At the end of a module students will be expected to be able to:
- Explain the principles of business and financial economics in an international context.
- Identify and explain the impact of governmental, monetary and economic policy on decision making in a business context.
- Describe and apply macro and micro concepts and models to business decision making.
- Interpret financial information (external and internal) and apply to decision making within a business context.
- Discuss the rationale and impact of decisions for business strategies to users and stakeholders.
- Examine and discuss the relationship between theory, application in business and financial economics in an international context.
1.Write ONE report that addresses:
(a) Compare the environmental factors that apply in both the internal and external spheres of a business firm. Your report should explain the business economics concepts or theories and practice.
(b) The retail Sector has seen rapid changes in consumer shopping in recent years. Choose a well-known retail company that trades globally and do a web search on how well it has performed in the past five years and how it has been influenced by various aspects of its business organisation. Your answer should include both the theory of business concepts and empirical evidences.
(c) Changes in demand or supply cause markets to adjust. Whenever such changes occur the resulting ‘disequilibrium’ (i.e. a balance of demand and supply) will bring an automatic change in prices. Discuss two or more businesses that supply goods and services to consumers. You may wish to include supermarkets such as Asda, or service sector firms like the London Underground and McDonalds. Your answer should include both the theory of these concepts and relevant hypothetical examples.
Managers need to be aware of financial intermediaries because they create financial instruments, for example, bank deposits and bank loans, which help the transfer of funds between lenders and borrowers. Identify four UK financial intermediaries and discuss their usefulness to a business organisation within the retail industry. Your answer should include both the theory of these concepts and hypothetical examples.
Internal and External Environmental Factors in a Business Firm
(a) With regards to any business, both the internal and external environment tend to be pivotal. The internal factors primarily relate to those factors which are specific to the company and not necessarily to the industry as a whole. Further, the internal factors are to a large extent within the control of the firm. This is in stark contrast with the external factors which are outside the control of the firm and tend to be applicable to the industry as a whole may be to varying degree depending on their ability to cope (Mintzberg, Ahlstrand and Lampel, 2014).
Consider for an instance a supermarket chain. The internal environment would relate to the staff, process particularly related to supply chain and backend integration, suppliers, organisational culture along with the management. These are the key factors which are under the control of the firm to a large extent and play a crucial role in the organisational failure or success. As a result, within the strategic framework named SWOT, strengths and weaknesses essentially refer to the internal environment. For instance, if the staff is trained and motivated then exemplary customer service would be delivered which would be a strength for the business. Additionally, a well-developed relationship with suppliers coupled with complete backend integration and inventory management system would be a big strength for the company. Similarly, unethical management or a poor organisational culture would be a weakness for the company and would adversely impact the performance of the firm. Clearly, these factors would not impact the performance of other firms in any direct manner (Haberberg and Rieple, 2015).
Additionally, there are external factors, which may be captured by the acronym PESTEL which tend to indicate the political, economic, social, technological, environmental and legal factors that can potentially impact the business. An example of social cultural factors is the shifting preference of the consumers towards online shopping owing to the underlying convenience. Further, economic factors would include the economic performance of the economy which also can have significant impact in the business especially in case of retail business where consumer spending is clearly driven by the underlying economic performance. Additionally, legal factors may also be important owing to the change in the laws (Mintzberg, Ahlstrand and Lampel, 2014).
An example could be tightening of immigration laws which can tighten the supply of immigrants which would result in higher wage cost. Additionally, political factors may also impact the business considering the policy change that government may make with regards to restrictions on foreign companies entering the domestic market. It is pivotal to note that the impact of these factors would not be limited to a particular firm but would be felt by the industry as a whole. Also, these factors are outside the control of the firm and hence are denoted by opportunities and threats which the firm has to adapt for maximising the wealth of the shareholders (Haberberg and Rieple, 2015).
(b) One of the global retail companies is Walmart which is based in US but has operations globally. The landscape of retail is changing as the online retailors tend to enhance their penetration not only in the developed countries but also in the developing countries. Also, in case of developing nations, the penetration of organised retail is on the increase which provides an exciting opportunity to a global giant such as Walmart. In the current year, Walmart has reported a strong performance with best sales figure in the last decade which are fuelled by the growth in the US economy backed by the tax cut introduced by the Trump administration. As a result, the consumer confidence is quite high in the US and therefore the sales have swelled (Domm, 2018).
Analysis of a Well-Known Retail Company
Also, a significant reason for stellar show in the company’s sales and earnings is the e-commerce push which traditional retailers such as Walmart are taking in order to successfully compete with changing retail landscape and the proliferation of e-retailers. The company was able to increase the e-commerce based sales by 33% in the current year (Hirsch and Rogers, 2018). Further, the performance of the company over the last five years in terms of sales is indicated below.
In the above sales trend, the only anomaly is 2016 which is the first year in the last 35 years when Walmart has reported a decline in the sales. Otherwise in all the other years the company has witnessed an increase in the worldwide sales. This was primarily on account of lacklustre performance in international markets particularly Brazil, China where the company had to close a number of stores (Whipp, 2016). Owing to the challenging times that the company has been facing during the last five years, it has taken a host of initiatives in order to ensure improved performance which is responsible for the increase in sales (Watrous, 2018).
One of these measures is acquisition of various e-commerce platforms in order to enhance the online presence. A noticeable acquisition in this regards was that of Jet.com for a consideration of $ 3.3 billion. The company has also made purchases of some native online brands in order to expand the product portfolio and enhance online sales. Another measure taken by the company is to raise the wages of employees in order to ensure that the customer experience would improve and the corporate image would improve owing to labour issues in the past. Yet another measure taken by the company is to repurpose the stores in order to enhance the overall relevance of stores and their underlying formats so as to align better with the evolving consumer needs (Bowman, 2018).
(c) In accordance to the economic theory, the market prices are based on the underlying demand and supply and any significant changes in either of these would lead to automatic adjustment in price. An underlying assumption is that the other firms existing in the market cannot fulfil the incremental demand or incremental shortfall. The theoretical discussion of “disequilibrium” in the market can be understood on the basis of the following situations and the associated graphical illustrations.
Consider that demand of a particular product or service increases while the supply remains the same. Owing to the higher demand of the underlying product or service and limited supply, there would be an apparent shortage which would lead to higher price as consumers would be willing to pay a higher amount for procuring the same. This situation is captured using the following diagram (Mankiw, Mankiw and Taylor, 2014).
In the above situation, the increased demand by consumers is indicated in the shift of demand curve from D0 to D1. However, there is no change in the supply. It is apparent that if the price is retained at the original price of P0, then the demand is QD while the supply is much lower at Q0 thereby leading to a shortage. In order for the demand and supply to meet, in the short run the prices have to increase which is apparent from the shift in price to a higher level P1 (Nicholson and Snyder, 2015).
Market Equilibrium and Its Impact on Businesses
Consider the supply of good decreases while the demand remains constant. Owing to lower supply but constant demand, there would be an apparent shortage which would lead to higher price as consumers would be willing to pay a higher amount for procuring the same. This situation is captured using the following diagram.
In the above diagram, it is apparent that owing to decrease in supply, there is a shift from S to S2 while the demand curve remains constant at D. As a result, there is an upward shift in price from P to P2. Owing to the demand supply mismatch created at the original equilibrium point E, the new equilibrium is marked by E2 (Nicholson and Snyder, 2015).
The above theoretical discussion can be applied to consumer facing businesses such as Asda and McDonalds. Considering the significant market share that supermarkets such as Asda possess especially in the grocery segment, hence any disruption in the supply at these stores would leave unmet demand and hence would cause a temporary disequilibrium. In order to correct the same, the prices on various commonly used grocery items would increase. Similarly, any increase in demand of any particular product which is available only in select supermarkets would cause a shortage of the same in the short term which again leads to potential disequilibrium and hence a shift in the prices becomes inevitable. Increased prices in the above context would enable restoration of the original equilibrium in the long run.
Another example of a consumer facing business is McDonalds. If there is an unexpected increase in the demand, then the same would not be able to be fulfilled and hence there would be a shortage since the demand remains unmet. In such a scenario, the market equilibrium would be disrupted and there would be an increase in the price so as to allow for matching of the demand and supply. Further, the price increase would also be witnessed in case there is any disruption in the supply from McDonalds. This is on account of the significant market shares that these companies have that which make it difficult for any other firm to fill in when there is changes in demand and supply that are unexpected.
Financial intermediaries tend to play a significant role with regards to providing financial resources to various companies from the depositors and thereby tend to provide a key linkage between the borrower and depositor. One of the most common examples of financial intermediaries in UK is the bank which tends to attract deposits from bank and tends to lend it to various retail and corporate borrowers and tends to earn a net interest margin in the process (Parrino and Kidwell, 2014). However, there are various other financial intermediaries in UK that are also active which tend to complement the banks and provide both competing and complementary services. One of these is credit union which tends to extent loans to both public as well as small businesses. This is considered a suitable option by many small businesses that find credit being difficult to obtain from traditional sources such as bank primarily because of the underlying formalities involved coupled with the small ticket size that the banks may not be willing to entertain (Damodaran, 2015).
Usefulness of Financial Intermediaries in the Retail Industry
Another type of financial intermediary that is active in the UK is in the form of collective investment schemes. These schemes tend to attract money from high net worth individuals and sophisticated investors and these tend to then offer money to various businesses so that returns can then be earned which is then passed on the to the investors who provided the money. These schemes can potentially invest in various financial instruments such as equity, debt or property. As a result, this can be a funding source for a business whereby debt can be sold to an investment scheme. Yet another example of financial intermediary in UK is insurance companies. These companies tend to attract insurance premiums from public and a portion of these proceeds are invested in equity and debt market and thereby provides funding to the corporates (Brealey, Myers and Allen, 2014).
With regards to a business operating in the retail segment, the above financial intermediaries can prove to be significant sources of finance. Retail businesses especially those having presence in the form of brick and mortar stores tend to have high capital requirements for expansion besides working capital needs for inventory stocking. Banks are a significant source of debt funding both in terms of working capital and also long term loans for expansion. However, banks as a funding mechanism may be more suitable for larger companies that have lesser risk associated with them (Parrino and Kidwell, 2014). For smaller retail businesses which have limited presence or run in franchise model, critical support is provided by credit unions. This is especially in the form of working capital particularly when a particular franchise is being run by an individual owner. Credit union is not considered as a significant source of long term capital that can be used for expansion in the form of opening new stores (Damodaran, 2015).
With regards to long term funding through debt and equity for a business in the retail industry, the viable financial intermediaries are collective investment schemes along with insurance companies. Collective investment schemes have the mandate to invest in debt and equity and hence money can be raised by providing these with bonds or shares of the business. It would be preferable if there is an exit option and hence a secondary market exists for the trading of the financial instruments. This lowers the liquidity risk and makes investment attractive. Debt or equity based financing can also be raised from insurance companies that tend to have significant long term investments in the financial markets. These sources of finance can act as a alternative to bank loan and enable raising of capital through issue of securities (Petty et. al., 2015).
a) With regards to liquidity position, there does not seem to be any significant change considering the fact that current ratio for both the years is the same. Even though the quick ratio has seen a slight decline but it does not pose any risk of the company not being able to meet the current liabilities. In regards to efficiency ratios, the debtors’ payment period remains the same for both the years. The stock turnover period for the company has decreased by 2 days in 2018 which essentially would shorten the cash cycle and lower the working capital requirements of the company (Brealey, Myers and Allen, 2014). The key concern for the company is that the turnover has declined in 2018 which has lowered the operating profits generated. In order to improve the performance in 2019, the company ought to take measures for topline growth which would result in higher profits. Also, the company should aim to bring the stock turnover period even lower which would enable lesser working capital and hence lower the interest cost for the company (Petty et. al., 2015).
b) The amount that Alice needs to deposit today would be equal to the present value of the annuity of three cash inflows starting from next year. The relevant formula for computing the present value of the annuity is indicated as follows (Damodaran, 2015).
Based on the given information, P = £ 1,550, n = 3 years, r= 3.75% p.a.
Hence, present value = 1550*(1-1.0375-3)/0.0375 =£ 4,321.88
Thus, in order to accomplish her goal, Alice needs to deposit £ 4,321.88 today.
- c) The objective is to find the NPV of the given two projects so as to select the superior project. The required return on each of these projects is 6.75% p.a.
NPV (Greenford Project) = -150,000 + (30000/1.0675) + (25625/1.06752) + (26000/1.06753) + (30000/1.06754) + (75000/1.06755) = - £ 831.86
NPV (Greenwich Project) = -175,000 + (60000/1.0675) + (30000/1.06752) + (25000/1.06753) + (20000/1.06754) + (40500/1.06755) = - £ 27,299.7
It is apparent from the above computations that NPV of Greenford Project is higher than the NPV of Greenwich Project. However, neither of the projects should be chosen for investment considering the fact that the NPV for both the projects is negative and hence investment in either of the projects would erode the wealth of the shareholders (Parrino and Kidwell, 2014)
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Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 6th ed. New York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.
Domm, P. (2018). Walmarts best sales in a decade show US consumer may be strongest in years because of the tax cut, jobs growth. Available from: https://www.cnbc.com/2018/08/16/walmarts-best-sales-in-a-decade-show-us-consumer-is-alive-and-well-because-of-the-tax-cut-jobs-growth.html [Accessed 12 November 2018].
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Hirsch, L. and Rogers,K. (2018). Walmart beats on earnings and revenues as US e- commerce push pays off. Available from: https://www.cnbc.com/2018/05/17/walmart-earnings-q1-2018.html [Accessed 12 November 2018].
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Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
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Watrous, M., (2018). Walmart sales boosted by strong grocery performance. Available from: https://www.foodbusinessnews.net/articles/12364-walmart-sales-boosted-by-strong-grocery-performance [Accessed 12 November 2018]
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