(a) For any given business, it is imperative to take into consideration the external and internal environment. The internal factors refer to the underlying factors which are company related and do not have an effect on the whole industry. Also, considering that these factors are firm specific, hence these are within the firm’s control and management. In comparison, there are external factors which the firm cannot control and do not impact only the firm but the whole industry even though the extent of impact may be different for different firms (Mintzberg, Ahlstrand and Lampel, 2014).
A suitable example can be taken in the form of a supermarket player. Key internal factoes for this business could be related to the satisfaction & productivity of staff, supply chain related processes, relationship with supplier, customer satisfaction along with the organisational cultural. The firm through their actions can impact each of the above factors and hence they are labelled as internal factors. In order to analyse the same, there do exist strategic framework such as SWOT analysis which besides some external factors also considers internal factors related to strength and weakness of the firm. In the context of supermarket, the presence of a global supply chain would imply sourcing of various products at the lowest cost and thereby having an advantage in terms of pricing over the peers. Besides, a company having exclusive suppliers and integrated inventory management system would have an edge on the other players. Also, employees with low morale or lack of training would be an internal weakness for the firm with adverse performance implications. The above examples highlight some aspects which would impact the firm performance but not of peers and industry (Haberberg and Rieple, 2015).
Besides, external factors are also present which influence the firm performance. These can be represented using the famous acronym PESTEL which essentially capture the different types of factors that have impact on the business. In this regards, a relevant socio-cultural factor could be the changing consumer preferences especially as the penetration of online shopping and associated convenience enhances. Relevant economic factors such as economic growth would also be relevant as the underlying consumer spending is dependent on the state of economy since during recessionary conditions, the tendency to save tends to increase. Besides, there are laws (labour, environment, consumer protection) which the company needs to comply with and thereby any changes in the same would be relevant (Mintzberg, Ahlstrand and Lampel, 2014).
Considering that in the US immigration workers from Mexico are easily available, hence any stringent action on immigration could increase the labour cost and adversely impact the business. Also, policy change with regards to foreign companies’ entry into a country could also impact the business as it would reduce the competition. A key aspect noteworthy about the changes being discussed is that the influence (positive or negative) of these would be realised by not only a given firm but by the whole industry. Besides, the control of these factors does not lie with the firm and the imperative aspect is to adapt in wake of changing external environment so as to maximise shareholders returns (Haberberg and Rieple, 2015).
(b) An example of a global retail company is US based Walmart considering the fact that company has global operations. There is a change in the retail landscape owing to the foray of the online retailors as the underlying experience and convenience by these is becoming superior. Considering the saturation in the US market, the growth for company like Walmart is likely to come from international presence especially in the developing world where the shift from unorganised or organised sector is taking place. The performance in the recent quarter has been excellent for the company on account of the tax cut based fuel injected by President Trump. This led to high consumer confidence leading to swelling of retail sales (Domm, 2018).
Besides, the company in order to face the competition from online retailors has made significant investments in the e-commerce drive which seems to have paid off in the recent quarters as the online sales have shown a significant increase. This is apparent from the fact that on a y-o-y basis, the sales increased by 33% in the current year as compared to the previous year (Hirsch and Rogers, 2018). The sales performance of the company in the most recent five years is summarised as follows.
With regards to the above time series of annual sales, the only blip occurred in 2016 which marks the first ever instance over more than three decades when a sales decline was reported by Walmart. Barring that year, for all the other reporting periods, the sales have increased. The decline in 2016 was attributed to the dismal performance in key foreign markets such as China, Brazil where there were several instances of store closure (Whipp, 2016). On account of the increases challenges and increased competition, the company in the recent times have embarked on various initiatives for improving performance and ensuring rising sales (Watrous, 2018).
A noteworthy measure in this regards is e-commerce sites acquisition so as to increase the presence in the online sphere. A key acquisition by the company is that of Jet.com which was carried out at $ 3.3 billion. In order to enhance the product portfolio and provide a boost to sales online, the company has made acquisition of certain native brands having sizable online presence. In order to improve the corporate image and enhance the overall consumer experience, the company in recent times has increased employee wage. Further, the company is also sensitive to the changing needs of the consumers and bringing in relevant changes in stores to improve the relevance of these and enhance footfalls (Bowman, 2018).
(c) The economic theory states that there would be automatic price adjustment when any change in the demand or supply factors is introduced. A key assumption in this context is that in the short run the demand or supply shock cannot be absorbed by the market. The following graphs can enable better understanding with regards to these price changes.
Assume there is an increase in the demand and the supply in the short run remains constant. This leads to a situation where there is a shortage and hence the price would increase owing to willingness on the consumers’ part to pay a premium for the same. The diagram indicated below represents the scenario (Mankiw, Mankiw and Taylor, 2014).
The demand increase is reflected by the demand curve shifting to D1 from D0. The supply curve remains the same since no change has occurred in this. At the price P0, there is a shortage as the demand (QD) outstrips the supply (Q0). For equilibrium to be achieved, it is imperative that the price increase would have to take place which is indicated by the price shifting to P1 which is greater than P0 (Nicholson and Snyder, 2015).
Now consider that there is a decrease in the supply while there is no change in the demand. As the supply is lower but demand is retained, hence a shortage would be created which would push prices to a higher level owing to willingness on their part to pay more. The corresponding graph to represent the situation is given below.
The diagram highlighted above captures supply decrease by the supply shift curve to S2 from S. There is no change in demand as the demand curve remains the same as D. The net result is revision in price to P2 from initial level P. This mismatch in demand supply tends to lead to creation a new equilibrium in the form of E2 which is different from original equilibrium (Nicholson and Snyder, 2015).
The discussion carried out above has relevance for business such as McDonalds and Tesco. Take for instance the supermarket major Tesco where supply disruption could potentially be a source of disequilibrium owing to demand being unfulfilled. For bridging this gap between demand and supply, comparable products or price of substitutes would rise. This in turn would lead to equilibrium restoration which would take place as demand and supply become equal at the new price. One more relevant example could be given in context of McDonalds. Any material increase in demand which was not expected would lead to shortage of supplies. The market equilibrium would be altered and temporary price increase may be considered for ensuring that demand supply can be matched. This is potentially the case with all consumer facing businesses which have significant market shares and hence makes it difficult for the other players in the market to cater to increased demand or lower supply.
A crucial role in relation to extending financial resources to businesses is played by financial intermediaries and these tend to serve as a vital link between the depositor and borrower. A most peculiar example of financial intermediary in the UK context would be bank which has the business of taking deposits from people at large and providing the same to the various borrowers (retail and corporate) and earning an interest margin in these transactions (Parrino and Kidwell, 2014). While bank may be most common of financial intermediary, it would be incorrect to assume that there are no other financial intermediaries. A key role in this regards is played by credit unions which provide loans to not only public but also small businesses. This options is quite favoured by small businesses that face difficulties in availing credit from sources such as bank as the loan requirement is particularly small and also the formalities required by the bank may be difficult to comply for small companies (Damodaran, 2015).
Another pivotal financial intermediary in the UK financial system is collective investment schemes. The objective of these schemes is to collect money from matured investors along with HNI’s and to invest the same in businesses so as to earn a return on the investment made. The investment range for these schemes is not limited to a particular financial instrument and instead includes a host of financial assets ranging from bonds, equity to real estate. Thus, this can act as a suitable funding mechanism for a small business which needs to raise debt and is not entertained by other financial intermediaries. Another financial intermediary of significance in UK exists in form of insurance companies. The money is collected by these in the form of insurance premiums and these premiums are then invested into various instruments issued by big corporates and hence money from the policyholders is diverted to large businesses (Brealey, Myers and Allen, 2014).
For a business based in the retail industry, the financial intermediaries tend to present a viable and pivotal financing source. The retail players which have presence in the store form require high amount of capital for opening and running these stores besides buying inventory. The main source of funding for these companies is banks which provide short term loans for meeting working capital requirements and long term loans for meeting expansion and project financing. But a key shortcoming is that this funding is difficult to be availed by smaller companies (Parrino and Kidwell, 2014). Thus, for these companies, a suitable alternative exists in the form of credit unions. Further, for owners of franchise stores, working capital may be availed from credit unions. However, this does not provide long term capital loans meant for business expansion (Damodaran, 2015).
In relation to funding on long term basis, a suitable financing option would be collective investment schemes besides insurance companies. The mandate of CIS (Collective Investment Schemes) is to invest in various instruments issued by the company and long term funding can be secured through the investors. However, with regards to investment in financial instruments, it is better if the trading of these is carried out in the secondary market as this serves as an exit mechanism for existing investors. Insurance companies also tend to invest in equity and debt instruments of businesses but these are limited to large businesses with credible business models as insurance funds do not invest in highly risky financial instruments. Thus, insurance companies can serve as an alternative to bank with regards to funding needs especially through issue of relevant financial instruments (Petty et. al., 2015).
a) In the context of liquidity, no significant alteration seems to have taken place as for the two years as there is no change in the current ratio. The quick ratio has witnessed a marginal decline however it lacks the ability to have any material impact on the ability of the company to honour current liabilities. In context of efficiency, there is no change with regards to debtor payment period for the given years. There has been a decrease in the stock turnover period by two days in the year 2018 which would lead to cash cycle becomes shorter and resulting in lower requirements for the company with regards to working capital (Brealey, Myers and Allen, 2014). The asset turnover seems to have lowered in 2018 which presents a matter of concern for the form owing to lowering of operating profits. For improving the 2019 performance, it is imperative that innovative measures must be undertaken to provide a boost to the topline without adversely impacting the profitability margins. Additionally, the stock turnover period must be paid attention to by the company so as to improve the working capital management and rationalise the finance cost (Parrino and Kidwell, 2014)
b) The present value of the future cash inflows need to be found for which the following formula may be useful for Alice (Damodaran, 2015).
Present value of annuity = P (1-(1+r)-n)/r
From the above computation, it can be inferred that Alex would need to deposit £ 4,321.88 for obtaining the given future payments.
c) For the given two projects, NPV needs to be computed so that a comparison of the projects can be drawn. It is known for both of the projects, expected return is the same as 6.75% p.a.
The computations conducted above clearly highlight that neither of the projects would be feasible as NPV for both the given projects is less than zero. As a result, none of the two projects presented would be selected as these would destroy the wealth of the shareholders (Petty et. al., 2015).
References
Bowman, J. (2018). How Walmart has changed in the last 5 years. Available from: https://www.fool.com/investing/2018/01/29/how-walmart-has-changed-in-the-last-5-years.aspx [Accessed 2 December 2018].
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 2 December 2018].
Haberberg, A. and Rieple, A . (2015), Strategic Management: Theory and Application, 2nd ed., New York: Oxford University Press
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 2 December 2018].
Mankiw, G.N., Mankiw, G.N. and Taylor, P. (2014) Microeconomics 5th ed. Sydney:Cengage Learning.
Mintzberg, H., Ahlstrand, B. and Lampel, B.J. (2014), Strategy Safari: The Complete Guide Through the Wilds of Strategic Management. 4th ed., New Jersey: Prentice Hall
Nicholson, W. and Snyder, C. (2015) Fundamentals of Microeconomics.11th ed. New York: Cengage Learning.
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015). Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French Forest Australia
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 2 December 2018].
Whipp, L. (2016). Walmart suffers worst sales performance in 35 years. Available from: https://www.ft.com/content/cbcb3f9e-d640-11e5-8887-98e7feb46f27 [Accessed 2 December 2018].
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