AQA A-Level Business: Analysing the strategic position of a business (7132) – Revision Notes

These notes condense topic 3.7, Analysing the strategic position of a business (A-level only), from the AQA AS and A-level Business specification (7131 and 7132). For full explanations and worked examples, read the study guide, then test yourself with the practice questions. Course hub: AQA A-level Business. Checklist: printable checklist. Find your weak spots with a free diagnostic.

3.7.1 Mission, objectives and strategy

Term	Meaning
Mission	Purpose of the business: why it exists
Corporate objectives	Measurable goals for the whole business
Strategy	Long-term plan to reach the objectives
Tactics	Short-term actions that carry out the strategy

• Chain: mission, then corporate objectives, then strategy, then tactics, then functional decisions.
• Influences on objectives: short termism, business ownership, internal environment, external environment.
• Strategy sets what each function must do; for example a low-cost strategy pushes operations to cut waste and marketing to stress price.
• SWOT: internal strengths and weaknesses, external opportunities and threats. Useful for organising evidence; weak because it is a list, subjective and dated. Always rank points and reach a choice.

3.7.2 Financial ratio analysis

Ratio	Standard form	High or rising means
ROCE	operating profit / capital employed x 100	Better return on funds used
Current ratio	current assets : current liabilities	Better liquidity (too high may mean idle assets)
Gearing	non-current liabilities / capital employed x 100	More reliance on debt, more risk
Receivables days	receivables / revenue x 365	Slower collection from customers
Payables days	payables / cost of sales x 365	Longer taking credit from suppliers
Inventory turnover	cost of sales / inventories	Stock sells faster

Capital employed = total equity + non-current liabilities. The specification names these ratios without formulas, so these are the standard forms.

Worked reminder. Norbrook Cafes (£000): operating profit 54; equity 300; non-current liabilities 100; current assets 150; current liabilities 120; revenue 600; cost of sales 360; receivables 50; payables 36; inventories 45.

• Capital employed 400, so ROCE = 54 / 400 x 100 = 13.5% and gearing = 100 / 400 x 100 = 25.0%.
• Current ratio = 150 / 120 = 1.25 : 1.
• Receivables days = 50 / 600 x 365 = 30.4; payables days = 36 / 360 x 365 = 36.5.
• Inventory turnover = 360 / 45 = 8.0 times.

Method for a ratio question: write the formula, substitute, give units (%, days, times), compare with last year or a rival, then say what it means and what else you would want to know.

Value of ratios: allow comparison over time and with other businesses; but backward-looking, depend on accounting choices, ignore non-financial factors, need a like-for-like benchmark.

3.7.3 Overall performance

• Non-financial data: operations (capacity utilisation, productivity, defects, delivery times), human resources (labour turnover, absenteeism, training), marketing (market share, satisfaction, retention). Analyse over time or against other businesses.
• Core competences: things done well that are hard to copy and valued by customers; source of competitive advantage.
• Short term (profit, cash) against long term (market position, skills, reputation). Cutting training lifts short-term profit and risks the long term.

Model	Content	Value	Limit
Kaplan and Norton’s Balanced Scorecard	Financial; customer; internal business processes; learning and growth	Balances short and long term	Time to design; weighting measures
Elkington’s Triple Bottom Line	Profit, People, Planet	Broader view of success	Social and environmental impact hard to measure

3.7.4 Political and legal change

• Law (UK and EU, in general terms): competition, labour market, environment.
• Policy: enterprise, regulators, infrastructure, environment, international trade.
• Effect on strategy: where to operate, which products, whether to enter or leave a market. Effect on functions: labour costs, production methods, marketing rules, financing.
• Evaluation prompts: how big, how soon, how long to adapt, do rivals face the same rule, is there an opportunity as well as a threat?

3.7.5 Economic change

Factor	Typical effect on business
GDP	Growth lifts demand, especially for luxuries
Taxation	Corporation tax cuts retained profit; income tax and VAT cut spending
Exchange rates	Stronger pound: exports dearer, imports cheaper. Weaker: the reverse
Inflation	Rising costs; pricing power matters
Fiscal and monetary policy	Taxes and spending; interest rates change borrowing cost and demand
Open trade v protectionism	Wider markets and rivals v shelter and higher import costs

Exchange rate reminder. An export priced at €910 earns £700 at €1.30 per pound but only £650 at €1.40. A stronger pound lowers the sterling revenue, or forces a price rise that cuts sales.

• Data skill: state the change, size it, say who is affected, give implications for the UK, European Union or global market.
• Globalisation: reasons are cheaper transport and communication, freer trade, search for lower costs and bigger markets. Importance: markets, inputs, scale economies, but more rivals and currency risk.
• Emerging economies: fast-growing demand and production base; political and infrastructure risk.

3.7.6 Social and technological change

• Demographics and movement: ageing population, urbanisation and migration.
• Lifestyle and buying behaviour: convenience, health, ethical choices; growth of online businesses.
• CSR: for (reputation, loyalty, avoiding regulation) and against (cost, lower short-term profit).
• Shareholder concept: serve owners’ returns. Stakeholder concept: balance all affected groups.
• Carroll’s pyramid, base to top: economic, legal, ethical, philanthropic.
• Pressures for socially responsible behaviour: consumers, pressure groups, social media, employees, investors, regulators.
• Technology: affects every function and strategy; creates markets, ends products, lowers entry barriers.

3.7.7 Porter’s five forces

Force	Strong when	Effect
Entry threat	Low barriers to entry	Profit competed away
Buyer power	Few or large buyers, easy switching	Lower prices
Supplier power	Few suppliers, specialised inputs	Higher costs
Rivalry	Many similar rivals, slow growth	Price competition, high promotion spend
Substitute threat	Easy alternatives	Price ceiling

Forces change with technology, mergers, regulation and new products. Weak forces mean higher profit potential. Forces shape competitive strategy: build barriers, differentiate, secure customers or suppliers.

3.7.8 Investment appraisal

Method	Formula or rule	Strength	Weakness
Payback	Time to recover the initial cost	Simple; stresses risk	Ignores later cash and timing
Average rate of return	(total returns - cost) / years / cost x 100	Uses all returns	Ignores timing
Net present value	Sum of discounted cash flows - cost	Allows for time value of money	Depends on discount rate and forecasts

Worked reminder. Norbrook Cafes spends £50,000 on a new oven; cash flows are £20,000, £25,000 and £30,000 in years 1 to 3; the discount rate is 10%.

• Payback: after year 2, £45,000 recovered, so 2 + 5/30 = 2.17 years (about 2 years 2 months).
• ARR: total returns £75,000, net £25,000, so 25,000 / 3 / 50,000 x 100 = 16.7%.
• NPV: 20/1.1 + 25/1.21 + 30/1.331 = 18.18 + 20.66 + 22.54 = 61.38, so NPV = 61.38 - 50 = +£11,380.
• Sensitivity: with cash flows 10% lower, NPV falls to about +£5,240.

Factors influencing the decision: investment criteria, non-financial factors, risk and uncertainty. Sensitivity analysis changes one assumption at a time to see how much the result depends on it; it shows which forecasts matter but gives no probabilities.

Quick self-test

1. Distinguish corporate objectives from tactics.
2. A business has operating profit £45,000, equity £250,000 and non-current liabilities £50,000. Calculate ROCE.
3. Using the same figures, calculate gearing.
4. Receivables are £40,000 and revenue is £480,000. Calculate receivables days to 1 decimal place.
5. Cost of sales is £420,000 and inventories £60,000. Calculate inventory turnover.
6. Name the four perspectives of the Balanced Scorecard.
7. What are the three Ps of the Triple Bottom Line?
8. Why might a stronger pound hurt an exporter?
9. Name Porter’s five forces.
10. A £90,000 project returns £30,000, £40,000 and £50,000 in years 1 to 3. Calculate payback.
11. What does a positive NPV tell you?

Answers

1. Corporate objectives are measurable, whole-business goals; tactics are short-term actions that carry out the strategy.
2. Capital employed = 300,000, so ROCE = 45,000 / 300,000 x 100 = 15.0%.
3. 50,000 / 300,000 x 100 = 16.7%.
4. 40,000 / 480,000 x 365 = 30.4 days.
5. 420,000 / 60,000 = 7 times.
6. Financial; customer; internal business processes; learning and growth.
7. Profit, People, Planet.
8. Its goods cost more abroad or its sterling revenue falls, reducing competitiveness or margins.
9. Entry threat, buyer power, supplier power, rivalry, substitute threat.
10. After year 2, £70,000 is recovered; £20,000 of £50,000 remains in year 3, so 2 + 20/50 = 2.4 years (about 2 years 5 months).
11. The project earns more than the discount rate, so it adds value on this measure.

Where marks are usually lost

• Stating a ratio result without a comparison or an explanation of what it means.
• Mixing up gearing (non-current liabilities over capital employed) with the current ratio.
• Writing days for payables using revenue instead of cost of sales.
• Describing a model such as Porter or Carroll without applying it to the business in the question.
• Treating every external change as a threat, with no opportunity or no judgement of size and timing.
• Discounting wrongly in NPV, or forgetting to subtract the initial investment.
• Recommending an investment on one method only, with no mention of risk, non-financial factors or sensitivity.
• Long definitions of CSR with no link to the business’s stakeholders.

Frequently asked questions

What are the four perspectives of the Balanced Scorecard? Financial; customer; internal business processes; and learning and growth.

What is Carroll’s pyramid of corporate social responsibility? Carroll’s pyramid sets out responsibilities from base to top: economic, legal, ethical and philanthropic.

What is sensitivity analysis in investment appraisal? Sensitivity analysis changes one assumption at a time, such as cutting every cash flow by 10%, to see how much the result depends on it. It shows which forecasts matter but gives no probabilities.

Why might a stronger pound hurt a UK exporter? A stronger pound means the exporter’s goods cost more abroad, or its sterling revenue falls if it keeps foreign prices the same, reducing its competitiveness or its margins.

What are core competences? Core competences are things a business does well that are hard to copy and are valued by customers, so they are a source of competitive advantage.

Official syllabus

AQA, AS and A-level Business (7131 and 7132) specification, section 3.7 (A-level only).