Entries Tagged 'business' ↓

Readers Question: “Business Strategy and the Strategic planning process within your organisation”

Do you know how i would go about answering this question- i am currently working for a manufacturing Global company called Smurfit Kappa who specialise in the paper and packaging industry.

Firstly, You could undergo SWOT analysis - Strengths, Weaknesses, opportunities, threats.

Strengths could include:

• Current profitable orders.
• Existing technology and skilled labour forces.

Weaknesses could include:

• Appreciation in exchange rate, which makes exports less competitive
• Over reliance on small number of customers.
• High ratio of debt
• Difficulty in finding suitable management / workers

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A report by the European Union EU, found that on average UK car prices were 10% higher than in EU. In some cases, the difference in price could be much greater. Some people have taken advantage of this price difference to buy a new car on the continent. [BBC report]

OCR exam question: Discuss factors that might explain differences in Car Prices across Europe

1. Purchasing power of Pound. Quite a few goods tend to be more expensive in the UK than the continent.

2. Different Living Costs. Exchange rates don’t always reflect local purchasing power of currencies. For example, in Poland living costs are relatively low, reflecting lower wages and lower cost of renting. Garages in UK, have to charge higher prices to cover the cost of renting in the UK.
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Profit = Total Revenue - Total Cost

High profit enables.

1. Investment in Research & Development. This leads to better technology and dynamic efficiency. This profit is particularly important for some industries such as oil exploration and car manufacture. Without this investment the economy will stagnate and lose international competitiveness, leading to job losses in some sectors.

2. Reward for Shareholders.

Shareholders are given dividends. Higher profit leads to higher dividends and encourages people to buy shares. Shareholders are an important source of finance for firms. Profit is important to be able to renumerate shareholders.

3. High Profit should Attract New Firms into the industry.

For example, the high price of oil and hence profits for oil companies should encourage firms to develop new oil fields. This assumes the market is contestable and new firms can actually enter. Continue reading →

(a) Explain why the Banking sector is not a contestable market (20)

A contestable market mean that there is freedom of entry and exit into the market. Therefore, there must be low sunk costs. Because there is freedom of entry and exit, there is always the threat of new firms entering.

It is difficult to enter the banking sector because:

1. Brand Loyalty to existing banks. People prefer big established banks; small new banks are more risky. A new firms would have to spend a lot on advertising.
2. Economies of scale. Banks usually have a national presence in each of the major towns. This includes organisational economies of scale, the benefits of having a branch in each town.
3. Risk Bearing economies. Trust is very important for a bank. The bigger it’s balance sheet and deposits the more people will trust the bank.

(b) Discuss whether high profits and the dominant market share in the banking sector suggests that there should be more government intervention - either through windfall taxes or regulation of prices. (30)

British banks are highly profitable. They made a combined profit of £42bn in 2007

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Readers Question: with economic scare, do you advise to invest? how do you predict inflation and interest rates will affect business?

In the UK, interest rates have only fallen slightly since the start of the global credit crisis. The Bank of England has reduced rates from 5.75% to 5.25%. The Bank is still worried about inflationary pressure (CPI inflation recently increased to 2.6%) Also the RPI rate suggests underlying inflation (the rate people actually face) is higher at over 4%

There is an increase in cost push inflation, due to factors such as: rising energy prices and rising food prices. This makes it difficult for the MPC to cut rates and still achieve the government’s inflation target of 2%

However, I still feel that interest rates will fall over the next 12 months. Falling house prices will definitely reduce consumer spending and this will reduce economic growth and therefore inflation. With low confidence and falling spending, the MPC might be able to cut rates to 4.75% or 4.5% by the beginning of 2009. If the housing market really starts to crash as some economists predict, we could even see interest rates fall to under 4%. However, at the moment I don’t think a housing crash is the most likely scenario

 Credit Crisis and Interest Rates

However, although the Bank may cut base rates, business may not see interest rates fall. This is because the commercial banks take advantage of the credit crunch to raise their own interest rates. Therefore, commercial lending rates may increase due to shortage of funds, even though the bank cuts the base rates.

• CPI Inflation Forecast
• Inflation forecasts
• Effects of Interest rates 

Readers Question: When would you want to own a business that sells price-elastic products? Why?

Not really thought about this before.

Price elastic products mean that an increase in price will cause a bigger % fall in demand. Therefore, presumably they offer less scope for increasing price. Elastic products suggest the good is in a competitive market and therefore it is more difficult to make profits. If demand was price inelastic a firm could put up prices  and make profits. This is the case of monopoly.

When Price Elastic products are Beneficial

1. For a Sales Maximising Firm.

If a firm wishes to increase market share and increase its sales then  price elastic means that cuts in price will beneficial in increasing sales.

• However, it depends on how other firms react. If One firm cuts its price, demand may be elastic, but if all the other firms follow suit demand is likely to be inelastic and the price war only causes a small increase in sales (see Oligopoly Kinked demand curve)

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Readers Question: when recession, people tend to save money in bank, because interest rise. the impact is..?(paradox of thrift),if the fiscal policy do not allow interest to rise and encourage people to spend, and govern collect more tax,which policy is beter?

• In a recession people tend to save money because there is a fall in confidence. If people expect to be made unemployed then you don’t want to spend and borrow, it is less risky to save.
• The paradox of thrift states that in a recession people are nervous so save more. This makes the recession worse because it causes a further fall in consumption. People think they are doing a good, responsible thing to save, but actually they are making the recession worse. Continue reading →

what are the consequences of competition between supermarket affliated petrol stations and independent petrol retailers ?

Before, the supermarkets entered the market for selling petrol, there was much less competition in the market for petrol. Therefore, independent retailers were able to set higher prices and gain higher profit margins.

I believe prior to the entry of supermarkets, petrol retail was dominated by the big 5 oil companies like Shell and Esso. The average profit margin on the retail of petrol was higher. This enabled independent retailers to be competitive and in some cases undercut the big petrol companies.

Economies of Scale. The big supermarkets can take advantage of economies of scale in the distribution and selling of petrol because they already have a national distribution network. This enables them to undercut the costs of independent retailers

Supermarkets have incentive to Sell Cheap Petrol. Independent retailers make all their profit from petrol (except selling food in small shops). However, supermarkets have an incentive to offer cheap petrol to encourage people to go to Tesco or Sainsbury’s. People often do both petrol buying and a big supermarket shop. Therefore, even if the profit margin on petrol is very low, it doesn’t matter because they will make profit from selling more groceries. This has been another factor in lowering prices.

The effect of supermarkets is to increase consumer and reduce the profit margin on the RETAIL of petrol. (I emphasise retail because, although it may be hard to believe there is a small profit margin on selling petrol at forecourts.

The effect is that many independent retailers have been forced out of business. One ancedotal piece of evidence - an independent retailers said they no longer accepted cheques for petrol payments because it would mean they make a loss on selling petrol

Warren Buffett has overtaken Bill Gates to become the world’s richest and wealthiest person. Known for his frugal lifestyle, Warren Buffett is unlikely to get too excited about the news. When he got married recently, he bought a cheap discount ring for his wife. Warren Buffet makes most of his money from investing. 2007 saw a particularly good year as he made good choices on the Brazilian currency.

Top 10 Rich List

1 Warren Buffett Investments $(bn) 62.0

2 Carlos Slim Helu Telecoms 60.0

3 Bill Gates Software 58.0

4 Lakshmi Mittal Steel 45.0

5 Mukesh Ambani Petrochemicals 43.0

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