Revision presentation on economic environment for UK businesses designed for AQA BUSS4 students, May and June 2013

1. Business &
Economic
Environment
BUSS4 May 2013

2. Business and the Economy
• Economic environment is
crucial for all businesses
– Large corporations and
SMEs
– Domestic facing
businesses and TNCs
– Businesses in cyclical
sectors and those less
exposed to
macroeconomic
volatility

3. An Age of Uncertainty
• High levels of economic
uncertainty
• Financial crisis has left a long
shadow
• Developed countries –
persistent slow growth for
many
• In 2013 the world's ten fastest
growing countries are likely to
be emerging countries
• European economy is struggling

4. The Big Picture – Slow Growth
Deep
recession in
2008-09
Followed by
persistently
low growth
GDP has
grown by
less than 2%
in each of
the last six
years

5. The Key UK Data in a Table
Indicator 2011 2012 2013*
Real GDP (% change) 0.9 -0.1 0.9
Consumer spending (% change) -0.9 1.1 1.6
Capital investment (% change) -2.4 1.8 2.5
Exports of goods and services (% change) 4.5 -0.2 2.4
Unemployment rate - % of labour force 8.1 8.0 8.3
Consumer price inflation - per cent 4.5 2.6 1.9
Source: OECD World Economic Outlook, December 2012
Data for 2013 is a forecast

6. Capital spending remains weak
Can you
identify 3
factors that
might explain
why
investment
spending
remains so
weak at the
moment?

7. Consumer spending and incomes
A combination of tax rises,
high inflation and modest
growth in earnings have hit
consumers across the
income spectrum in the last
5 years

8. Real Disposable Income
The strong rise in real incomes
has come to an end – when
living standards are squeezed
which businesses benefit most?

9. Inflation and interest rates
Inflation in
the UK has
been above
the 2% target
in recent
years – what
does this
mean for
business?

10. External Factors: BRICs Growth
Fast growth
for BRIC
countries –
can you think
of some of
the effects
for a range of
UK
businesses?

11. External Factors: Asia Rising
Strong
growth is not
just confined
to BRICS –
Asia and Sub
Saharan
Africa both
having a
phase of
rapid growth
and
development

12. External Factors: EU Growth Rates
Economic
conditions
have been
very tough in
a number of
EU countries
– consider
the effects
for a range of
UK
businesses

13. External Factors: Oil prices
World oil
prices have
been high in
recent years
but also very
volatile –
which
industries
are most
affected by
this?

14. External Factors: Food Prices
The global
prices of
many
foodstuffs
are highly
volatile and
have risen in
recent years
– what
implications
are there for
certain
businesses?

15. Business Profitability
How has the
recession
and the slow
recovery
affected
rates of
returns for
businesses?

16. Fragility in the Financial System
Commercial
banks have
cut their
lending to
many
businesses –
new forms of
lending are
growing
quickly

17. Policy Factors: Interest Rates
Official policy
interest rates
are set each
month by
the Bank of
England –
they have
been at 0.5%
since March
2009
This is not
the interest
rate paid by
businesses!

18. Economic growth & unemployment
The jobless
rate has
grown to 8%
of the labour
force - what
are some of
the
implications
for business?

19. Exchange Rates: Sterling v US $
Sterling has
been stable
against the
US dollar in
recent years
– but is now
falling. For
which
businesses is
this
significant?

20. Focus on Construction
In 2011/12 the number of new
homes built fell to the lowest level
since 1923.
Why are
businesses in
the housing
industry
more
exposed to
cyclical
fluctuations
in the
economy?
How can
they
respond?

21. The conventional wisdom is ...
• Standard view is that macro uncertainty
favours large, diversified businesses
• Sectors which benefit from stronger GDP
growth include consumer services companies,
financials and travel and leisure businesses
• Sectors that do better in slower-growth times
include energy, utilities and pharmaceuticals
• How true is this in current times?

22. Business Strategies for Uncertainty
Challenges
• Expected demand
• Profit margins
• Cash flow / late payment
• Availability of credit
• Financial uncertainty
• Structural challenges from
other economies

23. Business Strategies for Uncertainty
Challenges
• Expected demand
• Profit margins
• Cash flow / late payment
• Availability of credit
• Financial uncertainty
• Structural challenges from
other economies
Opportunities
• Plenty of growth sectors
• Grow market share even if a
market is flat
• Implement long overdue
changes
• New business models
• Emergence of new forms of
business financing

24. Defensive Balance Sheet Strategies
• Increasing cash flow
• Cutting costs
• Reducing leverage
In the UK official
data show corporate
cash balances stood
at £671 billion in
2012 equal to 46%
of GDP, up from
£240 billion in 2002,
and close to record
levels

25. Priorities

26. Opportunities – Growth Sectors
• Consumers are spending more on technology
• UK car production is on an upward path, rising 34%
between 2009 and 2011
• Skilled services such as design, consultancy, media
• Hotels, catering and restaurants, facilities
management
• Renewable energy, shale oil, natural gas fracking

27. Business Finance – Old....
Traditional Bank Finance
• Commercial bank loans
• Overdraft facilities
• Credit card finance
especially for SMEs
• Equity raised through stock
market
SMEs have built up their savings deposits
in banks but have found it much tougher
to get the loans they want .... New
finance streams needed

28. Business Finance..... And New
Growing Financial Options
• Corporate Bond Market
including retail bonds
• Peer to peer funding
– Funding Circle
– Zopa
– Crowd Cube
• New banks
– Aldermore
– Virgin Money
– Possible new regional banks
• Invoice discounting facility

29. Business Finance..... And New
Growing Financial Options
• Corporate Bond Market
including retail bonds
• Peer to peer funding
– Funding Circle
– Zopa
– Crowd Cube
• New banks
– Aldermore
– Virgin Money
– Possible new regional banks
• Invoice discounting facility
Retail Bonds
Tesco raised £125m in February with
an eight-year bond paying 5.2% a year
John Lewis raised £50m in April
through a Partnership bond, though
this was reserved for its customers and
staff.
Hotel Chocolat raised £4m by selling
the bond to members of its Chocolate
Tasting Club, who don't get interest
but instead receive a box of chocolate
each month

30. Peer to Peer Funding
Where people lend
directly to others via
online exchanges

31. Peer to Peer Funding
Conventional bank lending
to business in the UK
continues to decline.

32. Amazon – Aggressive Expansion
The world's
biggest
online
retailer by
sales
Aggressive
expansion
strategy

33. JCB – Digging for Higher Returns
One of the UK’s biggest
family-owned
companies,
£360m profit on
turnover of £2.9bn
Huge player in the global
market for excavation
equipment and other
heavy units
Manufacturing in the
UK, Brazil and India
Competitors include
Caterpillar and Komatsu

34. Apple – Competition Rising
“Investors
have been
worried that
its market
share was
being eroded
by popular
offerings
from rivals
such as
Samsung”
BBC News
Around two-thirds of
Apple’s cash pile, which
now stands at $145bn, is
held overseas
Falling share prices - concerns about
competition, fears of slowing innovation
and expectations of lower profits

35. Dominos – Big Recession Success!

36. Marketing key to sales and profits

37. Using social media to drive sales

38. BSkyB
UK’s fastest-
growing
broadband
and
telephony
business
£7bn annual
turnover
compared to
£2,2bn for
ITV

39. Tutor2u 10 for 2013
• Ikea
• Royal Mail
• Amazon / Zappos
• Nokia
• Sony
• Starbucks
• Tata Group
• Samsung
• John Lewis Partnership
• Southwest Airlines

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