
• Fixed Assets

  Anything the firm owns as long as it is useful to operating the firm (must last longer than a year)
• Current Assets

  Represent the working capital and are directly linked to what is sold to the customers (lasts less than 12 months)
• Current Liabilities

  Things that a firm will need to pay out for within 12 months
• Working Capital (Net Current Assets)

  Shows the liquidity of the business - if liabilities exceed assets, the firm would go into liquidation
• Influences on the amount of working capital

  • The volume of sales
  • The amount of trade credit offered by a business
  • Growth of the business
  • Length of the operating cycle
  • The rate of inflation
• Depreciation

  When the value of a non-current asset decreases as assets will eventually become worthless over time without continuous investment
• Income Statement

  Describes the income and expenditure of a business over a given period of time (usually a year), showing the profits and losses of a firm
• Components of an Income Statement

  • Gross Profit
  • Operating Profit
  • Profit Before Tax
  • Profit for the Year
• Purpose of an Income Statement

  • Legal requirement
  • Review progress
  • Allow shareholders to access if investment is needed
  • Comparisons can be made
  • Used to show potential investors
• Types of Expenditure

  • Capital expenditure
  • Revenue expenditure
• Order of an Income Statement

  • Revenue
  • Cost of sales
  • Gross profit
  • Expenses
  • Operating (net) profit
  • Finance costs
  • Profit before tax
  • Taxation
  • Profit for the year (retained)

  
• Ratio Analysis

  Ratios that assess the financial information by comparing two sets of linked data
• Stakeholders interested in financial ratios

  • Shareholders
  • Customers
  • Employees
  • Government
  • Competitors
  • Managers
  • Banks
  • Suppliers
• Types of Ratios

  • Liquidity and Gearing Ratios
  • Profit Ratios
  • Efficiency Ratios

  
• Current Ratio

  Used to keep track of the working capital within a business and make sure it can pay off its debts, with a target range of 1:1 to 3:1
• Gearing Ratio

  Used to show whether a firm's structure is likely to be able to continue to meet interest payments and to repay long term borrowing, with a target range of 25% to 50%
• Profit Margins

  An indication of a business' ability to control costs, with higher percentages being better as the firm is receiving more profit for the money invested
• Return on Capital Employed (ROCE)

  Shows what returns (profits) the business has made on the resources available to it, with higher figures being better
• Payables (Creditor Days)

  Estimates the average time it takes a business to settle its debts with trade suppliers, with a figure higher than the debtor days being desirable
• Receivables (Debtor Days)

  The time it takes for trade debtors to settle their bills, with a lower figure than the payables being desirable
• Inventory Turnover

  Helps firms to answer questions like 'how much money do we have tied up in stock?', with a quicker turnover being better