3.9 Strategic Methods : How To Pursue Strategies Flashcards
Why do businesses grow or retrench?
- Growth is an important objective for many businesses and can leverage a number of benefits and opportunities for the business that may not be available to smaller organisations.
- can ^ shareholder value
- can ^ market share
- can decrease average costs
- can improve stakeholder perception of success
Retrenchment involves downsizing the scale of operations e.g closing some stores,redundancies,delayering,outsourcing,withdrawing from international markets.
Businesses retrench to :
- Focus on core business
- Turn around poor performance
- sell off less profitable parts of the business to ^ overall performance
What are the two types of growth?What do they mean?
Organic growth -
- is steady and gradual, low risk (Internal growth)
- Can be within the UK and on a multinational scale
- Easier to maintain control and can build on the business’ strengths
- However growth is slow and it is harder to gain market share.
External growth -
- sudden and bring about significant change,
- fast expansion but risk of culture clashes when two separate businesses come together
Examples of organic growth
Market penetration
Product development
Market development
Examples of external growth
Mergers
Takeovers
Joint ventures
What are the issues with growth?
- economies of scale ( technical, purchasing and managerial)
- economies of scope
- diseconomies of scale
- synergy
- overtrading
Benefits of business growth
Synergies
Economies of scope
The experience curve
Economies of scale
What are economies of scale and the different types available?
Economies of scale - advantages gained by a business as it increases the scale of its operations, leading to a fail in unit costs.
- lower unit costs make a business more competitive ( they can lower prices to increase sales volume or keep them the same to gain higher profit margins.)
types of economies of scale are:
Technological economies - larger businesses can invest in latest/best technnology
Purchasing economies - bulk buying ( ^ buying power) (porter’s 5 forces)
Managerial - larger businesses can employ specialists
(Extra one) financial - larger businesses have more collateral and can raise moe capital (esp if plc)
What are economies of scope ?
Economies of scope - the advantages a business gains from increasing scale of operations through expanding the scope (range) of activities it undertakes leading to a fall in unit costs. E.g entering new markets, introducing new products,diversifications ( Ansoff’s matrix)
Economies of scope can improve brand loyalty and can spread the risk of one product failing due to having various product lines.
However it could lead to a loss of focus and potentially poor performance .
What are diseconomies of scale?
The disadvantage that arise from business increasing the scale oof its operations that lead to a rise in unit costs.
Some examples
-control- large business=more layers of management=slower decision making and less quality control
-flexibility
-communication problems
-motivation- workers won’t see their impact as much in larger organisations
E.g rising unit costs will make a business less competitive as it could lead them to ^ prices or maintain the same price, earning less profit
What is synergy?
When two businesses joined together will be able to achieve more than sum of the two businesses operating separately.
2+2=5 (more revenue or less cost)
E.g Shared resources, increased expertise, joint marketing
The experience curve
The advantages gained by an established business as a result of having both managers and employees who are familiar with the running of the business. This leads to a fall in unit costs.
- greater specialism which increases efficiency
- knowledgeable managers
What is overtrading ?
When a business has expanded too rapidly resulting in it operating at a level beyond its resources leading to potential liquidity problems.
- where supply is exceeding demand as a result of growth
What are the methods of growth?
- mergers
- takeovers
- ventures
- franchising
What are the types of growth?
- Vertical ( backwards & forward ) integration ( joining with a business at an earlier or later stage in the process)
- Horizontal integration ( 2 businesses at the same stage within a process)
- conglomerate integrate ( 2 unrelated businesses integration)
What are ventures?
Joint ventures are when 2 or more businesses agree to act collectively to set up a new business venture with all parties contributing equity to fund the set up and purchase of assets. ( separate business entity )
Pro’s
Combined expertise
Synergies
Greater potential capacity
Shared risk and control
Con’s
Shared revenue
Cultural difference
Potential conflict between stakeholder objectives
What is franchising?
When a franchisor, the owner of a business, licenses the use of trademarks and proven business ideas to another party, the franchise.
The franchisor has control over the marketing,quality and standards of the gods.
The franchisee is given support but has less autonomy over decision making.
Franchising allows the franchisor to grow more rapidly but may damage its reputation if standards aren’t maintained.
What is a takeover?
Aka acquisition, which may be hostile or voluntary
One business acquires another along with its assets
What is innovation?
Innovation involves a business developing new products and processes to create products or distribute them to customers.The two types are product and process innovation.Product development creates benefits for consumers whilst process tends to make the business more efficient.
What are the pressures that may lead to innovation?
PEST-C model is an easy way to remember!
Political change
Economic change ( during economic downturn ^ pressure to improve efficiency)
Social change
Technological change
Competitive change
What are the ways of becoming an innovative organisation?
A business must have a culture of innovation and leadership styles may support innovation e.g google (listening to shareholders) (acceptance of mistakes).
The four ways of being innovative are:
Kaizen (continuous improvement)
R&D e.g Google giving employees 20% of work time to work on creative projects
Intrapreneurship (‘intrapreneurs’ are encouraged to implement their ideas for the development of intellectual property
Benchmarking ( setting targets based on best practices from a similar business)
What’s the value of innovation?
Innovation may improve competitiveness through improved quality, faster delivery, lower costs. Without innovation a business would loose ground on its competitions = loss of market share = possible failure
- however, it could also be seen as a threshold requirement for a business to simply maintain its place.
Ways of protecting innovation and intellectual property
1) patent - protects inventions and products if registration is successful
2) copyright- literary work and creative content - no registration needed
Some more not on spec :
3) trademark- product name and logo - no registration needed
4)Design rights on styles,shapes and objects- no registration needed
Innovation impact on functional areas of a business
Marketing- must identify needs of customers to provide drive for innovation
Finance - must commit to innovation by investing in R&D, may need to retain profits to fund growth
HR- job design and work practices must encourage employees to be innovative e.g job enrichment opportunities and rewarding employees for their innovative ideas
Operations-responsible for developing new products or implementing process innovation
