3.9 Strategic Methods Flashcards
What are the four types of internal economies of scale?
Technical
Managerial
Purchasing
Marketing
What are technical economies of scale?
Technical economies of scale are related to production. Production methods for large volumes are often more efficient
What are managerial economies of scale?
Large businesses can employ managers with specialist skills to manage specific departments. They oversee plans and strategies which can result in work being done more quickly and efficiently
What are purchasing economies of scale?
Purchasing economies of scale are to do with discounts. Big businesses can negotiate discounts when buying supplies in large quantities. They can get bigger discount and longer credit period than their smaller competitors and they can also borrow money at lower rates of interest than a small business
What are marketing economies of scale?
Marketing costs are usually fixed, so a business with a large output can spread the cost over more units
When do external economies of scale happen?
External economies of scale happen when industries are concentrated in a small geographical area
Describe what the experience curve is?
In general, the production of any goods or services will follow the experience curve. As the total units produced by business increases, the cost per unit decreases at a constant rate
What are economies of scope?
Economies of scope arise when a business produces multiple products instead of specialising in one.
It’s cheaper for one business to produce many products than it is for many businesses to produce one product each
What are diseconomies of scale?
Diseconomies of scale make unit costs increase as the scale of production increases
Why do diseconomies of scale occur?
They happen because large firms are harder to manage than small ones.
How does a business prevent diseconomies of scale?
Strong leadership, delegation and decentralisation can all help prevent diseconomies of scale and keep costs down
What is retrenchment?
Retrenchment means that the business will have to downsize in some areas
How can a business retrench?
– Cut jobs
– reduce output
– withdraw from markets
– demerging (splitting the business up)
What is organic growth?
When a business grows from within
Give 4 advantages of organic growth over external growth
– Can maintain current management style, culture and ethics
– Less risk as it’s expanding what the business is good at and it’s usually financed using profits
– It’s easy for the business to manage internal growth and control how much the business will grow
- Less disruptive changes mean that workers efficiency, productivity and morale remain high
Give 3 disadvantages of organic growth compared to external growth
– It can take a long time to grow a business internally
– Market size isn’t affected by organic growth. If the market isn’t growing, the business is restricted to increasing its market share of finding a new market to sell products to
– Businesses might miss out on opportunities for more ambitious growth if they only grow internally
Give 5 problems of growing in size
– Large companies can suffer from diseconomies of scale
– Growing companies find it more difficult to manage cash flow
– Fast growth increases the risk of overtrading
– When a company grows in size it will often change from LTD to a plc which can make the running of the company more complicated
– Businesses have to avoid growing so much that they dominate the market and become a monopoly
Give 4 reasons why a business owner may choose to restrict growth or retrench
– They may want to maintain the culture
– The business will become more complicated to manage as it gets bigger
– Growth requires the business to secure additional financial resources which can be complicated
– They may not want to put too much strain on their cash flow position
Who came up with a model for Growth?
Greiner
What are the 5 crisis’ stated in Greiners model of growth?
Leadership Autonomy Control Red tape Growth
What are the 5 types of growth in Greiners model of growth?
Creativity Direction Delegation Coordination Collaboration
What is a franchise?
A franchise is an agreement which allows a new business to use the business idea, name and reputation of an established business
What is the franchisor?
The franchisor is the established business which is willing to sell, or license, it’s idea, name and reputation
What is the franchisee?
The franchisee is the business which buys into the franchise.
They usually pay the franchisor an initial fee plus ongoing payments – usually a percentage of their revenue or profit
Why is franchising good for growth?
Franchising allows a franchisor to grow quickly as most of the costs and risks are taken on by the franchisee
What are the three main types of external growth?
Mergers, takeovers and ventures
What is a merger?
Mergers are when two companies join together to form one company. They might keep the name of one of the original companies or come up with a new name. The shares of the merged company are transferred to the shareholders of the old companies
What is the main motive for mergers?
Synergy – this is where the business after the merger is more profitable than all the businesses before the merger. This is a result of the merged business generating more revenue or cost savings than the independent businesses could between them
What is a takeover?
Takeovers are when one business buys enough shares in another so it has more than 50% of the total shares. This is called a controlling interest and it means the buyer will always win in a vote of all shareholders.
What are takeovers also known as?
Acquisitions
What are the two types of takeovers?
Agreed and hostile
When do hostile takeovers occur?
Hostile takeovers occur when one plc buys a majority of the shares in another plc against the will of the directors of the company. It can do this because the plc shares are traded on the stock exchange and anyone can buy them
When does an agreed takeover happen?
Agreed takeovers happen when shareholders or other types of owners such as sole traders agree that they’ll sell the business to someone else. This is usually because the owners believe it would be beneficial for the survival of the business
What are ventures?
Ventures or small businesses or projects that are set up by existing businesses in the hope of making a profit. They are often set up to try and meet the needs that are not being met in the current market.
What is a joint venture?
If more than one business invest then it’s called a joint venture. In a joint-venture, businesses share their resources but there is no change of ownership for the businesses involved. When the joint-venture is terminated, bills are paid off, profits are shared and the businesses remain separate
What’s the advantage of a joint venture?
A joint venture can be a good way to set up a new business if you don’t have the capital to do it yourself and it can also be a good way for businesses to access markets in different countries
What is the main disadvantage of ventures and why are joint ventures often preferable?
A venture often involves a lot of risk to the business setting it up – a joint venture is often preferable because the risk can be spread among the businesses involved
What are the four types of integration?
Horizontal
Forward vertical
Backward vertical
Conglomerate
Describe horizontal integration
Horizontal integration happens when a firm combines with another firm in the same industry at the same stage of production process
Describe vertical integration
Vertical integration occurs when a firm combines with another firm in the same industry but at a different stage of the production process
What are the two types of vertical integration?
Forwards and backwards
Describe forward vertical integration
Forward vertical integration is when a business combined with another business that is further on in the production process.
For example, a manufacturer merging with the outlets where its products are sold
Describe backward vertical integration
Backward vertical integration is when a business combined with another business at an earlier stage of the production process.
For example, a retailer taking over its suppliers
Describe what a conglomerate merger is
Conglomerate mergers are between unrelated firms – they aren’t competitors of each other and they aren’t each other suppliers or customers
What is innovation?
Innovation means thinking of a new idea and putting it into action
What are the two types of innovations?
Product and process
What is product innovation?
Making new goods/services or improving existing ones
What is process innovation?
Putting into place new or improve production and delivery methods
Give 4 benefits of innovation
- Charge higher prices for innovative products
- Good for reputation
- Innovations in processes can help and value to existing products and services
- Take advantage of economies of scope
Give 4 drawbacks of innovation
- Very costly and time-consuming process
- You can waste resources by developing a product that is not wanted
- No guaranteed return on investment
- A business can ruin their reputation if the innovative product is poor quality
What are the six stages of new product development?
1) Idea
2) Analysis in screening
3) R&D
4) Value analysis
5) Test marketing
6) Launch
What is a continuous form of innovation?
Kaizen
What is kaizen?
The kaizen approach to innovation is by encouraging employees to improve the way they work and the processes they use all the time. Over a long period of time the small kaizen changes can add app and lead to innovation
What is intrapreneurship?
Intrapreneurship is when employees within a business are encouraged to solve a problem by coming up with innovative new ideas
What is benchmarking?
Benchmarking studies other businesses with excellent quality standards and aims to innovate by adopting the same methods
What is a patent?
A Patent as a way of registering and protecting a new invention
What do patents allows the business to do?
Patents allow businesses to maintain the unique features of their products for as long as the patent lasts. They do not have to worry about competitors copying their exact invention
What does a trademark do?
If you want to protect your businesses name, logo or slogan, you can register it as a trademark so that nobody else can use it
What is the purpose of copyright?
Copyright gives protection to written work and music
What are three factors that affect the attractiveness of international markets?
1) Size of the market
2) Political and economic factors
3) Cultural, ethical and environmental factors
What are four methods of entering international markets?
1) Importing and exporting
2) Licensing
3) Alliances
4) Direct investment
Give 3 advantages of locating abroad
Reduce costs – lower wages in certain countries
Target new international markets
Help companies avoid trade barriers
How has locating abroad been made easier in the recent years?
Improved transport and communication links and better infrastructure
What is off shoring?
Off shoring means moving parts of a business to cheaper countries
Which countries do businesses often move to for the purpose of off shoring?
China, India, Malaysia, Mexico and Indonesia
What is the biggest disadvantage of offshoring?
Bad for companies image, media and trade unions often criticise companies for UK job losses caused by off shoring
What is reshoring?
Reshoring is when a business move departments back to its country of origin
What is a multinational company?
A multinational company is a business that has branches or departments in more than one country. It’s head office will be based in one country and it will coordinate is global activities from there. They will also have offices or factories in other countries that offer services or produce goods
What are the four international business strategies outlined by Bartlett and Goshall?
International strategy
Multidomestic strategy
Global strategy
Transnational strategy
Give three benefits of using digital technology for innovation
A digital technology can lead to innovative new products, can make the production process more efficient and give businesses new opportunities such as e-commerce
Give three disadvantages of technology for innovation
– Very expensive to develop new products that are based on new digital technology
– New technology needs to be updated regularly
– Problems with digital technology can be difficult to diagnose
What opportunities does e-commerce provide?
– Greater access to international markets
– Manufacturers can sell directly to consumers
– Companies can keep track of online order history and make personal recommendations to improve customer satisfaction
– Interact directly with the customers through social media
– Businesses are able to deal with customer complaints more efficiently by switching from telephone services to online assistance
What is ERP and how does it benefit each department?
Enterprise resource planning is business management software that allows the business to monitor activities in every department through the collection and interpretation of data
How does ERP help the HR department?
It can help the HR department to track the work rate of staff to see who needs extra training when productivity drops
How does ERP help the finance department?
The finance department might use data from previous infrastructure changes to budget for upcoming changes
How does ERP help the marketing department?
It helps the marketing department to keep track of how well their promotional products are selling and compare sales before and after promotion
How does ERP help the operations department?
ERP can be used to track stock levels, distribution networks and productivity in order to see how well the operations department is functioning and if any improvements are needed
