Business Economic Environment BUSS4

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

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Business Economic Environment BUSS4

  1. 1. Business &EconomicEnvironmentBUSS4 May 2013
  2. 2. Business and the Economy• Economic environment iscrucial for all businesses– Large corporations andSMEs– Domestic facingbusinesses and TNCs– Businesses in cyclicalsectors and those lessexposed tomacroeconomicvolatility
  3. 3. An Age of Uncertainty• High levels of economicuncertainty• Financial crisis has left a longshadow• Developed countries –persistent slow growth formany• In 2013 the worlds ten fastestgrowing countries are likely tobe emerging countries• European economy is struggling
  4. 4. The Big Picture – Slow GrowthDeeprecession in2008-09Followed bypersistentlylow growthGDP hasgrown byless than 2%in each ofthe last sixyears
  5. 5. The Key UK Data in a TableIndicator 2011 2012 2013*Real GDP (% change) 0.9 -0.1 0.9Consumer spending (% change) -0.9 1.1 1.6Capital investment (% change) -2.4 1.8 2.5Exports of goods and services (% change) 4.5 -0.2 2.4Unemployment rate - % of labour force 8.1 8.0 8.3Consumer price inflation - per cent 4.5 2.6 1.9Source: OECD World Economic Outlook, December 2012Data for 2013 is a forecast
  6. 6. Capital spending remains weakCan youidentify 3factors thatmight explainwhyinvestmentspendingremains soweak at themoment?
  7. 7. Consumer spending and incomesA combination of tax rises,high inflation and modestgrowth in earnings have hitconsumers across theincome spectrum in the last5 years
  8. 8. Real Disposable IncomeThe strong rise in real incomeshas come to an end – whenliving standards are squeezedwhich businesses benefit most?
  9. 9. Inflation and interest ratesInflation inthe UK hasbeen abovethe 2% targetin recentyears – whatdoes thismean forbusiness?
  10. 10. External Factors: BRICs GrowthFast growthfor BRICcountries –can you thinkof some ofthe effectsfor a range ofUKbusinesses?
  11. 11. External Factors: Asia RisingStronggrowth is notjust confinedto BRICS –Asia and SubSaharanAfrica bothhaving aphase ofrapid growthanddevelopment
  12. 12. External Factors: EU Growth RatesEconomicconditionshave beenvery tough ina number ofEU countries– considerthe effectsfor a range ofUKbusinesses
  13. 13. External Factors: Oil pricesWorld oilprices havebeen high inrecent yearsbut also veryvolatile –whichindustriesare mostaffected bythis?
  14. 14. External Factors: Food PricesThe globalprices ofmanyfoodstuffsare highlyvolatile andhave risen inrecent years– whatimplicationsare there forcertainbusinesses?
  15. 15. Business ProfitabilityHow has therecessionand the slowrecoveryaffectedrates ofreturns forbusinesses?
  16. 16. Fragility in the Financial SystemCommercialbanks havecut theirlending tomanybusinesses –new forms oflending aregrowingquickly
  17. 17. Policy Factors: Interest RatesOfficial policyinterest ratesare set eachmonth bythe Bank ofEngland –they havebeen at 0.5%since March2009This is notthe interestrate paid bybusinesses!
  18. 18. Economic growth & unemploymentThe joblessrate hasgrown to 8%of the labourforce - whatare some oftheimplicationsfor business?
  19. 19. Exchange Rates: Sterling v US $Sterling hasbeen stableagainst theUS dollar inrecent years– but is nowfalling. Forwhichbusinesses isthissignificant?
  20. 20. Focus on ConstructionIn 2011/12 the number of newhomes built fell to the lowest levelsince 1923.Why arebusinesses inthe housingindustrymoreexposed tocyclicalfluctuationsin theeconomy?How cantheyrespond?
  21. 21. The conventional wisdom is ...• Standard view is that macro uncertaintyfavours large, diversified businesses• Sectors which benefit from stronger GDPgrowth include consumer services companies,financials and travel and leisure businesses• Sectors that do better in slower-growth timesinclude energy, utilities and pharmaceuticals• How true is this in current times?
  22. 22. Business Strategies for UncertaintyChallenges• Expected demand• Profit margins• Cash flow / late payment• Availability of credit• Financial uncertainty• Structural challenges fromother economies
  23. 23. Business Strategies for UncertaintyChallenges• Expected demand• Profit margins• Cash flow / late payment• Availability of credit• Financial uncertainty• Structural challenges fromother economiesOpportunities• Plenty of growth sectors• Grow market share even if amarket is flat• Implement long overduechanges• New business models• Emergence of new forms ofbusiness financing
  24. 24. Defensive Balance Sheet Strategies• Increasing cash flow• Cutting costs• Reducing leverageIn the UK officialdata show corporatecash balances stoodat £671 billion in2012 equal to 46%of GDP, up from£240 billion in 2002,and close to recordlevels
  25. 25. Priorities
  26. 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, facilitiesmanagement• Renewable energy, shale oil, natural gas fracking
  27. 27. Business Finance – Old....Traditional Bank Finance• Commercial bank loans• Overdraft facilities• Credit card financeespecially for SMEs• Equity raised through stockmarketSMEs have built up their savings depositsin banks but have found it much tougherto get the loans they want .... Newfinance streams needed
  28. 28. Business Finance..... And NewGrowing Financial Options• Corporate Bond Marketincluding retail bonds• Peer to peer funding– Funding Circle– Zopa– Crowd Cube• New banks– Aldermore– Virgin Money– Possible new regional banks• Invoice discounting facility
  29. 29. Business Finance..... And NewGrowing Financial Options• Corporate Bond Marketincluding retail bonds• Peer to peer funding– Funding Circle– Zopa– Crowd Cube• New banks– Aldermore– Virgin Money– Possible new regional banks• Invoice discounting facilityRetail BondsTesco raised £125m in February withan eight-year bond paying 5.2% a yearJohn Lewis raised £50m in Aprilthrough a Partnership bond, thoughthis was reserved for its customers andstaff.Hotel Chocolat raised £4m by sellingthe bond to members of its ChocolateTasting Club, who dont get interestbut instead receive a box of chocolateeach month
  30. 30. Peer to Peer FundingWhere people lenddirectly to others viaonline exchanges
  31. 31. Peer to Peer FundingConventional bank lendingto business in the UKcontinues to decline.
  32. 32. Amazon – Aggressive ExpansionThe worldsbiggestonlineretailer bysalesAggressiveexpansionstrategy
  33. 33. JCB – Digging for Higher ReturnsOne of the UK’s biggestfamily-ownedcompanies,£360m profit onturnover of £2.9bnHuge player in the globalmarket for excavationequipment and otherheavy unitsManufacturing in theUK, Brazil and IndiaCompetitors includeCaterpillar and Komatsu
  34. 34. Apple – Competition Rising“Investorshave beenworried thatits marketshare wasbeing erodedby popularofferingsfrom rivalssuch asSamsung”BBC NewsAround two-thirds ofApple’s cash pile, whichnow stands at $145bn, isheld overseasFalling share prices - concerns aboutcompetition, fears of slowing innovationand expectations of lower profits
  35. 35. Dominos – Big Recession Success!
  36. 36. Marketing key to sales and profits
  37. 37. Using social media to drive sales
  38. 38. BSkyBUK’s fastest-growingbroadbandandtelephonybusiness£7bn annualturnovercompared to£2,2bn forITV
  39. 39. Tutor2u 10 for 2013• Ikea• Royal Mail• Amazon / Zappos• Nokia• Sony• Starbucks• Tata Group• Samsung• John Lewis Partnership• Southwest Airlines
  40. 40. Keep up-to-date with businessstories, resources, quizzes andworksheets for your businesscourse. Click the logo!

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