3.9 Strategic Methods: how to pursue strategies

Question 1

Retrenchment and its causes

Answer 1

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

Question 2

Impact of retrenchment on functions of the business

Answer 2

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

Question 3

Organic and External Growth

Answer 3

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

Question 4

Economies of scale

Answer 4

Occurs when unit costs fall as a business expands

4 different types of economies of scale:
1) Purchasing
2) Technological
3) Financial
4) Managerial

Question 5

Purchasing economies

Answer 5

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

Question 6

Technological Economies

Answer 6

Occurs when a large scale of operations enables particular technologies to be used efficiently

Question 7

Financial Economies

Answer 7

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

Question 8

Managerial Economies

Answer 8

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

Question 9

Diseconomies of scale

Answer 9

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

Question 10

Economies of scope

Answer 10

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

Question 11

Experience Curve

Answer 11

as businesses grow employees gain more experience

Managers become more experiences = better & faster decisions

Question 12

Synergy

Answer 12

Occurs when you put two business together and as a combined unit they perform better than they did as individual parts

Question 13

Overtrading

Answer 13

occurs when there a liquidity problems linked to the financing of rapid growth

Question 14

Managing Growth - Greiner’s model of growth

Answer 14

The model attempts to predict the 6 phases and 5 crises that businesses may experience as they grow

Question 15

Growth Phases and Crises of Greiner’s Growth Model

Answer 15

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

Question 16

Greiner’s Growth model - PROS AND CONS

Answer 16

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

Question 17

Methods of growth - MERGERS & pros and cons

Answer 17

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

Question 18

Methods of growth - TAKEOVERS & pros and cons

Answer 18

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

Question 19

Methods of growth - JOINT VENTURES & pros and cons

Answer 19

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?

Question 20

Methods of Growth - FRANCHISING & pros and cons

Answer 20

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

Question 21

Types of growth - VERTICAL INTEGRATION

Answer 21

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

Question 22

Types of growth - HORIZONTAL INTEGRATION

Answer 22

Occurs when businesses in the same industry and operate at the same stage of production processes are combined

Question 23

Types of growth - CONGLOMERATE INTEGRATION

Answer 23

Occurs when one business joins together with another business that are unrelated in business activities

Question 24

Pressures for innovation - PRODUCT AND PROCESS

Answer 24

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

Question 25

Value of Innovation - ADVANTAGES & DISADVANTAGES

Answer 25

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

Question 26

Ways of becoming innovative - KAIZEN

Answer 26

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

Question 27

Kaizen - impacts and effects

Answer 27

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.

Question 28

Ways of becoming innovative - RESEARCH AND DEVELOPMENT

Answer 28

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

Question 29

Ways of becoming innovative - INTRAPRENEURSHIP

Answer 29

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

Question 30

Ways if becoming innovative - BENCHMARKING

Answer 30

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

Question 31

Protecting innovation and intellectual property - COPYRIGHT & PATENTS

Answer 31

Copyright - Legal protection against copying for authors

Patents - the right to be the only user or producer of a specified product or process

Question 32

Methods of entering international markets - EXPORT (pros and cons)

Answer 32

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)

Question 33

Methods of entering international markets - LICENSING (pros and cons)

Answer 33

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

Question 34

Methods of entering international markets - ALLIANCES (pros and cons)

Answer 34

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

Question 35

Methods of entering international markets - DIRECT INVESTMENT (pros and cons)

Answer 35

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

Question 36

Factors influencing attractiveness of international markets

Answer 36

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

Question 37

Reasons for buying from abroad & producing abroad

Answer 37

BUYING FROM ABROAD:
- suppliers may be abroad
- lower costs
- better quality

PRODUCING ABROAD
- lower costs –> cheap labour
- easier to overcome barriers to trade

Question 38

Off-shoring - pros and cons

Answer 38

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)

Question 39

Re-shoring - pros and cons

Answer 39

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

Question 40

Multinationals (multinational company) - PROS & CONS

Answer 40

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

Question 41

Bartlett and Ghoshal’s International Strategies

Answer 41

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?

Question 42

Bartlett & Ghoshal - GLOBAL STRATEGY

Answer 42

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

Question 43

Bartlett & Ghoshal - TRANSNATIONAL STRATEGY

Answer 43

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

Question 44

Bartlett & Ghoshal - INTERNATIONAL STRATEGY

Answer 44

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

Question 45

Bartlett & Ghoshal - MULTI DOMESTIC STRATEGY

Answer 45

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.

Question 46

Digital technology - E-COMMERCE (pros & cons)

Answer 46

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