1.5 - Growth And Evolution Flashcards
State the meaning of each letter in STEEPLE
Social, technological, economic, ecological, political, legal, ethical
What does the STEEPLE analysis examine
It examines external factors that influence or potentially influence a business. It’s often used by businesses before entering foreign markets since it is a systematic way to consider how it’s factors will influence the business in foreign markets.
What 8 factors influence Social aspects?
- demographics
- population growth
- age distribution
- education
- cultural differences
- lifestyle trends
- health and wellfare
- career attitudes
what 6 factors influence technological aspects?
- technological growth
- new innovation
- skilled resources
- automations
- tech awareness
- research
what 8 factors influence economical aspects?
- economic growth
- exchange rates
- interest rates
- inflation
- purchasing power
- unemployment rates
- income
- investment opps
what 4 factors influence environmental aspects?
- weather
- climate change
- environmental policies
- atmospheric emissions
what 5 factors influence political aspects?
- government policies
- taxation
- political stability
- foreign trade
- trade restrictions
what 8 factors influence legal aspects?
- the court systems
- employment laws
- discrimination laws
- anti trust laws
- trade union
- consumer protection
- health and safety
- copyright laws
what 5 factors influence ethical aspects?
- bribery
- intellectual property
- reputation
- business ethics
- confidentiality
how will a change in the STEEPLE factors affect a business?
if there is a change in these factors a business will have to prioritize which factors have more influence in the business and develop a new strategy based on that.
How will the correct use of STEEPLE benefit a business?
it will give them a first move advantage against other organisations. they might also be the first business to adapt a factor of change.
how will a social change be impactful?
-education
- fashion
- lifestyle
- demographics
- tastes
how will a technological change be impactful?
- technological improvements
- ICT
- R&D
- new technologies
- infrastructure
how will economic change be impactful?
- economic growth
- inflation
- unemployment
- exchange rates
- interest rates
- business cycles
how will ethical change be impactful?
- transparency
- corruption
- codes of business behaviour
- fair trade
how will political change be impactful?
- political stability
- trade policies
- regional policies
- lobbing
how will legal change be impactful?
- regulations
- employment laws
- competition laws
- health and safety laws
how will ecological change be impactful?
- global warming
- carbon emissions
- organic farming
- renewable resources
define economy of scale
the decrease in per unit production cost as activity increases
explain why businesses main goal in the grow due to economy of scale?
they want to benefit from an improvement in productive efficiency. so when a business increases its scale of operations and becomes more efficient in the process, the business benefits from economies of scale.
define diseconomies of scale
the increase in per unit production cost as output or activity increases
how do economies of scale benefit a business?
they can help a business gain a competitive cost advantage because a lower average can mean lower prices (charged to customers) and more profit margins for each unit sold.
what are fixed costs FC?
they are costs that do not change as the production changes (ie. rent, bills)
what are variable costs VC?
are costs that change (vary) as the production changes (i.e. new materials for production).
what are average total cost AC?
refers to the cost per unit
what is the concept of economies or diseconomies of scale?
If a business expands they produce more Q, hence, the VC increases. However, the FC remains the same and is spread over a greater quantity of units produced. Therefore, the ATC will go down, business is more efficient and it is achieving Economies of scale.
what’s a negative if a business keeps growing regularly?
if a business keeps growing regularly, it might benefit from economies of scale at first, but at some point in time the business might have produced at maximum capacity in the branch or factory and will have to look at different alternatives of production.
what does the economies and diseconomies of scale graph tell us?
In the graph above we can see that at the beginning the increase in production bring the ATC down till the optimum level of production, where the business is operation at full capacity.
At the point of “optimum production”, the ATC is at its lowest and profits are at its maximum.
As the business keep expanding and is becoming more inefficient, the ATC starts to increase
(internal) what are some technical factors that affect economies of scale?
bigger units of production can reduce the cost (increase in VC spread against a set of FC)
ie. a big mini bus instead of various small cars: big plane instead of various small ones
(internal) what are some technical factors affecting diseconomies of scale?
lorry to big for the roads, mini bus to difficult to park, big plane needs a big
(internal) what are some managerial factors affecting economies of scale?
a bigger organisation can afford specialised managers, by function: HR, marketing, finance, operations. instead of one manager that does everything.
(internal) what are some managerial factors affecting diseconomies of scale?
risk of having over specialised managers that might not want to work in any other area.
(internal) what are some financial factors affecting economies of scale?
bigger organisations have more access to finance or financial advantages (eg. low interest rates) since they are less risky
(internal) what are some financial factors affecting diseconomies of scale?
extra surplus might lead to poor decisions and poor investments (ie. buy a share of a company and then must sell it for a lower price)
(internal) what are some marketing factors affecting economies of scale ?
bigger organisations can have more effective marketing campaigns. They can also sponsor big events such as the grand prix. the world cup, and the Olympics
(internal) what are some marketing factors affecting diseconomies of scale?
sometimes big marketing mistakes can be made, like offering customers something unachievable (i.e diet products)
(internal) what are some purchasing factors affecting economies of scale?
big organisations can buy in bulk (ie, supermarkets, chain restaurants)
(internal) what are some purchasing factors affecting diseconomies of scale?
buying too much can be a problem, especially if the investment is greater than the cost. also things change, stocks, spoilt, or fashions
(internal) what are some risk bearing factors affecting economies of scale?
bigger organisations can bare to take risks, (e.g. invest in more products that might fail into hedging their bets such as Pepsi owning Tropicana and Lipton’s.
(internal) what are some risk bearing factors affecting diseconomies of scale?
e-bay bought skype but then sold it Microsoft in 2011
(external) what are some consumer factors affecting economies of scale?
when a big infrastructure benefits the organisations. (e.g. shopping malls and airports)
(external) what are some employee factors affecting economies of scale?
labour concentration - some organisations in specific geographic areas. there is a lower cost on recruiting and training if the business is situated in those areas (i.e. in the city, London)
(external) what are some employee factors affecting diseconomies of scale?
if an area becomes too concentrated in a specific sector (i.e. the financial sector), there might be a shortage of skilled workers. hence, organisation might have to offer higher wages to retain or attract employees.
state 2 businesses with appropriate scales of operations but different profits?
the market for mobile phones is bigger than the one for IB books.
5 ways the size of a business can be measured
Total Revenue – the value of an organization’s annual sales per period of time.
Market share – an organization’s sales revenues as a percentage of the industries total revenue.
Profit – the value of the organization’s profits in a certain period of time
Size of workforce – how many employees the organization has
Capital – the value of the organization’s investment
what are 6 advantages of being a big business?
brand recognition - familiarity with the brand allows the business to sell in a wider market
lower prices - larger organisations can afford to offer customers discounts due to economies of scale
survival - less likley to fail or get taken over by another firm
economies of scale - that generates greater profits and higher returns
higher status - greater status than smaller ones (i.e zara)
market leader status - how a business shaper market habits (coca cola)
what are 6 advantages of being a small business?
financial risk - the financial risk is lower than the risk of a big business
government aid - funds in the forms of subsidies or grants can be accessed if small business that need help
greater focus - they can focus on their investments and where they want them to be
greater motivation - managers and employees can be more motivated by the prestige of the business or the sense of belonging
competitive advantages - they can offer a more personalized service. flexibility can also lead to a competitive advantage (ie. a hairdresser to become a toyshop if it fails)
what is internal (organic) growth?
occurs when the business grows “organically” using its own capabilities and resources to increase the scale of operations and sales revenue. The business can grow steadily and slowly by simple selling more products or creating a new one. It is less risky!
how is the internal organic growth financed
Most of the growth is self financed. However, sometimes business need to borrow some money from Banks (i.e. buy more equipment)
state some examples of internal organic growth
change the price, have a promotion, improve or create a new product, “buy now and pay later” scheme
what is external growth (fast track)
it’s a faster way to grow but a more riskier one. Instead of selling more products the business expands by entering an agreement to work with another business. It normally requires significant external financing
what are the 4 most common ways of external growth?
1.Merging and Acquisition
2.(M&A) and takeovers
3.Joint Venture (JV)
4.Strategic Alliance (SA)
- A franchise
what is merging acquisitions and takeovers?
this is mainly the integration of two business. They can either Merge by joining together and forming a combined business or taking over another business, Acquisition (the term takeover is sued when the company been acquired does not want to be acquired). The main result is a bigger business
name the 4 ways integration can happen
- Horizontal integration
2.Backwards Vertical Integration
3.Forward vertical integration
4.Conglomeration
what is horizontal integration?
when there is a merge of firms operating in the same industry. for example, nike bought umbro; disney bought pixar. horizontal integration mainly represents a larger market share and therefore greater market power.
what is backwards vertical integration?
when a business integrates with another business who is at an early stage on the chain of production mainly to benefit and protect their supply chain. for example, Starbucks acquired the clover brewing system, a coffee manufacturer, to have control on the processing of their coffee beans
what is forward vertical integration?
when a business integrates towards the end stage in the chain of production. the business does this to have a secure sale of their products. for example, a coco bean producer acquiring a chocolate producer business, or chocolate producer acquiring a chocolate shop
5 advantages of merging and acquisitions
- economies of scale - larger scale of operations lower the unit costs improving the firms competitiveness and profit margins
- greater market share - greater market power and larger customer base
- synergy - integrated firms gave access to each others resources (i.e. HR, new technologies, distribution channels) combining these recourses the business can improve productivity
- survival - if a firm is acquired by a stringer firm that will help the weak business to keep in the market
- diversification - they can diversify products and hence reach larger base of customers
5 disadvantages of merging and acquisitions
- redundancies - job losses are likely to happen since the new company wont need to double the resources
- conflicts - due to the potential disagreements between 2 companies
- culture clash - there will be new mission and vision statements as a merged organisation. hence each individual form may loose there core value in the process
- loss of control - new board of director will need to be restructured, hence some original owners and managers will loose some degree of control
- regulatory problems - the M&A might create concerns on monopoly power. hence government might want to prevent the M&A
what is a joint venture?
it occurs when two or more organizations share costs, risks, control and rewards or a business project. The parts agree to set up a new legal entry that will create a new organization from two “parent business
why is a joint venture set up?
JV is normally set up for a finite period of time, after that period is over the new organization can either dissolve or be incorporated in one of the “parent business”.
what benefits does a joint venture give to a business?
JV allows organizations to enjoy some benefits such as large market share without loosing their legal existing or identity. Also, each organization brings their own expertise and that creates a powerful combination
explain the joint venture between Microsoft and general electric and state their aims and there objectives.
In December, 2011, Microsoft Corporation and General Electric formed a JV which is a health IT company of its own kind. Their common objective was to improve patient experience and the economics of health and wellness through providing the health systems with required system wide data and intelligence. The JV is known as Caradigm, aims at combining technology and clinical applications to transform it into intelligence which is usable by care providers
what are 3 advantages of joint ventures?
- jv partners benefit for each other expertise and resources (e.g. market knowledge, customer base, distribution channels)
- each JV partner might have the option to acquire in the future the JV business based on agreed terms if it provides success
- reduce the risk of a growth strategy - particularly if it involves entering a new market or diversification
what are 3 limitations of a joint venture?
- risk of a clash of organisational cultures - particularly in terms of management styles
- the objectives of each JV partner may change, leading to conflict of objectives with the other .
- imbalance in levels of expertise, investment or assets brought into the venture by different partners
what is a strategic alliance?
similar to the JV in the sense that two or more business cooperate for mutual benefit, sharing costs of production development, operation and management. The main difference between and JV and a SA is that in a strategic alliance the organizations remain independent
state an example of a strategic alliance
The best example is the airline industry; what’s better: two airlines traveling with half empty planes and competing between each other or collaborate by using a full plane to cut staff and costs and split the profits
what are 4 advantages of a strategic alliance
- more than 2 business may be part of the alliance
- no new business is created; no legal entity is created
- individual business in the alliance remain independent
- strategic alliances are more fluid than joint ventures; membership can change without destroying the alliance
what are 4 limitations of a strategic alliance
- the more business that are part of the strategic alliance the more problems in coordination and agreement
- without legally the strategic alliance has less force
- remaining independent means that the individual business cant benefit from economies of scale, other types of growth or capital strength of a legal merger
- greater fluidity of members also means lack of stability for the organizations
what is a franchise?
– Franchising is a form of business ownership where a person or business buys a licence to trade using another firm’s name, logos, brands and trademarks. To get that benefit the purchaser (franchisee) pays a license fee to the parent company of the business (franchisor). The Franchisee also pays a royalty payment (a commission)based on the sales revenue.
name 3 franchises
- taco bell
- McDonalds
- kumon
what is the franchisor
- the creator of the business concept and product
-sells the right to offer the concept and sell the product to another business
what is the franchisee
- buy the right to offer the concept and sell the product
- has to be consistent to the original business and developed by the franchisor
what are the 3 main aspects and goals of a franchise
- A Franchise is a quick way of growing as a business since the franchisor does not have to develop any new product and has a home or host country
- The franchisee has special knowledge in local markets, local conditions and local cultures. Also, speaks the local language, which is helpful for the franchise expansion
- The cost of the franchise is divided in 2 parts: first , the franchisee pays for the right to operate the business and second the franchisee pays royalties (a percentage of sales or a flat fee) to the franchisor.
what are the 7 responsibilities of the franchisor?
- the stock
- the fittings
- the uniforms
- staff training
- legal and financial help
- global advertisement
- global promotions
what are the 7 responsibilities of a franchisee?
- employ staff
- set prices
- set wages
- pay the agreed royalty on sale
- create local promotions
- advertise locally
- sell only the products of the franchise
what are the 5 advantages of a franchisee?
- the product already exists and have been tested for success - less risky
- there is an established format to sell products
- the start up costs are lower, since the franchisor already developed market strategies, market research ect.
- secure supply of stock
- the franchisor can provide legal, financial, managerial and technical help
5 disadvantages if a franchisee?
- the franchisee has unlimited liability for the franchise
- franchises are not cheap. the franchise must pay a substantial initial. fees and on going royalties and commissions. they may also have to buy good directly from the franchisor.
- the franchisee has no control over what to sell
- the franchisee has no control over the supplies
- the franchise needs to earn enough profit to satisfy both the franchisee and franchisor - there may not be enough to go round
4 advantages of a franchisor
- the company can grow quickly and expand to a wider market without risking a large amount of money
- takes advantage of local knowledge and expertise
- the franchisor does not assume the risks and lability of running the local franchise
- gains more profits and benefits from the sign up fee
3 disadvantages of a franchisor
- there is a risk on damaging the reputation of the business if the franchisee fails or does no follow the procedures
- loss of control on a daily operations and risk on losing some standards
- is not as quick as a merge and acquisition
what is a decision tree?
A decision tree is a quantitative decision-making tool used to help simplify complex decision. For example, whether to grow or not.
how is decision tree represented?
Represented by a diagram of the different options that are available to a business to make a decision for the organization, showing their probable outcomes
what does this tool allow managers to calculate?
This tool allows manager to calculate the Expected Value (EV) of each decision in order to plan the best option to follow
state the first 2 steps of the process of a decision tree
- Based o the choice that need to be made, we start with the decision node represented by a square node. From that node the possible choices will follow and they need to be numbered.
- To show the different outcomes of the decision we use the chance nodes, represented by a circle node. This outcomes are normally: “failure or success”, “improvements or deteriorations”, etc. Business and decision makers do not have direct control over the chance nodes.
state the next 3 steps of the process of a decision tree
- With the data available the manager needs to assign a probability to the outcome actually happening. These are calculated by managers with all the data available and placed below the outcome line. In mathematical terms the sum of the probabilities may always equal to 1 (100%).
- The manager then makes an estimate of the values of the outcome actually happening (returns) . This values are written at the end of the line that represent each outcome.
- Next, the manager should estimate the cost of the choices that are considered and placed under the respective choice lines. If there a no costs a “0” need to be shown
state the final 3 steps of a decision tree
- With all the pervious steps, the manager can now calculate the Expected Value (EV) for each outcome, with the following formula:
EVx = (probx1 X returnx1) + (probx2 X returnx2)
- If there are costs incurred they need to be subtracted from the EV . Once this is done, we can see what EV is has the highest value and that should be the decision.
- Finally, based on the highest EV, the manager makes a decision and crosses the choices not taken with the symbol //
what are 3 benefits of a decision tree
- gives a clear answer to a complex decision
- flexible - can be applied to many situations
- simple and visually attractive
what are 3 limitations of a decision tree
- is based on estimates (outcomes and probability outcomes)
- is based on quantitative data so ignores qualitative issues
- can be difficult to draw for very complex decisions
