A2 Business Studies
F297 Strategic Management
Q&As
Rapid Revision Handbook
 Step by step guide to key concepts
 Question and Answer format
 Glossary
Richard Young
2010 Edition
A2 Strategic Management
Business Objectives............................................... 2
Shareholder.................................................. 22
Mission.............................................................. 2
Financial efficiency ................................... 23
Strategic management .................................... 2
Aims and Objectives.................................... 2
Liquidity ........................................................ 22
Gearing........................................................... 23
Strategy and tactics ..................................... 3
Investment appraisal.................................... 24
Planning ................................................................ 5
External influences............................................. 27
Stakeholder objectives.................................... 7
Economic growth ........................................... 28
Corporate planning...................................... 3
SWOT Analysis .............................................. 6
Risk and reward ................................................ 8
Business analysis ................................................... 8
Market analysis.................................................. 8
Forecasting ............................................................... 9
Time series analysis......................................... 9
Data analysis .................................................... 11
Decision making .................................................. 12
Decision making process ............................ 12
Management information systems ......... 14
Decision trees .................................................. 15
Critical path analysis .................................... 16
International decision-making ................. 18
Measures of business performance............. 19
What is performance .................................... 19
Ratios .................................................................. 20
Budgets............................................................... 25
Market Failure ................................................. 27
Economic cycle................................................ 29
Labour Markets............................................... 30
Unemployment................................................ 31
Inflation and deflation.................................. 32
Government macro objectives.................. 33
International competitiveness.................. 34
Interest rates.................................................... 35
Exchange rates ................................................ 36
Taxation.............................................................. 37
Legal issues....................................................... 38
Political issues ................................................. 40
Social issues...................................................... 41
Technological factors.................................... 41
Environmental issues ................................... 42
Moral and ethical issues:............................. 43
Profitability ratios..................................... 20
Change ..................................................................... 44
Return on investment.............................. 20
Change management..................................... 45
Shareholder ratios .................................... 20
Liquidity ratios........................................... 20
Efficiency ratios ......................................... 20
Gearing ratios ............................................. 20
Profitability.................................................. 21
Communication............................................... 44
Industrial relations ................................... 46
Location.............................................................. 47
A2 Strategy Glossary.......................................... 48
1st Edition. First published 2010
© Richard Young. All rights reserved.
| Strategic management
1
Planning
What is planning? Planning is the management process of establishing objectives and selecting
strategies and tactics required to achieve them. Planning prepares a course of action to achieve
stated objectives given the internal resources of the business and its external environment.
What is a plan? A plan is a written document detailing future business activities.
Why is planning important? The planning process makes managers to look ahead rather than
focus on present problems. The planning process helps the business assess its current position
and identify appropriate future actions required to meet stated objectives
List stages in a typical
business plan. There is
no one agreed method.
Generalising, senior
managers carry out a
situational analysis of
their internal and
external environment.
They use results of the
audit to clarify mission,
aims and objectives and
to formulate a strategy most likely to deliver objectives given the firm’s internal resources and
external context. Junior managers then decide tactics. Monitoring involves regularly measuring
progress against forecasts and taking corrective action given variance. Evaluation of
performance in meeting objectives informs planning for the next cycle.
Explain the term situational analysis. A situational analysis is an assessment of the firm’s
internal and external environment
Explain the term external environment. The external environment is the circumstances in
which the organisation operates. External factors such as the state of the economy, legal
constraints, and social trends are beyond the control of the business.
Explain the term internal environment. The internal environment is the resources and
capabilities of an organisation.
What is an audit? An audit is an investigation into an area of business activity.
List the types of audit undertaken in a situational analysis. In assessing the current internal
and external environment a business can use a variety of tools including



PEST analysis
Competitor analysis
SWOT analysis
Why is it important to audit the external environment? Factors outside the control of the
business may limit the ability of the organisation to meet its objectives.
List the characteristics of a PEST analysis? A PEST analysis is an audit of the political,
economic social and technological factors in the firm’s external environment
What is the aim of a PEST analysis? A PEST analysis identifies and assesses the likely impact
of external factors beyond the control of the firm which may constrain its business activities.
Explain competitor analysis. Competitor analysis is an assessment of the strengths and
weaknesses of current and potential rivals.
| Planning
5
Give an example of a quantitative forecasting
technique. Time series analysis is a technique for
identifying a pattern in data. If a pattern exists, a trend
can be predicted.
Sales
Trend
Explain trend. A trend is a persistent long term
movement in data
Time
Use a graph to show an upward trend. In the
diagram there is a persistent upward movement in sales over time
Explain time series data Time series data is a set of values observed at regular intervals eg
annually, quarterly, daily, etc.
Quarter
Spring 2011
Sum 2011
Aut 2011
Winter 2011
Spring 2011
20
25
15
10
22
Sales
What are the components of time series data Time series data has four components
Trend: overall, persistent, long-term movement
Seasonal: regular periodic fluctuations, within a 12-month period
Cyclical: Repeating swings or movements over more than one year
Random: Erratic random fluctuations

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

How are trends identified? Trends are found by removing seasonal and cyclical factors
What is a moving average? A moving average is a technique for smoothing a data series to
reveal trends by removing seasonal or cyclical fluctuations.
Give an example of how a moving average is calculated
Here are 6 days sales for a corner shop
Mon
£
110
Tue
£
80
Wed
£
75
Thu
£
75
Fri
£
100
Sat
£
150
Total
£
590
Moving Average
£
98
Now suppose Sun sales are £200. A 5 day moving average of sales involves we would drop off Monday sales
(£110) and add in newest sales (£200) and then divide by 5
Tue
£
80
Wed
£
75
Thu
£
75
Fri
£
100
Sat
£
150
Sun
£
200
Total
£
680
Moving Average
£
120
The average of £98 is recalculated on the latest data points to £120, hence the term moving
average.
Use a diagram to show how a
moving average reveals a trend.
Why might forecasts be wrong?
Forecasts are based on past data
trends. A sudden unexpected change
in economic conditions or consumer
taste may invalidate future trends.
600
500
Annual
5 Year Moving Average
400
300
200
100
Firms operate in a dynamic market
2002 2001 2003 2004 2005 2006 2007 2008 2009 2010
and must respond to external forces
Year
beyond their control. An unexpected
economic downturn or new competitor may frustrate well researched forecasts
10
Time series analysis |
Explain the use of latest finish time (LFT). LFT shows the latest time an activity can finish
without delaying the entire project. LFTs are calculated by working from right to left. Eg the LFT
for node 5 = 62 – 5 =
What is the critical path? The critical path is the longest-path in the diagram. Any delay in
activities A B or H hold up the entire project. Critical activities lying have no float time
What is float time? Float time is the spare time available for a given activity. Any non-critical
activity has float time.
Define free float. Free float is the amount of time any one individual activity can be delayed
without affecting the EST of the next task. Free float is calculated using the equation:
Free float = EST of next activity – duration of this activity – EST of this activity
How is total float time estimated? Total float time shows how long an activity can over run
without delaying the whole project. Total float is calculated using the equation:
Total float time = LFT of this activity – duration of this activity – EST of this activity
CPA works best for those projects start to finish times for individual activities are easily
estimated
Why use Critical Path Analysis? CPA is an analytical tool that helps managers

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plan, control and monitor complex projects.
identify the most efficient path for completing a project
identify those activities whose delay holds up the entire project
allocate resources efficiently – resources arrive just-in-time when needed. Eg using CPA
and JIT stock control minimises waste and improves cash flow
What are the drawbacks in using CPA? As with any quantitative tool, CPA relies upon
accurate estimations of data eg activity duration. Managers are under pressure to complete
activity on time – quality may be compromised. CPA ties up management resources
| Critical path analysis
17
Financial efficiency
What do financial efficiency ratios measure? Financial efficiency or activity ratios measure
how well an organisation is using its resources
State the main measures of efficiency. Stakeholders use asset turnover, stock turnover,
debtor days and creditor days to assess the performance of an organisation’s operations.
How can stakeholders use the asset turnover ratio? The turnover ratio shows how
efficiently an organisation uses its assets to generate sales revenue. The higher the asset
turnover ratio, the greater the efficiency of the firm in generating sales revenues from assets.
How does an economic slowdown effect asset turnover? An economic slowdown reduces
total output income and employment in the economy. Sales fall damaging asset turnover
How can a firm improve its asset turnover ratio? By improving capacity utilisation; closing
down (selling off) underperforming areas of the business; increasing sales, eg, through better
marketing. Downsizing releases resources to areas that generate more sales revenue.
How is the stock turnover ratio used? Usually, a high stock turnover ratio suggests the
business is efficient and selling goods quickly to customers.
How can a firm increase its stock turnover ratio? The stock turnover ratio improves if a firm
hold less stock or increase sales.
How are JIT and stock turnover related? Switching to just-in-time production methods
reduces stock holdings and so increases the stock turnover ratio.
How is the debtor day ratio used? The debtor day ratio shows the average amount of time
taken to collect debts from customers sold items on credit. The lower the ratio, the more
efficient the firm’s credit control system is in improving cash flow and working capital.
How can a firm reduce its debtor day ratio? By improving credit control eg chasing late
payers and reducing credit terms. Less generous credit terms may impact negatively on sales
How can a firm improve is creditor day ratio? Delaying payment of debt improves cash flow
but risks supplier relations. Suppliers may respond by insisting on payment in cash.
Gearing
What is capital structure? Capital structure is the types of long term finance used by an
organisation to finance its operations and growth. The two main sources of long term finance:
borrowing (debt or loans) and equity (shares, shareholder funds or equity capital).
Explain gearing. Gearing is the proportion of long term finance made up of debt rather than
shareholder funds. The drawback of debt is loans must eventually be repaid (or continually
rolled over) and interest payments maintained.
What are debentures? A debenture is a type of long-term loan (bond). Usually debentures pay
a fixed rate of interest, are secured against an asset of the business and are redeemed (bought
back) within 15 years of issue. Issuing bonds to finance operations and growth increases debt.
How is the capital structure assessed? The gearing ratio measures the long term financial
health of an organisation ie its reliance on debt to finance its operations and growth.
Why is gearing important? Gearing measures the firm’s reliance on long term debt in its
capital structure to finance its operations and growth
Explain high gearing. A highly geared business has a gearing ratio above 50% suggesting
excessive borrowing. Maintaining interest and debt repayments may be challenge.
Assess the impact of a rise in interest rates on a highly geared organisation. Firms that are
highly dependent on loans are often vulnerable to interest rates rises. Can the firm still meet
| Ratios
23


Standardisation eg EU wide metric measurements;
Optional monetary union through adoption of a single currency - the euro.
How does membership of the EU affect British businesses? UK firms have




free trade access to a market of 500 million citizens and can freely recruit EU nationals
Increasing sales may cause economies of scale hence lower unit costs
Increasing competition from EU firms who have free trade access to UK markets
to comply with EU laws and regulations which increase costs and distract managers
What is the Eurozone? The Eurozone consists of 16 EU members who have opted for monetary
union by adopting the euro as a common currency. Each country has discarded its own currency
Why have some EU members adopted the euro? A common currency reduces the cost of
international trade as


Commission for buying and selling euros is avoided.
The uncertainty associated with unpredictable future exchange rates is removed and
firms no longer have to insure against unfavourable currency movements
Is the UK in the Eurozone? The UK has decided to stay outside the Eurozone for now. This
means businesses trading in Europe need to trade sterling (£) and euros. The €/£ rate of
exchange is volatile and uncertain – a source of increased risk and a barrier to planning
Why has the UK opted out of the euro? The major drawback of membership of the euro zone
is that interest rate decisions are made by the European Central bank.
Interest rates
What is interest? Interest is the amount paid by a debtor to a lender for the use of money. The
interest rate is both the cost of borrowing and the reward for saving.
What are interest rates? The interest rate is the sum charged for borrowing money, expressed
as a percentage. Eg but 18% annual interest rate means £18 is paid for every £100 borrowed.
Who sets interest rates? In the UK, the official interest rates or base rate is set monthly by the
Bank of England’s Monetary Policy Committee. High Street banks use the official interest rate as
the base for setting their own charges for overdrafts and loans and savings rates.
Why do interest rates change? The Bank of England increases interest rates to encourage
savings and discourage borrowing and so dampen demand. Less demand reduces inflationary
pressure but may result in more cyclical unemployment.
What is the effect on individual businesses of an increase in interest rates?
Internally: the cost servicing variable rate loans such as overdrafts increase. There is less
incentive to borrow funds to finance investment. Capital projects may be delayed
 Externally: households with net debts now paying more interest and so have less
disposable income. Demand falls, particularly for products with a high income elasticity
of demand.

The overall impact on individual firms depends on



the size of changes. A 0.5% change has less impact than a 2% change.
the amount of variable rate borrowing used by the firm. Evidence: gearing
the individual context of the firm eg its gearing and product portfolio
Are the costs of every business equally affected by interest rate change? The impact on
costs depends on sources of finance. Businesses that use equity financing face less impact on
costs than organisations that depend on overdrafts. Interest rate charges on overdrafts are
usually linked to Bank of England’s base rate.
| Interest rates
35
Change
Communication
Define communication. Communication is the transfer of information between individuals
Distinguish between internal and external communication. Internal communication is the
exchange of information within the organisation. External communication is the exchange of
information between individuals and groups outside the organisation.
Identify the steps in communication. A sender encodes (chooses
words & images) and sends a message (a memo) via a medium
(email) that is decoded (interpreted) by the receiver who then
responds (feedback).
What is effective communication? Communication aims to
influence behaviour. In successful communication, the receiver
decodes, understands and acts on a message as intended by the
sender.
List potential channels of communication. Messages can be sent by letter, fax, memo, report
or email or shared in face-to-face meetings.
Distinguish between formal and informal communication channels. Formal channels are
the official network of communications shown by an organisation chart. Informal unofficial
communication channels are set up by staff (the grapevine) and may counter formal channels.
Why is communication important? Effective communication improves business performance
Shared business culture. Staff share similar attitudes beliefs and behaviours
Shared goals: individuals and departments work towards corporate objectives
Coordination: staff understand their delegated role and function in the strategic plan
Consultation staff, departments and stakeholders become aware of issues
Change management. The need for change is explained and then understood
Conflict avoidance or resolution eg meetings to resolve an industrial dispute
Motivation excluding staff from the flow of appropriate information is demotivating


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



What causes miscommunication? Miscommunication is a misunderstood message and can be
caused by poor communication skills, interference (noise) or information overload.
List indicators of poor communication. Poor industrial relations and motivation.
Identify barriers to effective communication.
Poor staff communication skills eg staff using jargon, the wrong tone of voice or body
language, or inappropriate medium eg email for a confidential message.
Workplace eg staff are located in different buildings or regions
information overload eg sending too many messages and memos
Organisational structure. In formal, bureaucratic organisations with many levels of
hierarchy, communications is generally top down, and slow.
Business culture.





What is consultation? Consultation a discussion to assess views on a particular issue
What is downward communication? Downward communication occurs when messages are
transmitted down the organisational chart and is associated with autocratic leadership styles
Explain two-way communication. In two-way communication feedback from receivers is
valued and is associated with democratic leadership styles and consultation
44
Communication |
A2 Strategy Glossary
Absenteeism: staff missing work without
good reason
ACAS: An independent organisation that
aims to prevent and resolve industrial
disputes
Accountability: the process of holding
individuals or institutions answerable for
their responsibilities, actions and
decisions.
Accounting rate of return (ARR): an
investment appraisal method that
estimates annual profit from a project as a
percentage of the initial investment
Acid test ratio: Compares current assets
excluding stock with current liabilities. A
measure of liquidity
Acquisition: one business buys ownership
and control of another firm. A takeover
AGM: an annual General meeting where
shareholders received reports and elect
directors
Aims: the main objective of the business
eg survive, make a profit, or grow
Ansoff's matrix: a framework for
identifying four strategic options for
growth in terms of markets and products
Appraisal: an evaluation of staff
performance over a given period of time
usually against stated objectives
Asset led: firms markets products that (a)
match customers want and (b) match their
own strengths
Assets: items of value owned by a
business eg cash, equipment and stock
Audit: an investigation into an area of
business activity
Authority: the power managers have to
direct subordinates and make decisions.
Autocratic leadership: a leadership style
with the leader retains control and makes
major decisions with minimum
consultation
Average cost: the cost of making one item
ie unit cost
Balance sheet: a statement showing the
assets and liabilities of an organisation on
a particular date
Barriers to entry: the obstacles that
restrict firms breaking into a market and
competing with established firms.
Base rate: the official rate of interest set
by the monetary policy committee of the
Bank of England
Benchmarking: assessing the
performance of a business against those
achieved by rivals eg comparing
productivity levels or labour turnover
Billion: £ billion denotes £1,000 million ie
£1,000,000,000
Board of Directors: individuals elected by
the shareholders of a company to manage
the business. Directors control the
business
Book value: the value of total assets less
the value of total liabilities on the date
given in the balance sheet.
Bottleneck: any factor that causes normal
business activity to be delayed or stopped
Brand: a named product customers
distinguish from other products eg
McDonalds
Branding: the process of creating a
distinctive image for a product that sets it
apart from its rivals
Break even: the minimum level of units
sold for revenue to cover all costs - the
business is making neither a profit or loss
Budgetary control: The process of
monitoring actual and forecasted
performance over time to identify variance
Bureaucracy: the use of established rules
and regulations as a way of running an
organisation,
Business: any organisation that uses
resources to create products for its
customers
Business activity: the process of turning
inputs such as raw materials into outputs
ie goods and services
Business culture: shared attitudes, values
and behaviours within an organisation.
Business cycle: fluctuations in the level of
economic activity over time causing booms
and slumps. Also called the economic
cycle.
Business functions: the activities of
different departments in an organisation
Business organisation: the way in which
staff roles and responsibilities are
arranged within a firm
Business plan: a report stating the nature
of the business, research findings, cash
flow and sales forecasts, and an action plan
for future business activity
Business process re-engineering: BRP is
a fundamental redesign of business
procedures usually requiring substantial
investment in new capital
Calculated risk: a number value of the
chance of bad outcome from a decision. Eg
a 75% or 75:25 chance of a new business
surviving its first year.
Enterprise: willingness to take business
risks and organise production
Equity capital: funds provided by owners
of a business ie shareholders in return for
shares
Ethical behaviour: when firms try to do
the ‘right thing’
Ethics: principles considered fair, honest
and morally correct
Exchange rate: the price of one currency
in terms of another currencies $2/£ means
the price of one UK £ pound is two US$
dollars
Exports: domestically made products sold
overseas
Extension strategy: a set of actions which
aim to maintain sales of products in the
maturity phase of the product life cycle or
revive sales of declining products
External cost: the costs imposed on
others by consumers and producers. Eg
new night time deliveries impose noise
costs local residents
External environment: the context in
which firms operate and over which it has
no control and includes the economy, the
action of rivals, the law and social trends.
External finance: finance raised from
outside the business eg bank loan
External growth: an increase in the size of
a firm as a result of mergers or acquisition
Finance: funds raised by an organisation
Firm: an organisation that hires and
organises resources to make products
Fiscal policy: the use of government
spending and taxation to change the level
of total demand in the economy
Flat organisation: an organisational
structure where there are relatively few
levels of hierarchy
Flexible working: the workforce is
organised to be multiskilled and able to
work variable hours to respond the
changing demand
Floatation: the process of becoming a plc
by offering new shares for sale to
members of the general public.
Forecast: an attempt to estimate the
future value of a variable eg sales
Franchise: one business (the franchisor)
grants another business (the franchisee) a
licence to sell its products and use its
name
Franchisee: a business that uses the
business idea, process, product or brand
name owned by another, the franchisor
Franchisor: the firm that grants a
franchisee the legal right to use its
business idea, process, product or brand
name
Functional management: when a
business organises itself into departments
eg marketing and operations
Gap in the market: no business is yet
providing a product with a combination of
features customers may need eg medium
quality low priced fashion clothing
Gearing: The proportion of capital
employed financed through borrowing
rather than equity or reserves
Globalisation: the process of ever
increasing business activity taking place
across national boundaries creating
worldwide markets and interdependence
Gross profit: sales revenue less cost of
sales (direct costs or variable costs)
Gross profit margin: the proportion of a
product's selling price that is gross profit.
Overheads are ignored.
Growth: an increase in production levels.
Expansion
Hierarchy: management levels within an
organisation ie the ‘pecking order’
High gearing: the debts of a company are
high in relation to equity capital
Human resources: staff who work for an
organisation, both employees and
managers.
Image: perceptions of a product, brand or
organisation held by others
Imports: domestic purchase of goods and
services produced overseas
Income tax: a government charge on
individual's earnings. Gross income less
income tax is disposable income
Incorporation: the legal process that
gives a firm its own legal status separate
from that of tits owners.
Indirect costs: expenses of production
such as rent that are independent of the
level of output. Overheads
Indirect taxes: a charge imposed by the
government on the sale of goods or
services.
Industrial action: Staff activities eg
overtime bans and strikes that disrupt
production putting pressure on managers
to make concessions
Industrial dispute: conflict between
management and employees that can lead
to industrial action
Industry: all those firms producing the
same product
Inferior goods: products whose sales fall
as incomes rise. Items with a negative
income elasticity of demand
| Location
51