Strategic methods: how to pursue strategies Flashcards
What is the definition of economies of scale?
When unit costs fall as output increases.
How are unit costs calculated?
Total production costs / Total output
What are internal economies of scale?
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).
What are external economies of scale?
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.
What is economies of scope?
Where it is cheaper to produce a range of products rather than specialise in a minimal number.
e.g. Amazon, Hypermarkets
Why do businesses grow?
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
What is internal growth and what are examples of this?
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.
What are the benefits of internal growth?
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.
What are the drawbacks of internal growth?
Growth achieved may be dependent on the growth of the overall market.
Hard to build market share if business is already a leader.
What is external growth?
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
What is the difference between internal and external growth?
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
What is retrenchment?
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.
Why do businesses retrench?
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
How is retrenchment shown in a business?
Reduce output and capacity
Job losses - delayering
Product/market withdrawal
Disposable of business unit
Scaling back investment
What is invention?
The formulation of new ideas for products or processes.
What is innovation?
The practical application of new inventions into marketable products or services.
What is product innovation?
Launching new or improved products/services on to the market.
What is process innovation?
Finding better or more efficient ways of producing existing products, or delivering existing services.
What are the advantages of product innovation?
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
What are the benefits of innovation?
Improved productivity
Building a brand
Builds a strong organisational culture which should attract more talent
What are the advantages of process innovation?
Reduced costs
Improved quality
More responsive customer service
Greater flexibility
Higher profits
What are the problems with innovation?
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.
What is the conclusion of innovation?
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?
What are kaizen groups?
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.
Why seek to protect intellectual property?
Keep control of intellectual property
Maintain “unique selling point”
Maximise return on investment
Reduce threat of competition
How can a patent protect an invention?
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)
What is the purpose of copyright?
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
What are the factors affecting innovation in an organisation?
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.
What are the key steps of benchmarking?
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
What is intrapreneurship?
Where large businesses enable employees and managers to demonstrate entrepreneurial behaviour in their work to the benefit of the employer.
What is internationalisation?
Doing business abroad
What is the driving the increasing internalisation of business?
Deeper specialisation of labour
Global supply chain and new trade and investment routes
Increasing communication
Technological advancements
Increasing global brands
Why do businesses increasingly want to target international markets?
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
What are the main methods of entering international markets?
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
What has caused greater internationalisation?
Trade agreements
Improvements in transport
Improvements in communication technology
What are the benefits of trade agreements?
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.
What are the benefits of transportation costs falling?
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.
What are the benefits of selling abroad?
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.
What is a multi-national company?
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.
What are the benefits of MNC to the countries in which they operate?
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.
What are the potential drawbacks of MNCs?
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.
What are the key reasons for the rapid growth of MNCs?
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.
What is the difference between offshoring and outsourcing?
Offshoring - work is done overseas
Outsourcing - someone else does the work
Why do businesses move production overseas? (offshoring)
Manufacturing costs lower
Potentially better skilled and higher quality
Make use of existing capacity overseas
Take advantage of free trade areas
What are the potential drawbacks of offshoring?
Longer lead times for supply
Implications for CSR
Additional management costs
Impact of exchange rates
Communication: language and time zones
What is reshoring and what are the reasons for it?
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
What is digital technology?
The use of technology to aid communication and connectivity with
customers and employees plus giving businesses the ability to
analyse multiple sets of data.
What is the use of technology becoming more significant?
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.
What is big data?
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.
Why is big data important?
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.
What is data mining?
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.
Why is data mining important?
Can help companies identify patterns, predict consumer behaviour, and adjust strategies.
Without it, companies may struggle to maintain customer engagement in competitive markets.
What is enterprise resource planning (ERP)?
Business management systems which integrate the data sources and processes of an entire organisation into one system. A single database.
What is the purpose of ERP?
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.
What are the benefits of ERP?
Integration of all business processes
Greater efficiency from automation
Closer scrutiny of activities
The generation of Reports to analyse the effectiveness of the performance
Why do businesses use Enterprise
Resource Planning (ERP)?
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
What is the value of digital technology?
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.
What is synergy?
2 businesses joined together will be able to achieve more than the sum of 2 businesses operating separately.
e.g. shared resources, increased expertise, joint marketing, complimentary products, securing a supplier of customer.
What is overtrading?
A business has expanded too rapidly resulting in it operating at a level beyond its resources leading to liquidity problems.
What is integration?
The brining together of 2 or more businesses.
What is horizontal integration?
2 businesses at the same stage within a process integrate.
What is vertical integration?
2 businesses at different stages within a process integrate.
What is forward vertical integration?
When a business joins with a business at the next stage in the process e.g. manufacturer with a retailer.
What is backward vertical integration?
When a business joins a business at an earlier stage in the process e.g. a manufacturer with a supplier of a raw material.
What are joint ventures?
2 or more businesses agree to act collectively to set up a new business venture with all parties contributing equal equity to fund the set up and purchase of assets.
