3.9 Strategic methods - How to pursue strategies Flashcards
Retrenchment
When a business decides to significantly cut or scale back its activities, and use their resources more effectively/carefully.
Factors that cause retrenchment
An uncompetitive cost structure
Inadequate returns on investment
Poor competitive position
Financial distress (e.g. decline in sales revenue)
Market decline – more people buy online rather than going to department stores
Failed takeovers
Economic downturn (e.g. during a recession, a firm will reconsider their options)
Change of ownership
Methods of retrenchment:
Reduced output and capacity
Product and market withdrawal
Downsizing/rationalisation
Disposals of business units
De-mergers
Why do businesses grow?
To recieve higher profits
Lower unit costs
Higher market share
Diversification in products
Organic Growth
This involves expansion from within a business.
For example by expanding the product ranges or number of business units and location
It builds on the business’ own capabilities and resources. For most firms, this is the only expansion method used
Types of organic growth:
Developing new product ranges
Launching existing products directly into new international markets (e.g. exporting)
Opening new business locations – either in the domestic market or overseas
Investing in additional production capacity or new technology to allow increased output and sales volume
Advantages of organic growth:
Less risk than external growth (e.g. takeovers)
Can be financed through internal funds (e.g. retained profits)
Builds on the firms strengths (e.g. brands, customers)
Allows the business to grow at a more sensible rate
Disadvantages of organic growth:
Growth achieved may be dependant 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 as they will receive lower dividends
Franchises (if used) can be hard to manage effectively
External Growth
This involves expansion from outside the business mostly through intregatiaion via mergers and takeovers.
Merger
Where two companies merge together to share eachothers skills and business to become sucsessful.
Takeover
Where one business buys anothers shares so the original company no longer exists – e.g. Asda is owned by Walmart but is still called Asda in the UK)
Barriers to growth:
Economies of scale
Diseconomies of scale
Economies of scope
The experience curve
Synergy
Overtrading
Economies of Scope
This happens when unit costs are lower when a business produces a wider range of products rather than specialise in just one or a few products.
For example Amazon or Tesco.
The experience curve
A theory that shows the more experienced the firm is making a product, the better, faster, and cheaper it is able to make it
This means that experience is a key barrier to entry
and firms should try to maximise their market share to gain experience
This can be done by external growth
Disadvantages of the experience curve
Market leaders often become complacent
Experience can cause resistance to change and innovation
This could cancel out cost benefits of experience
It is less relevant in a competitive environment that changes is rapidly
Synergy
A key concept associated with external growth. It happens when the value of two businesses brought together is higher than the sum of the value of the two individual businesses
1+1=3
Cost synergies
Cost synergy is where cost savings are achieved as a result of external growth – this is an example of economies of scale
Due to:
Eliminating duplicated functions and services e.g HR managers from both businesses join to make one.
Getting better deals from suppliers which might be possible if combining two businesses gives them improved bargaining power
Higher productivity and efficiency from shared assets
Revenue synergies
Revenue synergy is where additional revenues are achieved as a result of integration
Due to:
Marketing and selling complimentary products
Cross-selling into a new customer base
Sharing distribution channels
Access to new markets (e.g. through existing expertise of the takeover target)
Reduced competition – more control over the market
Overtrading
This happens when a business expands too quickly without having the financial resources to support such a quick expansion - leads to business failure
Symptoms of overtrading:
High revenue growth but low gross and operating profit margins
Persistent use of a bank overdraft facility
Significant increases in the payables days, receivables days and current ratio
Very low inventory turnover ratio
Low levels of capacity utilisation
Managing the risk of overtrading:
Reducing inventory levels
Scaling back the pace of revenue growth until profit margins and cash reserves have improved
Leasing rather than buying capital equipment
Obtaining better payment terms from suppliers
Enforcing better payment terms with customers
Greiners model of growth
This suggests and attempts to predict that there are six phases and five crises that businesses may experience as they grow due to having no formal organisational structure.
What are the phases of Greiners model?
Phase 1 - Creativity
Phase 2 - Direction
Phase 3 - Delegation
Phase 4 - Coordination
Phase 5 - Collaboration
Phase 6 - Alliances
Backward vertical integration
This involves acquiring a business operating earlier in the supply chain (e.g. a retailer buys a wholesaler)
e.g IKEA buying forests in Romania to have a sufficenent supply of raw materials.
Conglomerate integration
This involves the combination of firms that are involved in unrelated business activities (e.g. investment funds that fund in entrepreneurs)
e.g when Walt Disney and American Broadcasting Company merged to make disney channel.
Forward vertical integration
This involves acquiring a business further up in the supply chain (e.g. a vehicle manufacturer buys a car parts distributer)
e.g Bookers wholesaler buying londis to create higher revenue overall.
Horizontal integration
Businesses in the same industry and which operate at the same stage of the production process are combined
e.g a Hotel buying other hotels
Franchising
When one business sells the right to another to use its name, logo and to sell its products.
e.g Primark selling disney clothing.
Innovation
This is about putting a new idea or approach into action.
Product innovation
Launching new or improved products (or services) in to the market
e.g Lush – this is because they constantly introduce more bath products and different ranges to suit the customer needs and trends/fashions
Process Innovation
Finding better or more efficient ways of producing existing products, or delivering existing services
e.g Tesla as they invested in different technologies to boost their sales and ideas/manufacturing
What does innovation include?
Improving or replacing business processes to increase efficiency and productivity.
Extending the range of quality of existing products/services
Developing entirely new and improved products and services
Adding value to existing products, services, and markets to differentiate the business from its competitors.
Advantages of innovation
Improved productivity and reduced costs
Better quality
Building a product range (diversification)
Environmentally friendly and meeting laws
Added value
Improved staff retention, motivation, and easier recruitment
Disadvantages of innovation
High levels of competition
Uncertain commercial returns
Small availability of finance
Potential risks
Efficiency
This includes how well a business is using its resources to produce
High vs low level of output to produce output
Efficiency can be measured by looking at cost per unit – the lower this is, the more efficient the business is and the higher the profit margin
Factors:
How well employees are managed
How good suppliers are
Investment in machinery and technology
Type of production
Kaizen
A continuous improvement involving constantly introducing small incremental changes to improve the quality and efficiency throughout a business
Benchmarking
To understand and evaluate the current position of the business so that they can identify areas of weakness and start performance improvement
Types of benchmarking
Strategic - Long-term way of closing gaps in performance
Performance - Focuses on operations to gain short term benefits
Functional - Leads to innovation and drastic changes
Internal - Between units within a firm
External - Used for introducing new ideas
International - Follow the leading firm from a different country to improve
Entrapenurship
Activities done by an entrepreneur along with risks and rewards
Intrapreneurship
Entrepreneurial activity done by managers and employees along with risks – rewards are invested back into the business
Intellectual property
This is aimed at protecting the property of an individual or business.
It helps to stop people stealing and copying the names of a firms products or brands, inventions, designs of products, and things that have been written, made, or produced.
Non-Disclosure Agreements
A legally binding document that can be used to stop those consulted from stealing the idea.
Patent
These protects invention and gives the inventor the rights to take legal action against anyone who makes, uses, sells, or imports it without their permission
You have to apply for this protection, which is usually a long process
It has to be renewed every year
Its expensive
Not everyhting can be patented
Copyrights
Exclusive legal rights that protects the publication, production, or sale of the rights to a literacy, dramatic, musical, or artistic work, or computer programme.
Its automatic
Trademarks
This refers to distinctive designs, graphics, logos, symbols, words, of any combination of the above that uniquely identifies a firm and/or its goods and services
For example nobody can copy the Mcdonalds logo.
Internationalisation
This is the act of designing a product that is can be readily consumed across multiple countries
(It fits under the market development sector of Ansoff’s matrix)
The 4 methods of entering international markets
Exporting directly to international customers (e.g e-commerce businesses)
Selling via overseas agents or distributors (e.g Coca-Cola selling products in different countries)
Opening an operation overseas – involves physically setting up one or more business locations in the target markets
Joint venture or buying a business overseas – the firm acquires or invests in an existing business that operates in the target market (e.g = airlines)
Factors influencing the attractiveness of international markets:
Size and growth of the market (e.g. population)
Economic growth and levels of disposable income
Ease of doing business/political environment
Exchange rates
Domestic competition
Infrastructure
Reshoring
It involves a business returning production or operations to the host country that had previously been moved to a different international location.
Why do businesses use reshoring?
Better delivery times
Minimising risk of supply chain disruptions
Reducing the complexity of the supply chain
Making it easier to collaborate with home-based suppliers
Getting greater certainty about the quality of inputs and components
Offshoring
This involves the relocation of business activities from the home country to a different international location
Why do businesses offshore?
To access lower manufacturing costs
To access potentially better skilled & higher quality supply
To make use of existing capacity overseas
To take advantage of free trade areas and avoid protectionism
To make it easier to supply target international markets
Disadvantages of offshoring
Longer lead times for supply & risks of poorer quality
Implications for CSR (harder to control aspects of operating long distances away from the home country)
Additional management costs (time, travel)
Impact of exchange rates (potentially significant)
Communication: language & time zones
Multinationals
Multinational companies are companies that operate in a number of countries around the world.
The Bartlett and Ghoshal Model of International Strategy
This indicates the strategic options for businesses wanting to manage their international operations based on two pressures: local responsiveness & global integration
Types of digital technology:
E-commerce & M-commerce
Big data
Data mining
Enterprise resource planning
Types of digital technology:
E-commerce & M-commerce
Big data
Data mining
Enterprise resource planning
E-commerce
Buying and selling online when business transactions are conducted electronically on the internet
M-commerce
Business transactions are conducted electronically by mobile phone (e.g Apple pay)
Big data
This is the process of collecting and analysing large sets from traditional and digital sources to identify trends and patterns that can be used in decision making
(e.g supermarkets use loyalty cards to look at trends and popular products and times for shopping which improves their business performance because they can tailor offers and products to their customers)
Data mining
This is the process of analysing data from different perspectives and summarising it into useful information, including discovery of previously unknown interesting patterns, unusual records, or dependencies
Example = McDonalds identify trends of customers and promotes the foods that are most popular
Enterprise resource planning
A software system that helps businesses integrate and manage their complex financial, supply chains, manufacturing, operations, reporting, and human resource systems.
