3.9 strategic methods Flashcards
why is growth an important objective for any businesses
business growth can create wealth for the owners
it can also leverage a number of benefits and opportunities for the business that may nor may not be available to smaller organisations
why is organic growth a lower risk option than external; growth
steady and gradual whereas external growth is very sudden and can bring about significant change in an organisation
benefits of external growth
offers the opportunity for fast expansion but with the risk of clashes in the way the two businesses that have been joined together operate
eg of organic growth
market penetration
product development
market development
external methods of growth
mergers
takeovers
joint ventures
benefits of business growth
synergies
the experience curve
economies of scope
economies of scale
synergies
external growth can bring businesses together that complement one anothers strengths eg one business could be extremely innovative whilst another might have the financial power to support investment in r&d
synergies may not occur when there is a clash of cultures
the experience curve
big businesses typically have more experience than smaller businesses
they have made mistakes and have gained knowledge and experience that smaller businesses dont have
however big businesses can sometimes become complacent- happened to m and s in mid 1990s
economies of scope
operating with a wide variety of products in a number of markets creates benefits theorugh reduced costs which are shared across the different product lines and spreading the risk of any one product failing
nevertheless widening a businesss scope may lead to a loss of focus on any particular product or market and potentially poor performance
when do economies of scale occur
when unit costs fall as a business expands- theese are the advantages of business size
benefits a business gains as it grows in size relating to economies of scale
purchasing economies- bulk buying
technological economies-larger businesses can invest in the best technology
financial- larger businesses have more collateral and can raise more capital especially if PLC)
managerial- larger business can employ specialists to manage a particular aspect of the business
the benefits and drawbacks of growth
economies of scale result in unit costs falling as the business grows in size
however at a certain point the business will start to experience diseconomies of scale
here unit costs will start to rise as the business starts to lose some of the efficiencies it gained from growth
for many businesses there is an optimal size where they are able to operate efficiently
furthermore large businesses can lose some of the advantage they had when they were smaller
diseconomies of scale
occur when unit costs rise as a business expands- therse are the disadvantages of sizew
what issues can a business face as it grows
communication problems- becomes harder to communicate a clear message across the organisation
control- inorder to control the organisation layers of management are added
this slows down decision making and quality becomes harder to monitor
flexibility- due to the issues of communication and control the business may be less flexible in its ability to adapt to the changing business enviornment
motivation- workers in large organisations find it difficult to see the impact they have and feel less significant
overtrading
occurs when businesses grow too fast and overstretch their financial resources such as cash
a business may also face logistical problems if it cannot manage operations
overtrading can lead to business failure
retrenchment
there may be times when a business needs to reduce its scale
this may be to counteract the problems of diseconomies of scale or to improve efficiency and reduce costs as demand falls
perhaps as a resukt of a downturn in the economic climate
what may retrenchment involve
redunandcies
closure of branches
discontinuing product lines
pulling out of international markets
delayering
reallocating expansion plans
outsourcing aspects of the business’ss operations
greiners model of growth
considers some of the issues a business might face as it grows in scale
the model can help managers predict and plan for different issues as the business grows
how many phases are in greiners model
6
what are the 6 phases of greiners model
phase 1- growth through creativity
phase2- growth through direction
phase 3- growth through delegation
phase 4- growth through coordination
phase 5-growth through collaboration
phase 6- growth through alliances
growth through creativity phase 1
informal business practices
business driven by creativity and all employees understand the impac they have on the business
rules are not clear
growth thriugh direction phase 2
leadership crisis
as the business grows some tasks may get missed or jobs will be duplicated
at some point clear direction is needed along with leadership
growth through delegation phase 3
autonomy crisis
as the business hrows there is a need for more delegation as managers desire autonomy to make their own decisions and respons to localised issues
growth through coordination phase 4
crisis of control
as the business continues to groq directors may feel they are losing control of some aspects of the business and they worry about strategic direction