3.9 Strategic methods - How to pursue strategies

Question 1

Retrenchment

Answer 1

When a business decides to significantly cut or scale back its activities, and use their resources more effectively/carefully.

Question 2

Factors that cause retrenchment

Answer 2

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

Question 3

Methods of retrenchment:

Answer 3

Reduced output and capacity

Product and market withdrawal

Downsizing/rationalisation

Disposals of business units

De-mergers

Question 4

Why do businesses grow?

Answer 4

To recieve higher profits
Lower unit costs
Higher market share
Diversification in products

Question 5

Organic Growth

Answer 5

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

Question 6

Types of organic growth:

Answer 6

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

Question 7

Advantages of organic growth:

Answer 7

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

Question 8

Disadvantages of organic growth:

Answer 8

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

Question 9

External Growth

Answer 9

This involves expansion from outside the business mostly through intregatiaion via mergers and takeovers.

Question 10

Merger

Answer 10

Where two companies merge together to share eachothers skills and business to become sucsessful.

Question 11

Takeover

Answer 11

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)

Question 12

Barriers to growth:

Answer 12

Economies of scale

Diseconomies of scale

Economies of scope

The experience curve

Synergy

Overtrading

Question 13

Economies of Scope

Answer 13

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.

Question 14

The experience curve

Answer 14

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

Question 15

Disadvantages of the experience curve

Answer 15

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

Question 16

Synergy

Answer 16

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

Question 17

Cost synergies

Answer 17

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

Question 18

Revenue synergies

Answer 18

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

Question 19

Overtrading

Answer 19

This happens when a business expands too quickly without having the financial resources to support such a quick expansion - leads to business failure

Question 20

Symptoms of overtrading:

Answer 20

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

Question 21

Managing the risk of overtrading:

Answer 21

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

Question 22

Greiners model of growth

Answer 22

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.

Question 23

What are the phases of Greiners model?

Answer 23

Phase 1 - Creativity
Phase 2 - Direction
Phase 3 - Delegation
Phase 4 - Coordination
Phase 5 - Collaboration
Phase 6 - Alliances

Question 24

Backward vertical integration

Answer 24

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.

Question 25

Conglomerate integration

Answer 25

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.

Question 26

Forward vertical integration

Answer 26

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.

Question 27

Horizontal integration

Answer 27

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

Question 28

Franchising

Answer 28

When one business sells the right to another to use its name, logo and to sell its products. e.g Primark selling disney clothing.

Question 29

Innovation

Answer 29

This is about putting a new idea or approach into action.

Question 30

Product innovation

Answer 30

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

Question 31

Process Innovation

Answer 31

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

Question 32

What does innovation include?

Answer 32

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.

Question 33

Advantages of innovation

Answer 33

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

Question 34

Disadvantages of innovation

Answer 34

High levels of competition Uncertain commercial returns Small availability of finance Potential risks

Question 35

Efficiency

Answer 35

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

Question 36

Kaizen

Answer 36

A continuous improvement involving constantly introducing small incremental changes to improve the quality and efficiency throughout a business

Question 37

Benchmarking

Answer 37

To understand and evaluate the current position of the business so that they can identify areas of weakness and start performance improvement

Question 38

Types of benchmarking

Answer 38

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

Question 39

Entrapenurship

Answer 39

Activities done by an entrepreneur along with risks and rewards

Question 40

Intrapreneurship

Answer 40

Entrepreneurial activity done by managers and employees along with risks – rewards are invested back into the business

Question 41

Intellectual property

Answer 41

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.

Question 42

Non-Disclosure Agreements

Answer 42

A legally binding document that can be used to stop those consulted from stealing the idea.

Question 43

Patent

Answer 43

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

Question 44

Copyrights

Answer 44

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

Question 45

Trademarks

Answer 45

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.

Question 46

Internationalisation

Answer 46

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)

Question 47

The 4 methods of entering international markets

Answer 47

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)

Question 48

Factors influencing the attractiveness of international markets:

Answer 48

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

Question 49

Reshoring

Answer 49

It involves a business returning production or operations to the host country that had previously been moved to a different international location.

Question 50

Why do businesses use reshoring?

Answer 50

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

Question 51

Offshoring

Answer 51

This involves the relocation of business activities from the home country to a different international location

Question 52

Why do businesses offshore?

Answer 52

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

Question 53

Disadvantages of offshoring

Answer 53

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

Question 54

Multinationals

Answer 54

Multinational companies are companies that operate in a number of countries around the world.

Question 55

The Bartlett and Ghoshal Model of International Strategy

Answer 55

This indicates the strategic options for businesses wanting to manage their international operations based on two pressures: local responsiveness & global integration

Question 56

Types of digital technology:

Answer 56

E-commerce & M-commerce Big data Data mining Enterprise resource planning

Question 57

Types of digital technology:

Answer 57

E-commerce & M-commerce Big data Data mining Enterprise resource planning

Question 58

E-commerce

Answer 58

Buying and selling online when business transactions are conducted electronically on the internet

Question 59

M-commerce

Answer 59

Business transactions are conducted electronically by mobile phone (e.g Apple pay)

Question 60

Big data

Answer 60

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)

Question 61

Data mining

Answer 61

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

Question 62

Enterprise resource planning

Answer 62

A software system that helps businesses integrate and manage their complex financial, supply chains, manufacturing, operations, reporting, and human resource systems.