Unit 9 Flashcards
Strategic methods: how to pursue strategies
Define growth
Growth is an increase in the scale (size) of operations of a business.
Define retrenchment
Retrenchment is the downsizing of the scale (reduction in size) of operations of a business, usually with the aim of becoming more financially stable.
- It is likely to involve job losses and reductions in output and capacity.
- Some areas of the business may be sold off or demerged.
What are the main reasons why businesses choose growth as an objective? (3 technical terms)
- To achieve economies of scale: when the unit costs fall as the business expands.
- To achieve economies of scope: when the costs fall as the business expands and sells a variety of products onto different markets.
- To achieve synergies: when the business expands by merging or taking over another business that complement its strengths.
Explain ‘profit’ as a reason for growth
Shareholders and other business owners look for profit, so businesses have an existential need to seek out profit. If the business is profitable as it is, shareholders are likely to feel it should increase the scope of its operations in order to make more profit.
- Likely to lead to an increase in share price and greater returns to shareholders from the business having increased sales, revenue and profit.
- In turn, this leads to positive media attention and greater security for the CEO and board members.
Explain ‘efficiency and profitability’ as a reason for growth
Profitability shows how capable a business is of turning revenue into profit (generally presented as a ratio).
Efficiency (making good use of resources) goes hand in hand with profitability.
- Businesses often achieve greater efficiency through economies of scale: by increasing its output, a business can decrease its average operating costs by purchasing raw materials in bulk, a business can decrease its total costs.
Explain ‘market power over customers and suppliers’ as a reason for growth
Porter’s five forces model
- Businesses are constantly at odds with one another to gain power over their markets’ suppliers and customers.
- Having power over suppliers can mean leverage (negotiating power) which leads to lower costs, which can lead back to profitability, and better trade terms aiding cash flow.
Explain ‘brand recognition’ as a reason for growth
Firms often increase their market share and brand recognition as a short- to medium-term tactic that supports the greater goal (strategy) of increased profitability.
- E.g. most supermarket chains, such as ASDA and Sainsbury’s, work tirelessly to increase their market share (by becoming the one name people think of when they need to do their weekly shop).
- Firms conduct market research on their customers (and potential customers) as well as push all manner of advertising and promotional campaigns.
- This brand recognition can be seen as an economy of scope, where the brand itself is an asset that draws customers in to buy from the supermarket’s vast range of products.
Explain ‘manager’s personal objectives’ as a reason for growth
Business leaders themselves are often the most driven of people, are are looking to progress in their careers and earn more money.
- Boosting the size of the business they manage is one way of doing this for themselves personally.
Explain ‘survival’ as a reason for growth
Sometimes growth is essential for the survival of a business.
- By remaining small, a business may not be able to benefit from economies of scale, resulting in high costs and a lack of competitiveness.
- Small businesses could more easily be taken over by larger rivals.
Explain ‘reduce risk’ as a reason for growth
Growth in the form of diversification or moving into new markets can be used to reduce risk.
Explain ‘achieve synergy’ as a reason for growth
Two businesses joined together (external growth) can achieve more than the sum of the two businesses operating separately.
What are the main reasons why a business might pursue a strategy of retrenchment?
- Changes in the market: this might be because of changes in taste and fashion, technological development or the arrival of new, more competitive businesses.
- Failed takeover: it is not unusual for a takeover to fail and for a business to demerge part or all of the business taken over.
- Economic downturn: can sometimes lead to a business retrenching in order to better cope with the changed economic environment.
- To focus more closely on core competencies.
What are economies of scale?
Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production.
- Fixed costs are spread over more units
- Variable costs are lower due to bulk buying
There are different types of economy of scale depending on the particular characteristics of an industry. What are the two overall categories for them?
INTERNAL
- Savings coming from the growth of the business itself.
- Arise from the increased output of the business.
EXTERNAL
- Savings coming from within the business’ environment or industry.
- i.e. all competitors benefit.
