Unit 9 Flashcards
Strategic methods: how to pursue strategies
What are the ways that businesses can increase efficiency by gaining more experience? (With an example)
- Labour efficiency - workers make less mistakes therefore less waste (less materials used)
- Labour specialisation - workers become specialised in certain tasks and therefore produce at a faster rate.
- Input mix - over time inputs such as raw materials may be optimised to reduce the cost of production.
- Ford cut Model T’s costs by 3/4 by integrating vertically, dividing labour and eliminating model changes.
What’s the benefit of the experience curve?
Increasing efficiency can reduce unit costs, therefore the business can get a cost advantage. This could mean you can decrease prices which will increase demand and therefore market share. Increasing market share can also lead to becoming a monopoly.
What is the experience curve?
The idea is that as a business increases its experience in producing a product, it becomes better at it, increasing efficiency.
What is offshoring?
Business activities or processes moved abroad. E.g manufacturing in China or IT services in Poland.
Why would a business choose to offshore?
To reduce costs
- Production costs
- Raw material costs: location
- Labour costs: lower wages
- Labour skills - better quality
Increase revenue
- Gloser to a growing market
- Overcome protectionism
What are the disadvantages/problems with offshoring?
- Initial transition costs
- CSR risks
- Exchange rate risks
- Logistics pressures (lead times?)
What is reshoring?
Bringing business activities back tot he home country (e.g UK).
Why would a business re-shore?
- To avoid offshoring risks:
CSR, exchange rate, transition costs, logistics risks.
How can overtrading occur?
- When growth is achieved through a 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
- A long term contract requires a business to incur substantial costs before payments are made by customers under the contract
What is overtrading?
Overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion
What are some symptoms of overtrading?
- High revenue growth but low gross and operating profit margin
- Persistent use of overdraft
- increase in payables and receivable days ratios
- increase in current ratio
- low inventory turnover ratio
- low levels of capacity utilisation
How can a business avoid overtrading?
- Reduce inventory levels
- Scaling back the pace of revenue growth
- Leasing rather than buying capital equipment
- Enforcing better payment terms with suppliers and customers
What are the six phases and five crises in Greiner’s model?
Creativity
Direction - Leadership -> Business now too large for leader to get involved in everything
Delegation - Autonomy -> Business now has functional management
Coordination - Control -> More formal management structure in place but new layers of hierarchy needed to keep control
Collaboration - Red Tape -> A dangerous growth in organisational bureaucracy, slowing decision making and missing external changes
Alliances - Growth -> Growth slowing as business runs out of ideas
What is synergy?
Synergy happens when the value of two businesses brought together is higher than the sum of the value of two individual businesses. eg when 1+1 equals more than 2
What are the two sources to create synergy/lead to synergy?
Cost savings
- eliminate duplicated functions and services
- better deals from suppliers
- higher productivity and efficiency from shared assets
Revenues
- cross selling to customers of both businesses
- access to new distribution
- brand extensions
- new geographic locations open up
What is retrenchment?
Retrenchment means the reduction in costs or spending in response to economic difficulty eg making employees redundant
What are some examples of retrenchment?
- Reducing outfit and capacity
- Job losses
- Product/market withdrawal
- ## Disposal of business unit
What drives retrenchment?
- Costs too high
- Low roce
- high gearing
- loss of market share
- failed takeover
- economic downturn
- change of ownership
What are some retrenchment actions and the possible implications for change?
Change in organisational structure
- changed responsibilities, greater workloads, higher stress, new team and colleagues
New leadership or ownership
- uncertainty, different leadership style, new priorities, aims objectives.
Fewer people
- Loss of morale and increased demotivation, bad news for some external stakeholders
What are the two methods of growth?
Organic growth and external growth
What is organic growth?
Involves expansion from within a business
What are some benefits of organic growth?
- less risk than external growth
- can be financed through internal funds eg retain profits
- builds on a brands strengths
- allows the business to grow at a more sensible rate (avoid overtrading)
What are some drawbacks of organic growth?
- growth achieved may be dependent on the growth of the market
- hard to build market share if business is already a leader
- slow growth
- franchises can be hard to manage effectively
What are some benefits of franchising?
Running your own business
easier to raise finance
lower risk method of market entry + lower failure rate
What is a joint venture?
A separate business entity created by two or more parties involving shared ownership, returns and risks
What’s a takeover?
Involves one business acquiring control of another business
Why pursue a takeover?
- Increase market share
- Aquire new skills
- Access economies of scale
- Spread risks by diversifying
- to eliminate competition
- enter new segments of an existing market
Why do takeovers fail?
Cultural incompatibility between the two businesses
Poor communication
What is forward and vertical integration?
Acquiring a business further up in the supply chain
-> manufacturer buys a distributor
What is backward and vertical integration?
Acquiring a business operating earlier in the supply chain
-> retailer buys a wholesaler
What is horizontal integration?
Acquiring a business in the same stage of supply chain
e.g manufacturer buys a competitor
What are benefits of horizontal integration?
Achieve economies of scale
cost synergies
wider range of products
What are the benefits of vertical integration?
Business can capture greater share of profit
creates barrier to entry
What’s the difference between internal vs external economies of scale?
Internal - arise from the increase output of the business itself
External - Occur within an industry e.g all competitors benefit
What are the different types of internal economies of scales?
Purchasing economies - buying in greater quantities resulting in lower price
Technical - use of specialist equipment or processes to boost productivity
Managerial - Specialist managers can be employed to help reduce unit costs and boost efficiency
Marketing - Spreading a fixed marketing spend over a larger range of products, markets and customers
Network - adding extra customers to a network that’s already established (phones)
Financial - Larger firms benefit from access to more and cheaper finance
What is external economies of scale with example?
Having many specialist suppliers close by
- Access to research and development facilities
- Pool of skilled labour to choose from
What is economies of scope?
Where it is cheaper to produce a wide range of products rather than specialise in a very limited number
What is the difference between an invention vs innovation?
invention is the formulation of new ideas for products or processes
innovation is the practical application f new inventions into marketable products or services
What are the 2 main types of innovation?
Product innovation
- launching new or improved products
Process innovation
- finding better or more efficient ways of producing existing products/services
What are advantages of product innovation?
First mover advantage
- higher prices and profitability
- added value
- opportunity to build early customer loyalty
- enhanced reputation
What are advantages of process innovation?
reduced costs
flexibility
improved quality
example: amazon prime (amazon also have copyright)
How do you protect IP (intellectual property)?
The invention must be:
- new an innovative step, capable of industrial application
What is intrapreneurship?
Where large businesses enable employees and managers to demonstrate entrepreneurial behaviour in their work to the benefit of their employer
What are some examples of intrapreneurship?
- Employees at google are allowed time for personal projects, one being gmail
- Ken Kutaragi created the playstation from tinkering with a Nintendo
What is benchmarking?
The objective of benchmarking is to udnerstand and evaluate the current position of a business or organisation in relation to best practice
What are benefits of innovation?
improved productivity
building a brand
higher sales and profit
establishing an advantage over competitors
builds a strong organisational culture which should attract more talent
What are the main types of benchmarking?
Strategic
internal
external
What is ERP?
Enterprise Resource Planning - a software system that helps businesses manage their financial, supply chain, manufacturing, operations, reporting and human resource systems.
Benefits and drawbacks of ERP?
-Streamlined processes so better control
- Increased productivity and efficiency
- Improved communication
- Cost savings on reducing waste, inventory management)
But:
- Significant investment therefore potential high costs
- High training requirement
