3.9 - How to Pursue Stratagies

Question 1

What are the reasons why businesses grow?

Answer 1

• Increase profitability
• Become more efficient
• Gain market dominance
• Achieve managerial objectives

Question 2

What are the reasons why businesses retrench?

Answer 2

• Survive a recession
• Improve competitiveness through delayering
• Prevent losses at the end of a product’s life cycle
• Strategically change direction

Question 3

What is organic growth?

Answer 3

growth achieved through the expansion of current business activities

Question 4

What are the advantages of organic growth?

Answer 4

• Less risk than external growth (e.g. takeovers)
• Can be financed through internal funds (e.g. retained profits)
• Builds on a business’ strengths (e.g. brands, customers)
• Allows the business to grow at a more sensible rate

Question 5

What are the disadvantages of organic growth?

Answer 5

• Growth achieved may be dependent on the growth of the overall market
• Hard to build market share if business is already a leader
• Slow growth - shareholders may prefer more rapid growth
• Franchises (if used) can be hard to manage effectively

Question 6

What is external growth?

Answer 6

• Business expansion achieved by means of merging with or taking over another business, from either the same or a different industry

Question 7

What are the possible reasons for takeovers?

Answer 7

• Increase market share
• Acquire new skills
• Access economies of scale
• Secure better distribution
• Acquire intangible assets (brands, patents, trade marks)
• Spread risks by diversifying
• Overcome barriers to entry to target markets
• Defend itself against a takeover threat
• Enter new segments of an existing market
• Eliminate competition

Question 8

Why might takeovers be preferred?

Answer 8

• Existing products are in the later stages of their life cycles
• Business lacks knowledge or resources to develop organically
• Speed of growth is a high priority
• Competitors enjoy significant advantages that are hard to overcome

Question 9

What are the disadvantages of takeovers?

Answer 9

• High cost involved
• Problems of valuation
• Upset customers and suppliers
• Problems of integration
• Resistance from employees

Question 10

What are the problems with retrenchment?

Answer 10

• Employee morale
• Redundancies
• Poor productivity
• Poor quality

Question 11

What are the reasons why takeovers fail?

Answer 11

• Price paid for takeover was too high
• Lack of decisive change management in the early stages
• The takeover was mishandled
• Cultural incompatibility between the two businesses
• Poor communication, particularly with management, employees and other stakeholders of the acquired business
• Loss of key personnel & customers post acquisition
• Competitors take the opportunity to gain market share whilst the takeover target is being integrated

Question 12

What is overtrading?

Answer 12

expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops

Question 13

What are economies of scale?

Answer 13

the property whereby long-run average total cost falls as the quantity of output increases. Technical, Purchasing, Managerial

Question 14

What are economies of scope?

Answer 14

savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology

Question 15

What are diseconomies of scale?

Answer 15

the property whereby long-run average total cost rises as the quantity of output increases. Can lead to poor employee motivation, poor communication, poor managerial condition

Question 16

What are the different types and directions of integration?

Answer 16

Forward + vertical
- Acquiring a business further up in the supply chain - e.g. manufacturer buys a distributor

Backward + vertical
- Acquiring a business operating earlier in the supply chain - e.g. a retailer buys a wholesaler

Horizontal
- Acquiring a business at the same stage of the supply chain - e.g. a manufacturer buys a competitor

Conglomerate
- Where the acquisition has no clear connection to the business buying it

Question 17

What are the benefits of horizontal integration?

Answer 17

-Internal economies of scale
-Cost savings from rationalisation
-Potential to secure revenue “synergies”
-Wider range of products - (diversification)
-Reduces competition by removing rivals
-Increases market share and pricing power
-Can make the entry barriers higher for new rivals

Question 18

What are the benefits of vertical integration?

Answer 18

• Enables a business to capture a greater share of the profit on each sale
• Secures important sources of supply or distribution
• Create a barrier to entry to potential new competitors

Question 19

What are joint ventures?

Answer 19

when two or more companies join forces - sharing resources, risks, and profits, but not actually merging companies - to pursue specific opportunities

Question 20

What are the benefits of joint ventures?

Answer 20

• JV partners benefit from each other’s expertise and resources (e.g. market knowledge, customer base, distribution channels, R&D expertise)
• Each JV partner might have the option to acquire in the future JV businesses based on agreed terms if it proves successful
• Reduces the risk of a growth strategy - particularly if it involves entering a new market or diversification

Question 21

What are the drawbacks of joint ventures?

Answer 21

Risk of a clash of organisational cultures - particularly in terms of management style

The objectives of each JV partner may change, leading to a conflict of objectives with the other

In practice, there turns out to be an imbalance in levels of expertise, investment or assets brought into the venture by different partners

Potential loss of intellectual property rights

Question 22

What is franchising?

Answer 22

A contractual agreement between a franchisor and a franchisee that allows the franchisee to operate a business using a name and format developed and supported by the franchisor.

Question 23

What is synergy?

Answer 23

the power that results from the combination of two or more forces