Edexcel 4a

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					Edexcel Revision Session 4a

A-Z Business Training 2010
        Planning to Succeed

   Marks:
   Time:
   Strategy:
       10 minutes for real dissection of the case
       10 minutes for the numerical data, including
        calculations, plus time to put numbers to
       Stick rigidly to a mark a minute; then you‟ll
        have 5 minutes at the end in case Q4
Keys to Success

   Thorough revision of all the left-hand
    topics on the spec. This should be a 3-
    stage process
       What is it?
       How does it fit?
       Why does it matter?
   Plenty of practice with past AQA Unit
    5W papers (old spec) and with
    possible questions based on the
    material provided
       To get an A

   Push the revision beyond Level 1
    (definitions and formulae) to Level 2 (how
    and why)
   Take enough time to master the material
   Get the timing right
   Be willing to use teacher/textbook as an
    aid, not a crutch (X Factor moment: don‟t
    be wooden; be yourself; have confidence)
 What are the most distinctive
 characteristics of Brompton Bikes?





     Lessons from January

   Investment appraisal was fully covered,
    so it‟s very unlikely in Section B …
   … much more likely are the company
    accounts and/or decision trees … but do
    watch out for a special order decision
    and CPA (in part A)
   Effectively ruled out are corporate
    culture, contingency planning and factory
    Over to you: Should JVG accept this
          special order decision?
   JVG sells 300 units a day at £20 each. It
    is operating at 75% of its capacity.
   JVG‟s variable costs per unit are £6;
    fixed costs are £3,000 and total unit
    costs are £16
   Now a buyer from Brazil wants to place
    an order for 100 units a day at a set
    price of £15. The Finance Director is
    furious at the thought: “sell for £15
    when they cost us £16. Are you mad!”
Decision Trees

A-Z Business Training 2010
Decision Trees

   To consider risk, reward and the
    chance of success and failure
   One diagram showing the estimated
    upside, plus the worst case, plus the
    probabilities of success or failure
   An attempt to quantify the
    unquantifiable – the „value‟ of a
Using Evidence H – ‘Consolidate’
              0.3      Good £200,000
              0.4      Moderate £100,000
  C    1
              0.3      Poor £10,000

              0.2      Good £50,000
       2      0.2      Moderate £20,000

              0.6      Poor £10,000
Using Evidence H
             0.3           Good £200,000
             0.4           Moderate £100,000
  C    1
             0.3           Poor £10,000

              £200,000 x 0.3 = £60,000

              £100,000 x 0.4 = £40,000
               £10,000 x 0.3 = £3,000
             Expected value = £103,000
Using Evidence H
£103,000       0.3   Good £200,000
               0.4   Moderate £100,000
   C       1
               0.3   Poor £10,000

               0.2   Good £50,000
           2   0.2   Moderate £20,000

               0.6   Poor £10,000
Over to You

   Calculate the expected value of
    Option D
   If Decision C costs £80,000 to
    implement and Decision D costs
    £10,000, which would you
   Show your decision on the diagram
    Brompton SWOT – look for 4 points in
    each category

   Strengths

   Weaknesses

   Opportunities

   Threats
Analysing a balance sheet

A-Z Business Training 2010
              Balance sheets

   Give an indication of a firm‟s size &
    financial muscle
   Reveal a firm‟s financial health
   Allow for comparisons over time
   (With P&L Account) show a firm‟s
    efficiency, by using financial ratios
   But ratio analysis relies on accurate data
    (as Brompton is a private co, no
    pressure to window-dress)

   Help unpick the masses of data within
    annual reports
   Allow measurement, analysis and
    evaluation of a firm‟s strength,
    efficiency and financial performance
   Raise questions, don‟t answer them
   But are not facts; they may have dated
    Measures of financial health

   Short-term: liquidity (acid test)
   Long term: gearing
These ratios help raise questions like:
   Is it a safe investment/employer/
   Has the firm got the resources to
    respond to opportunities or threats?
  Brompton’s financial health

                      2007      2006
Current ratio          4.9       4.6
Acid test ratio        3.1       2.8

Gearing ratio          0%        0%

Measuring the % return generated:
 Gross and net margins
 Return on Capital Employed

These ratios raise questions like:
 Are prices high enough? Are admin costs
  rising too fast?
 Are the rewards big enough for the
    Brompton’s profitability

                                          2007    2006
Gross profit margin                       38.4%   36.5%
Net profit margin                         15.1%   11.6%
Return on Capital                           -       -

2007 % sales increase: -
2007 % profit* increase: -
*Profit before tax, i.e. (net) operating profit
   A strong balance sheet but a weak market
    position (French Connection) leads nowhere
   Brompton has a very strong position, but
    needs investment (Butler-Adams says in
    capacity; I‟d say in patentable R&D)
   PLCs have the pressure of expectations:
    Ltds can be constrained by big shareholders
   To understand a business, accounts are not
    enough – marketing and people matter
Making a strategic decision

A-Z Business Training 2010
           Ansoff’s Matrix

           Existing                               New


                        Market        Product
                      Penetration   Development

           Ansoff’s Matrix

           Existing                                   New


                        Market        Product
                      Penetration   Development

 New                                                  High RISK
      Market Penetration

   boosting share of existing market with
    existing products
   the safest and most common strategy
   options: find new customers, e.g. Daily
    Express attempt to attract younger
   or increase usage by existing customers,
    e.g. Unilever‟s Timotei “frequent wash”
      Product development

   Boosting share of existing market with
    new products
   Quite high risk, despite advantages of
    market knowledge & distribution power
   Options: build on existing strengths,
    e.g. Nestle‟s new „After Eight Orange
    Thins ‟
   or develop new niches, side-stepping
    the opposition, e.g. the Apple iPhone
       Market development

   Finding a new market for your existing
   Quite high risk, as you may lack market
    knowledge (and under-estimate this)
   Options: reposition your product, e.g.
    Johnson‟s Baby Powder: babies
   …Or move abroad, e.g. Top Shop in U.S;
    Primark in Spain; Tesco in China etc.

   Grow by developing new products/services
    in a new market (to spread risk!!!)
   A Harvard B.R. survey showed that new
    corporate ventures average 4 years of
    severe losses, 8 years to pay back and 12
    years to match company average
   Options: greenfield (Nintendo); sub-
    contracting (Virgin); seedcorn; takeover
     Key factors in Business Strategy

   Corporate objectives - long or short
    term? Focus or diversification?
   Opportunities (growth markets, growth
    sectors, new sectors and step-changes)
   Resources and constraints
   Culture - entrepreneurial or risk averse?
    (key issues - personality &
      Objectives in Exam Answers

   At the root of all questions on strategy,
    i.e marketing strategy          marketing
    objectives         company objectives
   Key distinctions (scope for analysis):
        - long v. short term
             - profit v. other
             - core v. diversification
   N.B. the objectives may prove mistaken
  Porter’s Generic Strategies

  Strong          A struggle to survive         Strong

       Cost leadership            Differentiation

           Focused cost              Focused
            leadership            differentiation

Super-Strong                                 Super-Strong
      Sources of Competitive Advantage

   Cost leadership, e.g. Asda

   Differentiation, e.g. Waitrose/Booths

   Focused cost leadership, e.g. Aldi;

   Focused differentiation, e.g. Whole Foods

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