unit 9 Flashcards
reasons for growth
- increase shareholder value
- increase market share
- decrease average costs
- fulfil an objective of growth
- stakeholders perception of success
reasons for retrenchment
- downsizing the scale of business
operations (closing, delayering,
selling off parts) - possible reasons include
- restructure to increase
efficiency
- restructure to increase
- turn around poor business
- focus on core business
- sell off less profitable parts of
business to improve overall
performance
what is organic growth
when a firm grows with its existing businesses (increasing capacity and outlets)
what is external growth
is growth that is dependent on other businesses and may be via merges, takeovers or joint ventures
economies of scale
economies of scale arise when unit costs fall as output increases
concept links to economies of scale
- efficiency
- unit costs
- productivity
- market share
- competitive advantage
unit cost formula
total output in period (units)
internal economies of scale
arise from the increased output of the business itself
external economies of scale
occur within an industry: all competitors benefit
technical economies of scale
as firms grow, they are often able to invest heavily I automatic in order to further improve their efficiency and productivity
managerial economies of scale
smaller firms are often unable to afford manager with specialist expertise (finance, HR, marketing)
what is marketing economies of scale
spring a fixed marketing spend over a larger range of products, markets and customer
what is network economies
- adding extra customers or users to a
network that is already established
(netlfix) - adding an extra customer adds little
extra cost to the business and spreads
the fixed costs over more customer
what is financial economies
larger firms benefit from access to more and cheaper finance
what’s external economies of scale
- occur when a whole industry grows
larger ad firms benefit from lower
long-run average costs - associated with particular geographic
areas - examples
(having many specialists suppliers
close by,
access to research and development
facilities,
pool of skilled labour to choose from)
economies of scope
where its cheaper to produce a range of products rather than specialise in a very limited number.
- hypermarkets
- amazon
- proctor & gamble
what is overtrading
happens when a business expands too quickly without having the financial resources to support such a quick expansion
when is overtrading most likely to happen
- growth is achieved by making 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 I investors 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
symptoms of overtrading
- high revenue growth but low
gross and operating profits - persistent use of bank overdraft
facility - significant increases in the
payable days and receivables
days ratio - significant decrease in the
current ratio - very low inventory turnover
ratio - low levels of capacity utilisation
what are the most effective steps to avoid overtrading are essentially those that would be taken as part of a sensible cash flow and working capital management
- reducing inventory level
- scaling back the pace of growth until
profit margin and cash reserves have
improved - leasing rather than buying capital
equipment - obtaining better payment terms from
suppliers - enforcing better payment terms with
customers
synergy definition
happens when the value of two businesses brought together us higher than the sum of the value of the two individual businesses. in other words, when synergy happens, 1+1 = more than 2!
what are the two types of synergy
cost saving :
- eliminate duplicated functions and
services
- better deals from suppliers
- higher productivity and efficiency
from shared assets
revenue:
- cross-selling to customers of both
businesses
- access to new distribution
- brand extensions
- new geographic markets opened up
what is retrenchment
- to cut down or reduce something
- use resources more carefully
examples of retrenchment in business
reduce output & capacity
- product/market withdrawal
- disposal of business unit
- job losses
- calling back investment
what drives retrenchment
- costs too high
- low ROCE
- high gearing
- loss of market share
- failed takeover
- economic downturn
- change of ownership
implication for change management
- 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
what is organic growth
involves expansion from within a business, for example by expanding the product range, or number of business units and locations
advantages of organic growth
- less risk than external growth
- can be financed through internal
funds - builds o a business strengths
disadvantages of organic growth
- growth achieved may be dependent
on the growth of the overall market - hard to build market share if business
is already a leader - franchisees can be hard to manage
effectively (McDonalds)
what is franchising
arises when a franchisor grants a licence to another business to allow it trade using the brand/business format
advantages of franchising
- running your own business
- tried & tested brand
- advice, support, training
- easier to raise finance
- buying power of franchisor
- lowers the risk of market entry
disadvantages of franchising
- not cheap! initial fees + royalties &
commission - restrictions on actions, including
selling - franchisor owns the brand
- franchisor may fail
why does franchising work for the franchisor
- a classic growth strategy for a proven
business format - enables much quicker geography
growth for a relatively 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
potential benefits of a joint venture
- JV partners benefit from each others
expertise and resources (market,
knowledge, customer base,
distribution channels, R&D expertise) - 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 strategy -
particularly if it involves entering a
new market to diversification
potential drawbacks of a joint venture
- there may be an imbalance in the
level of expertise, investment and
assets bought to venture - the objectives pf each party may differ
- different cultures and management
styles may hinder progress
what is a takeover
involves pone business acquiring control of another business
possible reasons for takeovers
- increase market share
- access economies of scale
- secure better distribution
- acquire intangible assets
- spread risks by diversifying
- overcome barriers to entry to
target market - defend itself against a takeover
threat - enter new segments of an
existing market - to eliminate competition
types and direction of integration
- forward vertical
- horizontal
- backwards vertical
- conglomerate
what is forward + vertical direction
acquiring a business further up in the supply chain - manufacturing buys a distributor
what is backward + vertical direction
acquiring a business operating earlier in the supply chain - a retailer buys a wholesale
what is horizontal directions
acquiring a business at the same stage go the supply chain eg a manfucature buys a competitor
what’s conglomerate directions of integration
where the acquisition has no clear connection to the business buying it
potential benefits of horizontal integration
- achieve economies of scale
- cost synergies from the rationalisation of the business and revenue synergies
- wider range of products
- reduces competition
potential benefits of vertical integration
- 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 - Gai greater insights into customer
needs and wants at each stage of the
supply
what is invention
formulation of new ideas for products or processes
what is innovation
practical application of new inventions into marketable products or services
what are the two main types of innovation
product - launching new or improved products too the market
process - finding better or more efficient ways of producing existing products, or delivering existing
what are the advantages if product innovation
- higher prices and profitability
- opportunity to build early
customer loyalty - enhanced reputation as an
innovative company - PR coverage
- increased market share
what are the advantages of process innovation
- reduced costs
- improved quality
- more responsive customer
service - greater flexibility
- higher profits
what is 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
what must innovative firms protect intellectual property to
- keep control of intellectual property
- maintain “unique selling point”
- maximise return on investment
- reduce threat of competition
whats copyright
- important protection for many
creative industries - e.g. media,
design, publishing - lasts for 70 years after author death
- can control how copyrighted work is
exploited
what is globalisation
a process in which national economies have become increasingly integrated and inter-dependent
reasons for greater globalisation
- containerisation
- trade agreements
- reduced tariffs and protectionism
- expansion of global trading blocks
- improved technology
benefits of globalisation on companies
- access to new markets
- economies of scale
- source cheaper
- access to finance
- greater economic growth
- spread risk
disadvantages of globalisation on companies
- greater global competition
- exchange rates
- cultural consideration
- geopolitical development
- global supply chains and coordination
what are emerging economies
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
positive characteristics of emerging markets
- high economic growth (7-10% per
year) - large populations
- rising middle incomes
- greater openness to trade
- developing regulatory systems
limitations characteristics of emerging markets
- political volatility
- economic volatility - inflation,
exchange rates - poor infrastructure
what makes them an attractive market
- high economic growth - higher
incomes, greater disposable income - market not yet served domestically
and little competition - first mover advantage, potential for
significant sales - established market
share - own domestic markets may be
saturated - scope for economies of scale
what is the bartlettt and ghoshal model
indicates the strategic options for business wanting to manage their international operations based on two pressures: local responsiveness and global integration
what are the two factors in this model
- force for local responsiveness
- do customers in each country
expect the product to be adapted
to meet local requirements - do lock have an advantages based
on heir ability to be more responsive
- do customers in each country
- force for global integration
- how important is standardisation of
the product in order to operate
efficiently - is consistent global branding
required in order to achieve
international success
- how important is standardisation of
what is global strategy
- where there is high need to keep
costs down and products
standardised - low pressure for local responsiveness
- high pressure for global integration
- key features
- highly centralised
- focus on efficiency
- little sharing of expertise locally
- standardised products
what is multi-domestic strategy
- where there is a strong need to meet
local demands - high pressure for local responsiveness
- low pressure for global integration
- key features
- aims to maximise benefits of
meeting local market needs through
extensive customisation - decision making decentralised,
- local businesses treated as separate
businesses, - strategies for each country
- aims to maximise benefits of
what is offshoring
relocation of business activities from the home country to a different international location
key features of offshoring
- its the changed international location
of where the business activity is
performed that is key - associated with the relocation of
manufacturing activities from a
domestic economy overseas - also increasingly common with
business services
offshoring
work done overseas
outsourcing
someone else does the work
why do business move production overseas
- manufacturing costs lower
- potentially better skilled and
higher quality - makes use of existing capacity
overseas - take advantage of tree trade areas
potential drawbacks with offshoring
- longer lead times for supply
- implications for CSR
- additional management costs
- impact of exchange rates
- communication: language and time
zones
what is reshoring
involves the repatriation of business activities from overseas back to the home county
reasons for reshoring
- greater certainty around delivery
times - easier to collaborate with home
suppliers - greater certainty about the quality of
inputs and components - cost advantages of producing or
sourcing overseas is not as significant
as it used to be
key pressures on business to adopt digital technology
- serve existing customers better via
data analysis - tech 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 - inventory
control - the need to respond to digital
innovation by competitors
what is e-commerce
involves digitally enabled commercial transactions between and among organisations and individuals
created destruction
innovation challenges existing business models
examples of creative destruction
- music and book retailing (amazon)
- grocery retailing (Ocado,tesco)
- holidays (Expedia, trip advisor)
- music streaming (Spotify)
- media consumption (Netflix, YouTube)
key impacts of e-commerce on marketing
- marketing strategy of differentiation
increasingly effective - product life cycle 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
key impacts of e-commerce on HRM
- need for employees to have a broader
range of digital skills - workforce planning - to support highly
seasonal demand - concerns over the working conditions
of staff working in e-commerce
warehouse
key impacts of e-commerce on operations
- logistics behind large-scale e-
commerce platforms are complex - economies of scale are becoming
increasingly important - it is now relatively easy for smaller
firms to sell online
key impacts of e-commerce on finance
- significant investment required to set
up e-commerce platforms and to
integrate them with other systems - e-commerce likely to involve greater
use of multi-currency transactions
what is big data
generation of humongous amounts of data that are too large for many software applications to handle
(analysis of these is known as data mining)
reasons for the exponential growth of big data
- retail e-commerce database
- user interactions with website, mobile
apps, social media - usage within logistics, transportation
systems, financial and health care - location data (GPS-generated)
- internet of things (IoT) data generated
key business application of big data
- tracking and monitoring the
performance, safety and reliability of
operational equipment (data
generated by sensors) - generating marketing insights into the
needs and wants of customers - improved decision making - analysing
the real-time impact of pricing
changes (dynamic pricing) - better security of business systems: ca
identify unusual activity, for example
on secure-access systems - more efficient management of
capacity: can inform decision-making
about capacity management
what is data mining
the process of analysing data from different perspectives and summarising it into useful information, including discovery of previously unknown interesting patterns, unusual records or dependencies
examples of data mining can help a business improve competitiveness
- sales forecasting
- databade marketing
- market segmentation
- e-commerce basket analysis
examples of data mining
- Dunnhumby & Tesco
- club card loyalty program
- using data about pasty customer purchase habits, Tesco was able to stock its stories with precisely what customers might want in the future. It was revolutionary for the UK retail scene
example of data mining
- pop tarts and hurricanes
- increased 7 times prior to a hurricane
- Walmart places the strawberry pop-
tarts at the checkouts prior to a
hurricane
