3.9 Strategic Methods: how to pursue strategies Flashcards
Retrenchment and its causes
When a business reduces the scale of its operations e.g. through redundancies
Cause of retrenchment could include
- economic downturn
- new ownership
- failed takeover or merger
Impact of retrenchment on functions of the business
FINANCE - costs money in the short-term e.g. through redundancy payments HOWEVER business may be able raise funds by selling off assets when downsizing
HR - managers need to deal with who is made redundant etc.
OPERATIONS - scale of operations will be reduced –> becoming more efficient and thus reduce unit costs
MARKETING - will be focussed on small core part of the business –> may enable better integration & consistency in approach
Organic and External Growth
Organic growth - business grows through expanding its own operations e.g. through LAUNCH OF NEW PRODUCTS OR INCREASE IN SALES OF EXISTING PRODUCTS
External Growth - business grows through joining other businesses e.g. through MERGER OR TAKEOVER
Economies of scale
Occurs when unit costs fall as a business expands
4 different types of economies of scale:
1) Purchasing
2) Technological
3) Financial
4) Managerial
Purchasing economies
As business gets bigger it will purchase more suppliers
Gives more bargaining power over suppliers
Suppliers become dependent on business and may willing to reduce prices to keep their orders
Technological Economies
Occurs when a large scale of operations enables particular technologies to be used efficiently
Financial Economies
As a business gets bigger it has more assets and this may mean a bank is willing to lend it lower interest rates as the risk is lower
Managerial Economies
as a business expands, it may bring in specialists to focus on certain parts of the business
This expertise advice may enable better decision making which can increase efficiency and reduce unit costs
Diseconomies of scale
Occurs when unit costs increase as a business expands
1) Communication problems –> operating all over the world means communications becomes more complex –> can lead to inefficiency and poor decision making
2) Motivational problems –> employees may lose contact with senior managers –> feel less valued –> demotivates
Economies of scope
occurs when a business gains cost advantages by sharing costs between different products etc.
makes it difficult for new firms to enter markers because their initial unit costs will be so much higher
Experience Curve
as businesses grow employees gain more experience
Managers become more experiences = better & faster decisions
Synergy
Occurs when you put two business together and as a combined unit they perform better than they did as individual parts
Overtrading
occurs when there a liquidity problems linked to the financing of rapid growth
Managing Growth - Greiner’s model of growth
The model attempts to predict the 6 phases and 5 crises that businesses may experience as they grow
Growth Phases and Crises of Greiner’s Growth Model
1) Growth Phase 1 = creativity
2) Phase 2 = direction / Crisis 1 = leadership
3) Phase 3 = delegation / Crisis = autonomy
4) Phase 4 = Coordination / Crisis = Control
5) Phase 5 = Collaboration - Crisis = Red Tape
6) Phase = Alliances - Crisis = Growth
Greiner’s Growth model - PROS AND CONS
PROS:
- Provides identifiable crises a business may face –> businesses can prepare for these
- simple and easy to understand
CONS:
- Too simplistic
- Not every business will suffer crises as it grows – many adapt easily without suffering any crises
- Doesn’t take account of the pace of growth
Methods of growth - MERGERS & pros and cons
When the owners of two or more businesses join together and becomes owners of a new shared business
PROS:
- economies of scale –> bigger firms = efficient = lower unit costs
- saves a struggling firms from going out of business
- more profit allows more R&D
- can benefit off of each others resources & strengths
CONS:
- increased market share can lead to monopoly power = higher prices for customers
- monopolies = inefficient through regulations placed by gov
- diseconomies of scale?
- redundancies of employees
Methods of growth - TAKEOVERS & pros and cons
A takeover (or acquisition) involves one business acquiring control of another business
PROS:
- access economies of scale and new skills
- to increase market share
- acquire intangible assets e.g. brands, patents
CONS:
- High cost involved –> takeover price often proving too high
- Upset customers & suppliers, due to disruption involved –> they are unfamiliar with this new business now
- Problems of integration (change management) –> through resistance from employees, incompatibility of management styles and business culture
Methods of growth - JOINT VENTURES & pros and cons
Involves businesses sharing information and resources on some projects but each retaining their own identity
PROS:
- Partners benefit from each other’s expertise and resources e.g. market knowledge, distribution channels, customer base etc.
- Sharing of risks and costs with a partner
CONS:
- Risk of a clash of organisational cultures e.g. management styles
- The objectives of each partner may change, leading to conflict?
Methods of Growth - FRANCHISING & pros and cons
Occurs when one business sells the right to another business to use its name and sell its goods or services in return for a fee
PROS:
- quick growth as funds are provided by the franchisee
- franchisees = v motivated as they own part of the business
CONS:
- lose complete control over what the franchises do
- don’t gain all profits from the operations
Types of growth - VERTICAL INTEGRATION
VERTICAL INTEGRATION - occurs when one business joins together with another at a different stage of the same production process
FORWARD VERTICAL INTERGRATION - involves acquiring a business further up in the supply chain – e.g. a vehicle manufacturer buys a car parts distributor
BACKWARD VERTICAL INTEGRATION - involves acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler
Types of growth - HORIZONTAL INTEGRATION
Occurs when businesses in the same industry and operate at the same stage of production processes are combined
Types of growth - CONGLOMERATE INTEGRATION
Occurs when one business joins together with another business that are unrelated in business activities
Pressures for innovation - PRODUCT AND PROCESS
Innovation - putting a new idea into action
Product Innovation - provides extra benefits to the consumer in terms of what they are buying e.g. product is longer-lasting
Process innovation - improves the transformation process and the customer experience e.g. easier to place an order
Value of Innovation - ADVANTAGES & DISADVANTAGES
ADVANTAGES:
- Enables a business to offer better quality, lower costs, faster delivery or more reliability –> attracts more customers
- Businesses can charge higher prices on innovative product before competitors products come out
- businesses with lots of innovative products can take advantages of economies of scope
DISDADVANTAGES
- Very costly and time consuming
- If new product doesn’t sell then resources are wasted
- businesses rick ruining reputation if new product is poor quality
Ways of becoming innovative - KAIZEN
Process of ‘continuous improvement’ –> where employees work together to consistently introduce small incremental changes to improve performance of the business in the long run
Employees are the best people to identify room for improvement, since they see the processes in action all the time –> business that use this approach develops a culture that encourages and rewards employees
Kaizen - impacts and effects
For kaizen groups to work effectively employees must:
- feel valued and want to contribute
- feel appreciated and well treated by managers
- feel the need that something actually improves
HOWEVER, some employees may resist kaizen groups because:
- they may already feel the business is doing well enough
- unwelcome pressure upon them as they consistently have to find little improvements
- employees may see these demands as an extra burden –> may lead to resentment unless they receive an award etc.
Ways of becoming innovative - RESEARCH AND DEVELOPMENT
1) MARKETING RESEARCH – customers wants? gaps in the market?
2) PRODUCT DEVELOPMENT & TESTING – make prototypes; experiment by allowing a sample of potential customers to trial the product before it is launched
3) DISTRIBUTION – the product cannot be sold unless it is in a position for customers to buy it
4) PROMOTIONAL LAUNCH - inform customers about features of new product, customers need to know when the product is ready
At the first two stages (marketing research and product development/testing) many products are rejected because research shows that it won’t be successful –> Product testing shows if customers react badly to a product
Ways of becoming innovative - INTRAPRENEURSHIP
Entrepreneurial activities done by employees and managers –> rewards and risks go mostly to company
WAYS TO ENCOURAGE & FACILITATE INTRAPRENEURSHIP:
1) structured time away from work –> allows employees and managers to develop business ideas
2) staff competitions and innovation days
Ways if becoming innovative - BENCHMARKING
Occurs when a business tries to match the approach and success of a particular process that is used by another organisation
1) Understand in detail existing processes & performance
2) Analyse the business processes & performance of others
3) Compare own business with others
4) Implement necessary steps to close performance gaps
Protecting innovation and intellectual property - COPYRIGHT & PATENTS
Copyright - Legal protection against copying for authors
Patents - the right to be the only user or producer of a specified product or process
Methods of entering international markets - EXPORT (pros and cons)
Exporting - selling directly to international customers
PROS:
- relatively simple and low risk
- business keeps all profit earned
- business remains in charge
CONS:
- potentially bureaucratic
- risk of non-payment
- customer service may need changing e.g. in different lang
- may be affected by tariffs or quota (protectionism)
Methods of entering international markets - LICENSING (pros and cons)
Occurs when a business sells the right to an overseas business to produce or sell its products
PROS:
- overseas business will have specialist market knowledge and existing customers
- likely to accelerate international sales in key markets compared with exporting
CONS:
- Loss of some profit margin which goes to the overseas business
- harder to manage quality of customer service
Methods of entering international markets - ALLIANCES (pros and cons)
Occurs when a domestic business works in partnership with an overseas business
PROS:
- reduced risk –> risk is shared out
- buying into existing expertise and market presence
- gives domestic business existing customers to sell to
CONS:
- significant cost and investment of management time
- need to understand & comply with local legal and tax issues
- have to share profits
Methods of entering international markets - DIRECT INVESTMENT (pros and cons)
It is opening an overseas operation e.g. establishing outlets
PROS:
- local contact with customers & suppliers
- direct control over quality & customer service
- avoids protectionism e.g. tariffs
CONS:
- significant cost & management time
- much higher risk
- no experience beforehand
Factors influencing attractiveness of international markets
1) Size of the market –> population
2) Economic growth & levels of disposable income
3) ease of doing business / political environment
4) exchange rates
5) domestic competition
6) infrastructure
Reasons for buying from abroad & producing abroad
BUYING FROM ABROAD:
- suppliers may be abroad
- lower costs
- better quality
PRODUCING ABROAD
- lower costs –> cheap labour
- easier to overcome barriers to trade
Off-shoring - pros and cons
Occurs when a business moves its productions overseas
PROS:
- manufacturing costs are lower
- potentially better skilled & higher quality
- to be closer to customers, suppliers & demand
- to overcome protectionism
CONS:
- longer lead times for supply
- additional management costs
- more exposed to changes in exchange rates
- communication difficulties (language)
Re-shoring - pros and cons
Occurs when business moves production back to the domestic country
PROS:
- greater certainty around delivery
- easier to work with domestic suppliers
- better control over product quality
CONS:
- range of customers is now limited
Multinationals (multinational company) - PROS & CONS
When the business has operations in more than one country
PROS:
- MNCs provide employment & training
- transfer of skills & expertise to the different country
- competition from MNCs acts as an incentive to domestic firms in that country to improve their competitiveness e.g. raising quality
CONS:
- Domestic businesses may not be able to compete with MNCs
- profits earned by MNC may be sent back to base country rather than being invested in the different country
Bartlett and Ghoshal’s International Strategies
FORCES FOR LOCAL RESPONSIVENESS
1) do customers in each country expect the product to be adapted to meet local requirements?
2) do domestic competitors have an advantage based on their ability to be more responsive?
FORCES FOR GLOBAL INTEGRATION
1) how important is standardisation of the product to operate efficiently? e.g. economies of scale
2) is consistent global branding required in order to achieved international success?
Bartlett & Ghoshal - GLOBAL STRATEGY
LOW LOCAL RESPONSIVENESS AND HIGH GLOBAL INTEGRATION
- Occurs when there’s significant economies of scale & similarities in market demand
- Business develops standardised products sold globally
- Subsidiaries abroad are weak
- Products are designed & developed in domestic country.
Key Features include:
- highly centralised
- focused on efficiency
- little sharing of expertise locally
- standardised products
Bartlett & Ghoshal - TRANSNATIONAL STRATEGY
HIGH LOCAL RESPONSIVENESS & HIGH GLOBAL INTEGRATION
- Occurs when there’s pressure to meet local needs & benefits from integrating globally
- The organisation is regarded as a network with each subsidiary (subordinate company) given responsibility appropriate to itself
- Balance of centralisation and decentralisation & culture of sharing within the global organisation
- Staff move around the business globally –> builds shared values and shared knowledge.
Key Features:
- locally responsive
- highly efficient
- learning and sharing
Bartlett & Ghoshal - INTERNATIONAL STRATEGY
LOW LOCAL RESPONSIVENESS & LOW GLOBAL INTEGRATION
- Occurs when there’s similarities between markets and little gains from globally integrating
- Business operates from abroad but run very much from the home country
- The head office and main decisions are based at home
Key Features:
- centralised
- focused on learning and sharing
Bartlett & Ghoshal - MULTI DOMESTIC STRATEGY
HIGH LOCAL RESPONSIVENESS & LOW GLOBAL INTEGRATION
- Occurs when there’s considerable variations between market demands and few benefits from globally integrating
- Independent companies running themselves & producing for their own markets.
Digital technology - E-COMMERCE (pros & cons)
E-commerce can involved:
1) B2B (business to business) –> businesses selling to eachother
2) B2C (business to customer) –> consumer buying from business
3) C2C (customer to customer) –> customers trading w eachother
PROS:
- access to worldwide markets 24/7
- new way for customers to shop & attracts more customers
- relatively cheap start-up costs
CONS:
- customer’s inability to touch products
- having to wait for delivery
- delivery costs
