Business Economic Environment BUSS4
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Transcript of Business Economic Environment BUSS4
Business & Economic
EnvironmentBUSS4 May 2013
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
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
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
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
Capital spending remains weak
Can you identify 3 factors that might explain why investment spending remains so weak at the moment?
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
Real Disposable Income
The strong rise in real incomes has come to an end – when living standards are squeezed which businesses benefit most?
Inflation and interest rates
Inflation in the UK has been above the 2% target in recent years – what does this mean for business?
External Factors: BRICs Growth
Fast growth for BRIC countries – can you think of some of the effects for a range of UK businesses?
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
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
External Factors: Oil prices
World oil prices have been high in recent years but also very volatile – which industries are most affected by this?
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?
Business Profitability
How has the recession and the slow recovery affected rates of returns for businesses?
Fragility in the Financial System
Commercial banks have cut their lending to many businesses – new forms of lending are growing quickly
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 2009This is not the interest rate paid by businesses!
Economic growth & unemployment
The jobless rate has grown to 8% of the labour force - what are some of the implications for business?
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?
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?
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?
Business Strategies for Uncertainty
Challenges• Expected demand• Profit margins• Cash flow / late payment• Availability of credit• Financial uncertainty• Structural challenges from
other economies
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
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
Priorities
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
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
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
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
Peer to Peer FundingWhere people lend directly to others via online exchanges
Peer to Peer FundingConventional bank lending to business in the UK continues to decline.
Amazon – Aggressive Expansion
The world's biggest online retailer by sales
Aggressive expansion strategy
JCB – Digging for Higher ReturnsOne 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
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
Dominos – Big Recession Success!
Marketing key to sales and profits
Using social media to drive sales
BSkyB
UK’s fastest-growing broadband and telephony business
£7bn annual turnover compared to £2,2bn for ITV
Tutor2u 10 for 2013
• Ikea• Royal Mail• Amazon / Zappos• Nokia• Sony• Starbucks• Tata Group• Samsung• John Lewis Partnership• Southwest Airlines
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