9.1 Strategic methods, assessing a change in scale- need to finish (includes types of growth & integration- include flashcards on drive)
What do strategic methods refer to?
Refer to the different strategies that a business might persue to achieve its objectives.
Why can growth be seen as an important factor?
Shows progress- can be good for managers in terms of their own careers & in terms of showing shareholders why they are valuable.
Can provide sense of achievement- Maslows self actualisation needs.
Can create financial benefits such as higher revenues & lower unit costs.
Creates momentum- can be important. Means there are new opportunities for employees - can help keep them focused & engaged.People feel part of something that works & is growing than shrinking. Help staff retention rates & attract best employees.
Brings benefits such as more market power & lower costs due to greater bargaining power.
What are the forms of growth?
Internal (organic)
External (inorganic)
What are the forms of organic growth?
Increase sales of existing products
Launch new products.
What are the forms of external growth?
Mergers
Takeovers/ aquisitions
What are the different methods of growth?
Takeover
Franchise
Merger
Venture
What is a merger?
When the owners of two or more businesses become owners of a new shared business.
What is a takeover?
The acquisition of one business by another.
Takeover- is it beneficial or not beneficial?
It can be agreed ad it may be in the best interest of both like a merger- or can be hostile if business doesn’t want to be taken over.
What is a joint venture?
- Joint venture - when businesses share information & resources with each other but retain their own identity.
- It is a separate business entity created by two or more parties, involving shared ownership, returns & risks.
- The parties involved - looking to benefit from complementary strengths & resources brought to the venture, as well as sharing the risks & rewards involved.
What is a Franchise?
The ability to sell under another business’s name- giving them the right to use its name & sell its products.
What are the advantages of selling a franchise?
- Quick growth & cost effetive method as funds are provided by franchisee.
- Capital investment by franchisees is an important source of growth finance.
- Enables much quicker geographical growth for a relatively low investment.
- Franchisees may be very motivated as they own part of the business.
What are the disadvantages of selling a franchise?
- Lose complete control over what franchises do.
- Do not gain all the profits from operations.
What are the advantages of buying a franchise?
- Buying an established product- no need to think of own idea.
- Often have an established reputation and image & consumer base.
- Data should exist on the success of the business and also on important issues such as buyer and behaviour costs.
- May be provided with training, experience, support & ideas of other franchisees.
What are the disadvantages of buying a franchise?
- Do not have complete independence to decide what to do- little room for creativity- franchise agreements dictate how its run.
- Do not gain all the profits from the operations, have to pay money to the franchisor.
What are the different types of integration?
Vertical
Horizontal
Conglomerate
What is horizontal integration?
Horizontal integration involves the combination of two business operating in the same industry and at the same stage of the supply chain.
e.g. a brewery merges / takes over another brewery.
What is backward vertical integration?
This involves acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a brewer buys a hop farm
What is conglomerate integration?
This involves the combination of firms that are involved in unrelated business activities
What is forward vertical integration?
This involves acquiring a business further up in the supply chain – e.g. a vehicle manufacturer buys a car parts distributor
What is diseconomies of scale?
Where unit costs begin to rise rather than decrease.
Why may diseconomies of scale occur?
Poor communication - (Due to greater complexity, more layers & people. Decision making process slower = less responsible & flexible. Problem for businesses where fashions change regularly & technology is subject to rapid change).
Lack of control & coordination- Larger business more complex & difficult to monitor & coordination between departments difficult.
Alienation of the worforce- Alienation due to job losses as greater investment in technology- or poor communication, not feeling valued, less engaged & motivated- lower productivity.
What is another problem of growth?
Overtrading!
- Happens when a business expands too quickly without having the financial resources to support such a quick expansion.
- If suitable sources of finance are not obtained, overtrading can lead to business failure.
- Importantly, overtrading can occur even a business is profitable. It is an issue of working capital & cash flow- a business undertakes more business than its working capital can cope with.
What is a synergy?
The idea that the value & performance of two businesses combined will be greater than the sum of the two parts.
What is retrechment & what does it involve?
When a business downsizes.
What drives retrenchment?
Uncompetitive cost structure.
Inadequate returns on investment.
Poor competitive position.
Financial distress (e.g high debt)
Market decline
Failed takeovers
Economic downturn
Change of ownership.
What are the different methods of retrenchment?
Singificant reductions in output & capacity.
Significant job losses.
Product or market withdrawals.
Disposals of business units
Outsourcing key business functions.
De-mergers
What is economies of scope?
The reduction of unit costs because of producing a wider variety of goods & services.
A proportionate saving gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately.
e.g. A restaurant that has catering facilities & uses it for multiple occasions – as a coffee shop during the day & as a supper-bar and jazz room in the evenings.
What are the different types of economies of scale?
Financial
Technical
Purchasing
Managerial
What is financial economies of scale?
Financial institutions see bigger businesses as a safer bet because of their greater assets, so are more willing to lend & offer at lower interest rates.
What are technical economies of scale?
Technical economies are the cost savings a firm makes as it grows larger, arising from the increased investment and use in technology & machinery- enabling them to be more productive & produce a greater return on investments.
What is purchasing economies of scale?
They are economies of scale achieved via buying in bulk. They result from the greater power that can be exerted by a large business over suppliers- reducing unit costs.
What is managerial economies of scale?
Managerial economies of scale occur when large firms can afford specialists. They more effectively manage particular areas of the company.
