Topics 44-51 (Strategy) Flashcards
Definition of business aims
Things a business intends to do in the long-term. It is what a business strives to achieve. They are less specific than an objective and could be expressed as a vision.
Definition of mission statements
Mission statements declare the business’ overriding purpose, but may also reflect its goals and values.
Benefits of mission statements
- Creates a commitment to customers
- It can increase motivation
- Brings the workforce together
what are S.M.A.R.T objectives?
S - Specific
M - Measurable
A - Agreed
R - Realistic
T - Time specific
Potential drawback to business objectives
If they are unrealistic it can lower morale. They are also time and resource consuming. They must be constantly assessed to ensure they are correct.
What are the four parts of Ansoff’s matrix
Market Penetration
Market Development
Product Development
Diversification
Which part of Ansoff’s Matrix relates to an existing product in an existing market?
Market Penetration
Which part of Ansoff’s Matrix relates to an existing product in a new market?
Market Development
Which part of Ansoff’s Matrix relates to a new product in an existing market?
Product Development
Which part of Ansoff’s Matrix relates to a new product in a new market?
Diversification
Ways of achieving market penetration
- Increasing brand loyalty so that customers use the brand more regularily.
- Encouraging customers to use a product more
Benefits of market penetration
If a business has a successful product that it believes that it can generate more revenue from, then it may wish to use market penetration. It has the lowest level of risk.
What is product development?
marketing new or modified products into an existing market. This strategy may be appropriate for markets which typically have short life cycles or when consumer trends change quickly.
Two benefits and two drawbacks of using product development
- Associated with Kaizen
- Gains reputation for this
- Significant R&D investment
- Significant risk taken
What is market development?
The marketing of existing products into a new market. This could involve entering geographically new markets, or deciding to focus on a new target age group or ethnic group.
Benefits (1) and drawbacks (2) of market development?
- Allows business to expand into new markets and create a wider customer base.
- Risky as they may have different prefrences
- Relies on knowledge of the new market
What is diversification?
When new products are developed for new markets.
Explain one benefit and one drawback of diversification
- Enables business to move away from reliance upon existing markets and spread risk and increase safety.
- It will take a business outside the area of expertise which could be bad if they get it wrong.
What is Porters Strategic Matrix?
Porter’s Strategic Matrix identifies the sources of a competitive advantage. He says a business that does not adopt one of these strategies will be stuck in the middle.
What are the three types of competitive advantage that Porter identifies?
- Cost leadership
- Differentiation
- Focus
What is cost leadership (Porter’s Strategic Matrix)
Cost leadership involves striving to be the lowest-cost provider in the market. This does not necessarily mean that they will have the lowest price, although this may be an option. It only means they want to be the one with the lowest unit costs.
Benefits and drawbacks of cost leadership (Porter’s Strategic Matrix)
- Higher revenue compared to rivals
- Ability to lower prices below rivals
- Requires significant market share
- Usually results in a boring product
What is differentiation (Porter’s Strategic Matrix)
Differentiation involves a business taking a unique position in the market, normally a mass market. They usually substitute this position for the lowest cost position.
Benefits and drawbacks of differentiation (Porter’s Strategic Matrix)
- Can be adopted by any business
- Can charge a premium price
- Cannot guaratee a justification of price rises
What is focus (Porter’s Strategic Matrix)
Focus involves targeting a narrow range of customers in one of two ways. It is linked to a niche market. It can be in the form of cost focus (ALDI) or differentiation focus (Ferrari)
Benefits and drawbacks of focus (Porter’s Strategic Matrix)
- Understands customers very well
- Meets customer needs
- High customer satisfaction
- Small bargaining power with suppliers
What are John Kay’s (1995) three types of distinctive capability.
- Architecture - structure and organisational
- Reputational - associations of the business
- Innovation - new products or services
What is an internal audit
An internal audit is an analysis of the business itself and how it operates, attempting to identify the pros and cons of its operations. It may cover products, finance, the production process and HR.
What is an external audit
An external audit is an analysis of the environment in which a business operates and over which it has little to no control. This audit is likely to assess 3 key areas including the market, competition and PESTLE.
What do the letters of S.W.O.T analysis stand for?
Strenghts
Weaknesses
Opportunities
Threats
What do the letters of P.E.S.T.L.E analysis stand for?
P- Political
E- Economic
S- Social
T- Technological
L- Legal
E- Environment
Why would political factors have an affect on a business? (PESTLE)
Some parts of the world are particularly volatile and should be approached with caution. This can have an effect in both stable and unstable countries.
Why would economic factors have an affect on a business? (PESTLE)
The general state of the economy has a large impact on businesses. Trading conditions can become very difficult for certain businesses during a recession, but it can be good too.
Why would social factors have an affect on a business? (PESTLE)
Social and cultural changes can impact a business, however they are usually slow changes.
Why would technological factors have an affect on a business? (PESTLE)
Businesses normally welcome technological advances as they can provide new opportunities or help to improve efficiency. But, they can shorten the life cycle of products.
Why would legal factors have an affect on a business? (PESTLE)
Legislation may be directed at businesses to protect vulnerable groups that might otherwise be exploited.
Why would environmental factors have an affect on a business? (PESTLE)
Global warming and climate change has led to people becoming more protective of the environment.
What are Porter’s 5 forces? (Porter’s 5 Forces)
Bargaining power of suppliers
Bargaining power of customers
Threat of new entrants
Threat of substitutes
Rivalry among existing businesses
Ways to reduce the bargaining power of suppliers? (Porter’s 5 Forces)
Grow vertically
Encourage competition between suppliers
Use technical research to find suppliers
Minimise information given to suppliers so that they do not realise the power they have.
Ways to reduce the bargaining power of customers? (Porter’s 5 Forces)
Extend into the buyers market through forward vertical integration. This could encourage other businesses to enter the market and reduce customers’ existing power. They could also make it expensive for a customer to switch suppliers.
Ways to counteract the threat of new entrants? (Porter’s 5 Forces)
Installing barriers to entry, such as patents, or creating a strong brand and building a loyal customer base. This will lead to them being less elastic and less price sensitive.
Ways to counteract the threat of new substitutes? (Porter’s 5 Forces)
Research & development, and then patenting it to prevent others from copying it. They can also use marketing tactics to prevent the spread of substitutes.
Ways to reduce the threat of rivalry between existing firms? (Porter’s 5 Forces)
Forming cartels or engaging in some anti-competitive practices, such as raising prices to an abnormal level, restricting consumer choice, raising barriers to entry and market sharing.
Definition of economies of scale
Economies of scale is where unit costs will fall as the level of output rises.
What is the law of diminishing returns?
The law of diminishing returns is where a rise in output will also lead to a rise in costs.
What does it mean for a business to be productively efficient?
If unit costs cannot be reduced by any further expansion.
What are internal economies of scale?
Benefits of growth that arise from within the firm.
Examples of internal economies of scale
Purchasing economies of scale
Technical economies of scale
Specialisation economies of scale
Financial economies of scale
Risk-bearing economies of scale
What is purchasing economies of scale?
buying components and raw materials can be cheaper when buying in bulk. Additionally, admin costs of purchasing larger orders do not change.
What is technical economies of scale?
This arises when larger plants are often more efficient. Capital costs and running costs do not rise in proportion to their size. Sometimes called the principle of increased dimensions.
What is specialisation economies of scale?
Growth may allow a business to employ specialised managers, which increase efficiency and average costs.
What is financial economies of scale?
Larger firms have more choice when looking to raise finance. They may find it easier to get a loan, persuade investors or even be able to sell shares on the stock market.
What is risk-bearing economies of scale?
As a firm grows it may diversify to reduce risk. This can reduce the businesses chance of failure and hardship.
What is external economies of scale?
Reductions in cost which any business in an industry may enjoy as the industry grows.
Examples of external economies of scale
Labour
Ancillary and commercial services
Cooperation
Disintegration
Explain how labour can act as an external form of economies of scale
Concentration of firms may lead to increased skills from the workforce. This can reduce the training costs if workers have already gained skills from another firm in the industry.
How can ancilliary and commmercial services act as a form of external economies of scale?
Established industries attract smaller firms trying to serve its needs. This means a wide range of commercial support can be offered.
How can cooperation act as an external form of economies of scale?
Firms in the same industry are more likely to co-operate if they are in the same region. Might join forces to fund a R&D project, or publish an industry journal / newsletter so that information can be shared.
How can disintegration act as an external form of economies of scale?
This occurs when production is broken up so that more specialisation can take place. When an industry is concentrated in one area, firms might specialise in one component and then transport it to a main assembly line.
How is increased market share and brand recodnition positively affect a business?
Ability to charge higher prices
Create customer loyalty
Develops an image
They can launch new products easier
What are some problems that could arise from growth?
Diseconomies of scale
Internal communication problems
Overtrading
What is a merger?
Where two or more companies join together and operate as one. Usually conducted with the agreement of both businesses. Generally ‘friendly’.
What is a takeover?
Also known as acquisitions, this occurs when one business buys another. Public limited companies can be traded openly and anyone can buy them, so if another company buys 51% of the shares, they can be acquired.
Reasons for mergers and takeovers
Synergies (2+2=5)
Cheap form of expansion
Defensive reasons
Easy for international expansion
To exploit economies of scale
Asset stripping
What is horizontal integration?
When two firms that are in exactly the same line of business join together.
What is vertical integration?
When firms in different stages of production join together. Forward vertical integration is where a business joins with another that is in the next stage of production, and backward vertical integration is where a business joins with another that is in the previous stage of production.
What are some drawbacks of mergers and takeovers
Regulatory intervention (CMA)
Resistance from employees
Inital cost
Bidding wars
Problems with rapid growth
Drain on resources
Ability to cope with change
Alienation of customers
Loss of control
Shortages of resources
Difference between organic and inorganic growth
Businesses growing through mergers or takeovers is known as external growth or inorganic growth. Internal growth or organic growth occurs when a business grows naturally by selling more of its output using its own resources.
