Strategic methods: how to pursue strategies

Question 1

What is the definition of economies of scale?

Answer 1

When unit costs fall as output increases.

Question 2

How are unit costs calculated?

Answer 2

Total production costs / Total output

Question 3

What are internal economies of scale?

Answer 3

Arise from the increased output of the business itself. e.g., purchasing, technical (AI, robotics), managerial (specialist managers reduce unit costs due to increased efficiency), marketing (large businesses invest in advertisement), network (working with other companies), and financial (larger companies getting loans at lower interest rates).

Question 4

What are external economies of scale?

Answer 4

Occur within an industry i.e. all competitors benefit.
Often associated with particular geographic areas.
e.g. having specialist suppliers close by, access to R+D facilities.

Question 5

What is economies of scope?

Answer 5

Where it is cheaper to produce a range of products rather than specialise in a minimal number.
e.g. Amazon, Hypermarkets

Question 6

Why do businesses grow?

Answer 6

Larger returns for the owners
More reward
Spreading risk- e.g. many companies have more than 1 product so if one product fails they still have the other products.
Survival

Question 7

What is internal growth?

Answer 7

It grows without joining with another businesses.
It could:
Develop new product ranges
Launching existing products directly into international markets e.g. exporting.
Opening new business locations (domestic markets, overseas).
Investing in additional production capacity of new technology to allow increased output and sales volumes.

Question 8

What are the benefits of internal growth?

Answer 8

Less risk than external growth.
Can be financed through internal funds e.g. retained profits.
Builds on a business’ strengths e.g. brand customers.
Allows the business to grow at a more sensible rate.

Question 9

What are the drawbacks of internal growth?

Answer 9

Growth achieved may be dependent on the growth of the overall market.
Hard to build market share if business is already a leader.

Question 10

What is external growth?

Answer 10

Merger- involvement with another business.
Takeover- 2 firms join together and have equal ownership. e.g. 02 buying Virgin.
Acquiring a supplier or major customer
Joint venture overseas

Question 11

What is the difference between internal and external growth?

Answer 11

Organic:
Profits are retained - reinvested
Reduced risk levels - existing brand loyalty
Less chance of diseconomies of scale
Provides a business with greater focus - build stronger market position.

External:
An effective method of rapid market development
Achieving economies of scale

Question 12

What is retrenchment?

Answer 12

Most businesses aim to grow- but not all succeed - and many are forced to reduce the scale and scope of their business activities as a deliberate act of strategy. e.g. Tesco tried to branch to USA and failed.

Question 13

Why do businesses retrench?

Answer 13

Changes in market conditions
Diseconomies of scale
Lack of demand
Operating costs are too high
Lost its market leadership position
High risk take over proves to be a mistake
Gearing - struggling to pay their debts

Question 14

How is retrenchment shown in a business?

Answer 14

Reduce output and capacity
Job losses - delayering
Product/market withdrawal
Disposable of business unit
Scaling back investment

Question 15

What is invention?

Answer 15

The formulation of new ideas for products or processes.

Question 16

What is innovation?

Answer 16

The practical application of new inventions into marketable products or services.

Question 17

What is product innovation?

Answer 17

Launching new or improved products/services on to the market.

Question 18

What is process innovation?

Answer 18

Finding better or more efficient ways of producing existing products, or delivering existing services.

Question 19

What are the advantages of product innovation?

Answer 19

First mover advantage (e.g. Dyson) can mean:
higher prices and profitability
added value e.g. saving time, more convenient
opportunity to build early customer loyalty
enhanced reputation as an innovative company
PR coverage
increased market share

Question 20

What are the benefits of innovation?

Answer 20

Improved productivity
Building a brand
Builds a strong organisational culture which should attract more talent

Question 20

What are the advantages of process innovation?

Answer 20

Reduced costs
Improved quality
More responsive customer service
Greater flexibility
Higher profits

Question 21

What are the problems with innovation?

Answer 21

No guarantee that R+D expenditure will result in new products and processes.
Competitors may follow suit - this means that …. the product may go into decline.
Operational difficulties are common with new products
Copies of products
Risk if the product doesn’t sell - impacts business’ reputation.

Question 22

What is the conclusion of innovation?

Answer 22

Successful innovation will depend on…
-external circumstances
-culture you have within the business (HR, leadership style)
-how risk averse is the leader?
-how much funding you have in place?
-what skills do your team have?

Question 23

What are kaizen groups?

Answer 23

Linked with developing an innovative culture in business.
Another kind of quality assurance
Based on concept/culture of continuous improvement
Encourages employees to engage fully with finding ways to improve quality processes.

Question 24

Why seek to protect intellectual property?

Answer 24

Keep control of intellectual property
Maintain “unique selling point”
Maximise return on investment
Reduce threat of competition

Question 25

How can a patent protect an invention?

Answer 25

To be protected by a patent, the invention must be:
-new
-an innovative style (i.e. not obvious to other people with knowledge of the subject)
-capable of industrial application (i.e. it can be made and used)
-not to be excluded (certain inventions don’t count -e.g. scientific theories)

Question 26

What is the purpose of copyright?

Answer 26

Important protection for many industries e.g. media, design, publishing.
Protection is automatic for any original work.
Lasts for 70 years after author’s death
Can control how copyrighted work is exploited (e.g. license, royalties)
Protecting creative work of all kinds

Question 27

What are the factors affecting innovation in an organisation?

Answer 27

Leadership - what do the leaders want to happen, what do they value, what do they encourage
Benchmarking - understand and evaluate the current position of a business or organisation in relation to best practices and identify areas and means of performance improvement.

Question 28

What are the key steps of benchmarking?

Answer 28

1) Understand in detail existing business processes
2) Analyse the business process of others
3) Compare own business performance with others
4) Implement steps necessary to close performance gaps

Question 29

What is intrapreneurship?

Answer 29

Where large businesses enable employees and managers to demonstrate entrepreneurial behaviour in their work to the benefit of the employer.

Question 30

What is internationalisation?

Answer 30

Doing business abroad

Question 31

What is the driving the increasing internalisation of business?

Answer 31

Deeper specialisation of labour
Global supply chain and new trade and investment routes
Increasing communication
Technological advancements
Increasing global brands

Question 32

Why do businesses increasingly want to target international markets?

Answer 32

Reduce dependence on domestic markets
Access faster-growing markets and demand
Achieve economies of scale
Better serve customers located overseas
Build brand value, particularly global brands

Question 33

What are the main methods of entering international markets?

Answer 33

Exporting directly to international customers
Selling via international agents and distributors
Opening an operation overseas
Joint venture or takeover
Licensing - a business gives permission to a 3rd party to sell their goods and services abroad.
Direct investment - capital expenditure to establish a physical presence in another country.
Allinaces

Question 34

What has caused greater internationalisation?

Answer 34

Trade agreements
Improvements in transport
Improvements in communication technology

Question 35

What are the benefits of trade agreements?

Answer 35

Enables businesses in one country to focus on producing the goods and services that are relatively good at and buy the items which can be produced more efficiently abroad.

Question 36

What are the benefits of transportation costs falling?

Answer 36

Global trade has become more attractive
Companies standardise the size and design of containers so they can be fully loaded- quickly lifted off and onto lorries - put on a boat and stocked efficiently.

Question 37

What are the benefits of selling abroad?

Answer 37

A large target population - expanding overseas provides opportunities for fast growth in particular in emerging economies eg. India.
Opportunity to reduce risk - entering international markets may be an example of market development if products are essentially the same.

Question 38

What is a multi-national company?

Answer 38

A business that has operations in more than one country.
A business does not become an MNC simply because it sells goods and services overseas.
Business has operations in 2 or more countries.

Question 39

What are the benefits of MNC to the countries in which they operate?

Answer 39

Employment and training to the labour force in the host country.
Transfer of skills and expertise, helping to develop the quality of the host labour force.
Add to the country’s GDP through their spending e.g. with local suppliers.
Competition from MNCs acts as an incentive for domestic firms in the host country to improve their competitiveness, perhaps by raising quality.

Question 40

What are the potential drawbacks of MNCs?

Answer 40

Domestic businesses may not be able to compete with MNCs and some will fail.
MNCs may not feel they need to meet the host country expectations for acting ethically and/or in a socially responsible way.
Accused of imposing their culture on the host country.
Profits earned by MNCs may be remitted back to the MNC’s base country rather than reinvested in the host economy.
Make use of transfer pricing and other tax avoidance measures to significantly reduce the profit.

Question 41

What are the key reasons for the rapid growth of MNCs?

Answer 41

Global brands seeking to drive revenue and profit growth in emerging economies.
Search for economies of scale, to reduce unit costs by concentrating production on a few international locations.
Perceived need to supplement relatively weak demand in existing developed economies.
Need to operate in many countries to avoid protectionism.
Increasing takeover activity that has built a business with widespread international operations.

Question 42

What is the difference between offshoring and outsourcing?

Answer 42

Offshoring - work is done overseas
Outsourcing - someone else does the work

Question 42

Why do businesses move production overseas? (offshoring)

Answer 42

Manufacturing costs lower
Potentially better skilled and higher quality
Make use of existing capacity overseas
Take advantage of free trade areas

Question 43

What are the potential drawbacks of offshoring?

Answer 43

Longer lead times for supply
Implications for CSR
Additional management costs
Impact of exchange rates
Communication: language and time zones

Question 44

What is reshoring and what are the reasons for it?

Answer 44

Return of business activities from overseas back to the home country.
-problems maintaining quality abroad
-problems with delivery
-a fall in cost differential - if wages overseas rise faster than domestically
-desire to be seen to support domestic production and create jobs locally

Question 45

What is digital technology?

Answer 45

The use of technology to aid communication and connectivity with
customers and employees plus giving businesses the ability to
analyse multiple sets of data.

Question 46

What is the use of technology becoming more significant?

Answer 46

As technology has become a more permanent fixture in everybody’s lives so businesses have to use that technology to help them gain a competitive advantage.

Question 47

What is big data?

Answer 47

A data set which is too large and complex to manipulate or interrogate with standard methods or tools.
e.g. Walmart used big data to improve shelf-stocking, reducing out-of-stock items and improving customer experience.

Question 48

Why is big data important?

Answer 48

Big data expands customer intelligence – as a marketing tool big data is
invaluable. As customers we want businesses to remember us, to understand us
– this provides the sort of personal touch which traditionally only a small business could give us. Using big data enables businesses to:
Have purchase history information
Use customer relationship management software effectively (customer names, etc.)
Link to social media so that likes/dislikes considered.
Use information from partner businesses.
All of this information can help the business make the purchasing experience a
more personalised, pleasant one for customers – meaning they should become
loyal customers.

Question 49

What is data mining?

Answer 49

The practice of examining large pre-existing databases in order to generate new information.
e.g. Netflix’s recommendation engine is powered by data mining, improving user retention.

Question 50

Why is data mining important?

Answer 50

Can help companies identify patterns, predict consumer behaviour, and adjust strategies.
Without it, companies may struggle to maintain customer engagement in competitive markets.

Question 51

What is enterprise resource planning (ERP)?

Answer 51

Business management systems which integrate the data sources and processes of an entire organisation into one system. A single database.

Question 52

What is the purpose of ERP?

Answer 52

To improve the flow of information between all business functions within the organisation. Mostly used by manufacturing businesses.
Combines all the data into one place.

Question 53

What are the benefits of ERP?

Answer 53

Integration of all business processes
Greater efficiency from automation
Closer scrutiny of activities
The generation of Reports to analyse the effectiveness of the performance

Question 54

Why do businesses use Enterprise
Resource Planning (ERP)?

Answer 54

To reduce costs
To make business more accessible or other businesses to do business with
To efficiently manage future growth
To manage growth expectations in a co-ordinated manner
To improve customer response time to overcome difficulties in co-ordinating activities taking
place in different locations
To help innovation in order to increase added value

Question 55

What is the value of digital technology?

Answer 55

Higher living standards – DT has improved the efficiency with which businesses provide goods and services and this has led to improvements in wealth creation.

Greater competition: by improving communications and creating global markets digital technology has been a key factor in reducing the barrier to entry in many industries so leading to more rice competition.

Improved efficiency and reduced waste – cost effective use of resources benefits consumers and firms and in the long term resources last longer thus benefiting society

Advances in communication- have allowed businesses to improve their efficiency, customers to have their needs met more fully and for society to benefit from a much wider choice of goods
and services.