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A-Level Business > unit 9 > Flashcards

unit 9 Flashcards

1
Q

why do business grow

A
  • increase shareholder value
  • increase market share
  • reduce average cost
  • fulfil an objective of growth
  • stakeholders perception of success
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2
Q

reasons for retrenchment

A
  • downsizing the scale of the business operations eg closing branches, selling off parts of the business, delayering
    - Possible reasons include
  • restructure to increase efficiency
  • turn around poor performance
  • focus on core business
  • sell of less profitable parts of business to improve overall performance
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3
Q

organic growth

A

when a firm grows with its existing business eg increasing capacity and outlets

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4
Q

external growth

A

is growth that is dependant on other businesses and may be via mergers, takeover or joint ventures

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5
Q

how to calculate unit costs

A

total output in period (units)

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6
Q

economies of scale

A

economies of scale arise when unit costs fall as output increases

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7
Q

internal economies of scale

A

arise from the increased output of the business itself

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8
Q

external economies of scale

A

occur within an industry: i.e. all competitors benefit

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9
Q

technical economies of scale

A

as firms grow, they are often able to invest heavily in automation in order to further improve their efficiency and productivity.

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10
Q

managerial economies of scale

A

smaller firms are often unable to afford manager with specialist expertise (eg in finance, HR, marketing)

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11
Q

purchasing economies of scale

A

the major grocery supermarket chains are able to obtain much lower prices from key suppliers than smaller independent retailers

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12
Q

marketing economies of scale

A

spreading a fixed marketing spend over a larger range of products, markets and customers

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13
Q

network economies

A
  • adding extra customers or users to a network that is already established (eg mobile phones, Netflix)
  • adding an extra customer adds little extra costs to the business and spreads the fixed over more customers
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14
Q

whats external economies of scale

A
  • external economies of scale occur when a whole industry grows larger and firms benefit from lower long run average costs
  • often associated with particular geographic areas eg creative and media in London
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15
Q

economies of scope

A
  • where it is cheaper to produce a range of products rather than specialise in a very limited number
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16
Q

diseconomies of scale

A
  • diseconomies lead to a rise in unit costs
  • they happen when a business expands beyond an optimum size and loses productive efficiency, causes:
  • control
  • negative effects of internal politics
  • co operation
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17
Q

what is over trading

A

overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion

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18
Q

overtrading is most likely to happen when

A
  • growth is achieved my significant capital investment in production or operations capacity before revenues are generated
  • sales are made on credit and customers take too long to settle amounts owed
  • significant growth in inventories is required in order to trade from the expanding capacity
  • a long term contract requires a business to incur substantial costs before payments are made by customers under the contract
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19
Q

classic symptoms of over trading

A
  • high revenue growth but low gross and operating profit margins
  • persistent use of a band overdraft facility
  • significant increases in the payables days and receivables day ratios
  • significant decrease in the current ratio
  • very low inventory turnover ratio
  • low levels of capacity utilisation
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20
Q

how to manage the risk of overtrading

A
  • reducing inventory levels
  • scaling back the pace of growth until profit margins and cash reserves have improved
  • leasing rather than buying capital equipment
  • obtaining better than payment terms from suppliers
  • enforcing better payment terms with customers
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21
Q

what is synergy

A

happens when the value of two business brought together is higher than the sum of the value of the two individual businesses ie 2 is better than 1

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22
Q

what is retrenchment

A

‘to cut down or reduce something’
‘use resources more carefully’

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23
Q

examples of retrenchment in business

A
  • reduce output and capacity
  • job loses
  • product / market withdrawal
  • disposal of business unit
  • scaling back investment
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24
Q

what drives retrenchment

A
  • costs too high
  • low ROCE
  • high gearing
  • loss of market share
  • failed turnover
  • economic downturn
  • change of ownership
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25
Q

implications for change management

A
  • will depend on the scale and scope of the retrenchment
  • small scale, incremental retrenchment has only limited impact
  • significant retrenchment is often associated with a fundamental reappraisal of the business
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26
Q

retrenchment and change and the possible implications

A

changed organisation structures
- changed managements responsibilities
- greater workloads/higher stress
- new teams and colleagues
- different reporting structures

new leadership and/or ownership
- different leadership style
- uncertainly
- new priorities, aims and objectives
- a threat to the prevailing corporate culture
- previous projects often abandoned

fewer people
- loss of morale and motivation
- bad news for some external stakeholders

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27
Q

what are strategic methods

A

Strategic methods refer to the different strategies a business might pursue to achieve its objectives

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28
Q

what are the forms of growth

A

organic
external
merger

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29
Q

whats organic growth

A

This occurs when a business grows through expanding its own operations; for example, it sells more of its existing products or launches new products for its customers.

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30
Q

whats external growth

A

This involves growth by joining with other businesses; for example, one business may gain a controlling share of another organisation.

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31
Q

whats merger growth

A

In a merger the owners of company A and company B become joint owners of a new organisation.

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32
Q

what are purchasing economies of scale

A

As a business gets bigger it will purchase more supplies. This gives it more bargaining power over suppliers. Suppliers become dependent on the business and may be willing to reduce their prices to keep the orders.

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33
Q

whats technological economies of scale

A

These occur when a large scale of operations enables particular technologies to be used efficiently. For example, imagine a small farm has to have various pieces of equipment, such as a tractor and harvesting equipment

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34
Q

what are financial economies of scale

A

As a business gets bigger it has more assets and this may mean a bank is willing to lend to it at lower interest rates as the risk is lower.

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35
Q

what are managerial economies of scale

A

As a business expands it may bring in specialists to focus on parts of the business.
For example, an expanding business may create a specialist HR department which is probably not cost effective in a small business.

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36
Q

what are economies of scope economies of scale

A

Whereas economies of scale refers to unit costs falling when more of one product is produced, economies of scope are cost savings from operating in several markets or providing several products.

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37
Q

whats the experience curve

A

As businesses grow employees gain experience. Their managers become more familiar with what needs doing when, who to ask to do what, where to get supplies from, how to fix problems and how to deal with particular issues. This makes decision making faster and better.

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38
Q

whats synergy

A

Synergy occurs when you put two businesses together and as a combined unit they perform better than they did as individual parts.

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39
Q

why can diseconomies of scale occur / problems with growth

A
  • communication
  • control and coordination
  • motivation issues
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40
Q

benefits of organic growth

A
  • less his than external growth
  • can be financed through internal funds
  • builds on business strengths
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41
Q

disadvantages of organic growth

A
  • growth achieved may be dependant on the growth of the overall market, generally slower
  • hard to build market share if business is already a leader
  • franchises (if used) can be hard to manage effectively eg McDonalds
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42
Q

what is franchising

A

franchising arises when a franchisor grants a licence (franchise) to another business (franchisee) to allow it trade using the brand / business format

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43
Q

drawbacks of franchising

A
  • not cheap, initial fees + royalties and commission
  • restrictions on actions, including selling
  • franchisor owns the brand
  • franchisor may fail
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44
Q

benefits of franchising

A
  • running own business
  • tried and tested brand
  • advice, support, training
  • easier to raise finance
  • buying power to franchisor
  • lowers the risk of market entry
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45
Q

why franchising works for the franchisor

A
  • a classic growth strategy for a proven business format
  • enables much quicker geographical growth for a relativity low investment
  • still have the option to open locations that are operated by the franchisor
  • capital investment by franchisees is an important source of growth finance
46
Q

whats is a joint venture

A

a separate business entity created by two or more parties, involving shared ownership, returns and risks

47
Q

potential benefits of a joint venture

A
  • JV partners benefit from each other expertise and resources
  • each JV partner might have the option to acquire in the future the JV business based on agreed terms if it proves successful
  • reduces the risk of a growth, particularly if it involves entering a new market or diversification
48
Q

potential drawbacks of a joint venture

A
  • there may be an imbalance in the level of expertise, investment and assets bought to the venture
  • the objectives of each party may differ
  • different cultures and management styles may hinder progress
49
Q

what is a takeover

A

a takeover (or acquisition) involves one business acquiring control of another business

50
Q

possible reasons for take over

A
  • increase market share
  • access economies of scale
  • secure better distribution
  • acquire intangible assets
  • spread risks by diversifying
  • overcome barriers to entry to target markets
  • defend itself against a take over threat
  • enter new segments of an existing market
  • to eliminate competition
51
Q

types and direction of integration

A
  • forward vertical
  • backward vertical
  • horizontal
  • conglomerate
52
Q

whats forward vertical direction of integration

A

acquiring a business further up in the supply chain eg manufactures buys a distributor

53
Q

whats backward vertical direction of integration

A

acquiring a business operating earlier in the supply chain eg a retailer buys a wholesaler

54
Q

whats horizontal directions of integration

A

acquiring a business at the same stage of the supply chain eg a manufacturer buys a competitor

55
Q

potential benefits of horizontal integration

A
  • achieve economies of scale
  • cost synergies from the rationalisation of the business and revenue singers from distribution
  • wider range of products
  • reduces competition
55
Q

whats conglomerate directions of integration

A

where the acquisition has no clear connection to the business buying it

56
Q

eg of horizontal integration

A
  • Dec 2015 dominoes buys largest German pizza chain for $86m
57
Q

potential benefits of vertical integration

A
  • enables a business to capture a greater share of the profit on each sale
  • secures important sources of supply or distribution
  • create a barrier to entry to potential new competitors
  • gain greater insights into customer needs and wants at each stage of the supply chain
58
Q

eg of vertical integration

A
  • Netflix, producing their own originals
  • Nov 2015 apple buys Star Wars notion capture company face shift
59
Q

whats invention

A

formulation of new ideas for products or processes

60
Q

whats innovation

A

practical applications of new inventions into marketable products or services

61
Q

two main types of innovation

A

product innovation - launching new or improved markets (or services) on to the market
process innovation - finding better or more efficient ways of producing existing products, or delivering existing services

62
Q

advantages of product innovation

A
  • higher prices and profitability
  • opportunities to build early customer loyalty
  • enhanced reputation aș an innovative company
  • PR coverage
  • increased market share
63
Q

process innovation advantages

A
  • reduced costs
  • improved quality
  • more responsible customer service
  • greater flexibility
  • higher profits
64
Q

whats kaizen groups

A
  • 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
65
Q

innovative firms must protect intellectual property to…

A
  • keep control of intellectual property
  • maintain “usp”
  • maximise return on investment
  • reduce threat of competition
66
Q

protecting an invention - patents

A

a patent prevents other firms copying your idea and lasts for 20 years in the UK
to be protected by a patent, the invention must be:
- new
- an innovative step
- capable of industrial application

67
Q

whats copyright

A

important protection for many creative industries eg media, design, publishing
- protection is automatic for any original work
- lasts for 70 years after authors death
- can control how copyrighted work is exploited

68
Q

what is benchmarking

A

the objective of benchmarking is to understand and evaluate the current position of a business to organisation in relation to best practice and to identify areas and means of performance improvement

69
Q

4 keys steps in benchmarking

A
  1. understand in detail existing business processes
  2. analyse the business processes of others
  3. compare own business performance with others
  4. implement steps necessary to close performance gaps
70
Q

main types of benchmarking

A
  • strategic benchmarking
  • performance or competitive benchmarking
  • internal benchmarking
  • external benchmarking
71
Q

what is strategic benchmarking

A

examines the long term strategies and general approaches that have enabled high - performance to succeed

72
Q

performance or competitive benchmarking

A

business consider their position in relation to performance characteristics of key products and services eg delivery times

73
Q

internal benchmarking

A

benchmarking business’s or operations from within the same organisation, eg business units in different countries

74
Q

external benchmarking

A

analysing outside organisations that are simply known to be ‘best in class’

75
Q

what is intrapreneurship

A

where large businesses enable employees and managers to demonstrate entreprenurial behaviour in their work to the benefit of their employer

76
Q

ways to encourage and facilitate intrapreneruship

A
  • structured time away from work to allow employees and managers to develop business ideas
  • build cross functional trams to lead innovation projects
  • secondments of staff to smaller businesses or startups
  • staff companions and innovation days
77
Q

reasons why large businesses are not entrepreneurial

A
  • complacency / arrogance
  • bureaucracy
  • reward systems do not provide an incentive to innovate
  • short termism
78
Q

what large businesses need for successful intrapreneruship

A
  • senior management support (eg mentoring) and resources
  • communication: clear signal that business encourages / celebrates new ideas
  • culture of innovation and creativity
  • rewards systems: financial and other incentives for innovation
79
Q

what is globalisation

A

a process in which national economies have become increasingly integrated and inter-dependant

80
Q

reasons for greater globalisation

A
  • trade agreements
  • reduced tariffs and protectionism
  • expansion of global trading blocks
  • improved technology
81
Q

benefits to globalisation

A
  • access to new markets
  • economies of scale
  • source cheaper
  • access to finance
  • greater economic growth
  • spreads risk
82
Q

challenges to globalisation

A
  • greater global competition
  • exchange rates
  • cultural consideration
  • geopolitical development
  • global supply chains and coordination
83
Q

whats protectionism

A

policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors.

84
Q

what are emerging economies

A

an emerging market economy is transitioning from a low income, less developed, often pre industrial economy toward a modern, industrial economy with a higher standard of living

85
Q

positive characteristics of emerging markets

A
  • high economic growth (7-10%)
  • large population
  • rising middle incomes
  • greater openness to trade
  • developing regulatory systems
86
Q

potential limitations of emerging markets

A
  • political volatility
  • economic volatility - inflation, exchange rates
  • poor infrastructure
87
Q

whats offshoring

A

Offshoring involves the relocation of business activities from the home country to a different international location.

88
Q

why to offshore

A
  • to access lower manufacturing costs (particularly in emerging markets which enjoy the advantage of lower labour costs)
  • To access potentially better skilled & higher quality supply
  • To makes use of existing capacity overseas
  • To take advantage of free trade areas and avoid protectionism
  • To make it easier to supply target international markets (where it is important to be located in, or near to, those markets)
89
Q

whats reshoring

A

Reshoring is the reverse of offshoring. it involves a business returning production or operations to the host country that had previously been moved to a different international location.

90
Q

why do business reshore

A
  • Greater certainty around delivery times (including shorter delivery times)
  • Minimising risk of supply chain disruptions
  • Reducing the complexity of the supply chain
  • Making it easier to collaborate with home-based suppliers
  • Getting greater certainty about the quality of inputs and components
  • Recognising that the cost advantage of producing or sourcing overseas is not as significant as it used to be (particularly in China where unit labour costs have risen significantly in recent years).
91
Q

methods of entering external markets

A
  • exporting
  • licensing
  • ventures
  • ## direct investment
92
Q

what is the Bartlett and ghoshal model

A

indicates the strategic options for the businesses wanting to manage their international operations based on two pressures local responsiveness and global integration

93
Q

force for local responsiveness

A
  • do customers in each country expect the product to be adapted to meet local requirements
  • do local (domestic) competitors have an advantage based on their ability to be more responsive
94
Q

for the global integration

A
  • how important is standardisation of the product in order to operate efficiently (eg economies of scale)
  • is consistent global branding required in order to achieve international success
95
Q

what strategy is where there is a high need to keep costs down and products standardised - Bartlett and Ghoshal called this a

A

Global Strategy

96
Q

whats a global strategy - Bartlett and Ghoshal

A
  • low pressure for local responsiveness
  • high pressure for global integration
  • highly centralised
  • focus on efficiency
  • little sharing expertise locally
  • standardised products
    EG pfizer, Cat
97
Q

what strategy is it when there is a strong need to meet local demands - Bartlett and Ghoshal

A

multi domestic strategy

98
Q

whats multi domestic strategy - Bartlett and Ghoshal

A
  • high pressure for local responsiveness
  • low pressure for global integration
  • aims to maximise benefits of meeting local markets needs through extensive customisation
  • decision making decentralised
  • local businesses treated as separate businesses
  • strategies for each country
    EG nestle, music television
99
Q

why do businesses move production overseas (offshoring)

A
  • manufacturing costs lower
  • potentially better skilled and higher quality
  • makes use of existing capacity overseas
  • take advantage of free trade areas
100
Q

what are potential drawbacks with offshoring

A
  • longer lead times for supply
  • implication of CSR
  • additional management costs
  • impact of exchange rates
  • communication: language + time zone
101
Q

key pressures on business to adopt digital technology

A
  • serve exisitng cusomters better via data analysis
  • reach new customers in new segments and locations
  • offer new ways of delivering products and services using digital technology
  • reduce costs by integrating digital technology into operations
  • the need to respond to digital innovation by competitors
102
Q

whats e commerce

A

involves digitally enabled commercial transactions between and among organisations and individuals

103
Q

what is creative destruction

A

he process of new innovations replacing existing ones, which can lead to the destruction of existing economic structures, such as industries, firms, and jobs.

104
Q

examples of creative destruction

A
  • music and book retailing (Amazon)
  • Grocery retailing (Ocado, Amazon, Tesco)
105
Q

key imapcts of e commerce on marketing

A
  • marekting strategy of differtiation increasingly effective
  • product life cycles are shortened
  • greater use of digital promotion
  • brands and retailers increasingly using multiple distribution channels
  • greater use of dynamic pricing
  • increased need for localisation
  • ability to sell a much wider product range
106
Q

what is big data

A

refers to the generation of humongous amounts of data that are too large for many software applications to handle

107
Q

reasons for the exponential growth of big data

A
  • retail e-commerce database
  • user interactions with websites, mobile apps, social media
  • usage within logisitcs, transportation systems, financial and health care
  • location data
  • internet of things data generated
108
Q

key business applications of big data

A
  • tracking and monitering the performance, safety and relibaility of operational equipment
  • generting marketing insights into the needs and wants of customers
  • improved decision making
  • better security of business systems
  • more efficient managment of capacity
109
Q

what is data mining

A

is the process of analysing data from different perspectives and summarising it into useful information, including discovery of previsouly unknown interesting patterns, unusual records or dependencies

110
Q

some examples of how data mining can help a business improve competitivness

A
  • sales forcasting
  • database marketing
  • market segmentation
  • E-commerce basket analysis

A-Level Business (22 decks)

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