Market opportunity is big factor in shaping a company’s strategy. Opportunities may be plentiful or scarce. The may range from widely alternative to marginally interesting. A company is well advised to pass on particular market opportunity unless it has th e resource capabilities most relevant to a company are: i) ii) Those that offer important avenues for profitable growth Those where a company has the most potential for completive. Threats: Certain factors in a company extend environment may pose threats to i ts profitability and competitive well-being.
Revels introduction of new product New government regulations that is more burdensome to a company than is competitors Vulnerability to a raise in interest rates Political upheaval and the like. It is management job to identify the threats to the company’s future well-being and to evaluate what strategic actions can be taken to neutralize or lesson their impact. Opportunities and threats point to the need for strategic action. Managers need to i.
ii. Pursue market opportunities well suited to the company’s resources capabilities, and Take action to defend against internal threats to the company’ business.
Why SWOT analysis? ? It involves evaluating the strengths, weakness opportunities and threats and drawing conclusions about the attractiveness of the company’s situation and the need for strategic action. From a strategy marking perspective strengths are significant because they can be used as the cornerstones of strategy and the basis on which to build competitive advantages. ? Management should build strategy around what the company dose best on the basis of the strengths and should avoid strategies whose success depends heavily on areas where the company is weak. A strategy also needs to aim at correcting competitive weakness that make the company vulnerable, hurt its importance of disqualify it from pursuing an attractive opportunity. ? Strategy must be aimed at pursuing opportunities well suited to the company’s capabilities and provide a defense against internal threats. Mashriqui Jute Mills Ltd. Consolidated profit and loss account For the year ended 30th June, 2008 Revenue Cost of revenue Gross Profit Operating Expenses Administrative Expenses Distribution (selling) Expenses Profit before Interest, Tax & Depreciation Depreciation Net Profit/Loss before Tax
Theoretical Illustration Concepts relating to ratio analysis 3. 1 Liquidity Ratio o Liquidity refers to the ability of a firm to meet its short -term financial obligations when and as they fall due. o The main concern of liquidity ratio is to measure the ability of the firms to meet their short-term maturing obligations. Failure to do this will result in the total failure of the business, as it would be forced into liquidation. i) Current Ratio The current ratio expresses the relationship between the firm’s current assets and its current liabilities. Current assets normally include cash, marketable securities, accounts receivable and inventories. Current liabilities consist of accounts payable, short-term notes payable, short-term loans, current maturities of long term debt, accrued in come taxes and other accrued expenses (wages). The rule of thumb says that the current ratio should be at least 2 that are the current assets should meet current liabilities at least twice. (ii) Quick Ratio
Measures assets that are quickly converted into cash and they are compared with current liabilities. This ratio realizes that some of current assets are not easily convertible to cash e. g. inventories. The quick ratio, also referred to as acid test ratio, examines the ability of the business to cover its sh ort-term obligations from its “quick” assets only (i. e. it ignores stock). The quick ratio is calculated as follows clearly this ratio will be lower than the current ratio, but the difference between the two (the gap) will indicate the extent to which current assets consist of stock. 3. 2 Profitability Ratio
Profitability is the ability of a business to earn profit over a period of time. Although the profit figure is the starting point for any calculation of cash flow, as already pointed out, profitable companies can still fail for a lack of cash. Note: Without profit, there is no cash and therefore profitability must be seen as a critical success factors. o A company should earn profits to survive and grow over a long period of time. o Profits are essential, but it would be wrong to assume that every action initiated by management of a company should be aimed at maximizing profits, irrespective of social consequences.