Unit 9 - Growth Flashcards
Retrenchment
The cutting back of an organisations scale of operations
Why do businesses retrench
- Poor performance
- strong competition
- to focus on core
- economic landscape (e.g. recession)
How do businesses retrench
- reduce capacity
- delayer
- close stores/offices/factories
- redundancies
Internal growth (organic)
When a firm expands its existing capacity or range of activities by extending its premises/ building new factories from its own resources rather than by integrating with another firm
External growth
Mergers, takeovers, franchising, ventures
Ventures
Venture capitalists/ larger companies invest in companies in their early stages of development. Prepared to support new businesses with technical and managerial expertise
(High risk high rewards)
Vertical integration
The coming together of firms in the same industry but at different stages of the production process e.g. Tesco buying a farm / BP buying a fuel supplier
Vertical forwards integration
Where a manufacturer integrates with a retailer that sells its finished product
Backwards vertical integration
A manufacturer integrates with the supplier of its raw material
Horizontal integration
The coming together of firms at the same stage of production and in the same market
E.g. Disney and Pixar
Conglomerate integration
The coming together of firms operating in unrelated markets
(Diversification to spread risk)
Impacts of growth
- economies of scale
- diseconomies of scale
- economies of scope
- synergy
Synergy
Two firms join together and the resulting outcome is expected to be much better than two individual companies working alone. Teamwork creates an overall better result if working towards the same goal
Overtrading
When a business expands too quickly without having the financial resources to support such a quick expansion, putting strain on working capital
E.g. a business opening a store without the sales to cover the costs/ a business taking a large bid and maximising their overdraft for additional funds to pay for supplies
Implications of overtrading on business strategies
- cash flow strategies
- extend payable days and reduce receivable days to hold cash for a longer time to allow sufficient working capital
- closure of business
Economies of scope
When unit costs are lower due to spreading costs when a business produces a wider range of products rather than specialise in just one or a few products
E.g. supermarket like Tesco, Amazon , Unilever (diverse product portfolio)
Advantages and disadvantages of economies of scope
+ gain efficiency
+ more security
+ using the same resources to produce multiple products saves money and time
+ increased customer choice
-less experience with new products
-damaging reputation
-loss of image
-market research is time consuming
Diseconomies of scale
The disadvantages that an organisation experiences due to an increase in size
Poor motivation from diseconomies of scale?
Business grows - less personal contact with management- alienation- staff feeling under valued- decreased motivation- decrease in labour productivity (output)- increase unit costs
Poor communications due to diseconomies of scale?
Poor motivation / too many levels of hierarchy - communication deteriorates - misunderstandings- problems in operations
Poor coordination due to diseconomies of scale?
Growth - hard for people at the top to control and coordinate effectively - if leader refuses to delegate they may be unable to cope with increases work load - problems in operations
Economies of scale
Advantages of being a large business
Purchasing economy of scale
Negotiate discounts when buying supplied in large quantities and get longer credit periods that small competitors - USP/ control cash flow
Managerial economies of scale
Employ the best managers with specialist skills - greater knowledge and skill - motivated staff/ innovations- increased productivity - lower unit costs
Technical economies of scale
Large businesses can afford to buy better and more advanced machinery - increased efficiency - lower unit costs
Impact of growth on marketing
+ afford to lower price if price elastic
+ diversity
+ expansion of target marker
+ product life cycle extension strategies
+ localisation of advertisement (international markets / different languages )
+ enhanced customer data insight
+ economies of scope
Impact of retrenchment on marketing
- reduced marketing budgets
- less advertising
- narrowed target audience
- reductions in product or service offerings
Impact of growth on operations
- economies of scale (bulk, technology, managerial)
- extend payable days
- increased capacity utilisation
- invest more in technology and automation
Impact of retrenchment on operations
- diseconomies of scale
- decreased capacity utilisation (downsizing)
Impact of growth on finance
- good cashflow forecast for budgeting
- more recievable days than payable days
- higher operational costs (rent, utilities, wages etc)
- potential for higher revenue and profit
Impact of retrenchment on finance
- sell assets
- reduced operating expenses
- short term financial relief (liquidity)
- decreased revenue potential
- low investor confidence
Impact of growth on Human Resources
- training (increased time and costs)
- more layers in structure of business so less control
- emphasis on managing business culture
- higher demand for employee support and resources
Impact of retrenchment on Human Resources
- higher redundancies
- reduce training
- delayer business structure
Innovation
The successful exploitation of new ideas. Enables businesses to compete effectively in an increasingly competitive global environment. (A practical application of new inventions into marketable products or services)
Invention
Formulation of new ideas for products or processes
Product innovation
The creation and launch of a good or service that is new, or a sognicaint change to an earlier good or service
Advantages of product innovation
First mover advantage means…
- higher price and profitability (price skimming)
- added value
- opportunity to build early customer loyalty
- PR coverage
- increased market share
Process innovation
The creation of a new way of making, providing or delivering a particular food or service
e.g. Redbull F1 car pit stops (1.7secs)
Advantages of process innovation
- reduced unit costs (efficiency so increased productivity)
- improved quality
- more responsible customer service
- greater flexibility
- higher profitability
Kaizen
Continuous improvement
Policy for implementing small, incremental changes in order to achieve innovation, better quality and/or greater efficiency
E.g. Toyota
Benchmarking
The practice of comparing business processes and performance in relation to best practice within the same sector
Advantages and disadvantages of benchmarking
+ enhanced quality
+provides a goal for employees which will increase motivation
+cam make the organisation more competitive in the market by identifying the other businesss weaknesses
-may be difficult to gather required into from competitions
-time consuming to study
-internal factors e.g. lack of finance may prevent adoptions of competitors practices
-company/product will only be as good as the benchmark set
-poor choice of company to benchmark off can lead to no innovation
Research and development
When businesses gather knowledge to create new products/ discover new ways to improve their existing products and services
Research and development contributes to innovation by…
- influencing product development
- influencing process innovation
- encourage strategic planning
- provide the necessary data and insight to launch new products/ services
- deploying new technologies/ improving them
HOWEVER, only contributes to innovation if money is successfully invested
Intrapreneurship
A system allowing an employee to act like an entrepreneur within an organisation
E,g, used by Apple and Google
Advantage of intrapreneurship
- encourages out of the box thinking
- drives growth
- boost morale /self esteem
- enhance creativity
- increase profitability use resilience’s in most efficient way
- encourages open communication
Intrapreneurship relies on…
- culture of innovation and creativity
- support from team managers
- excellent two ways communication
- rewards (recognition)
- ownership of projects
Intellectual property
Any intangible assets that arise from human knowledge and ideas
E.g. business name, logo, designs and inventions
Patent
An exclusive right granted for an invention or design of a product (purely product or process)
- generally lasts for 20 years after 5 years
- benefit inventors by providing them with legal protection for inventions
E.g. Coca Cola owns patent on their formula
Copyright
The legal ownership of intellectual property and conveys the right to control its reproduction and distribution (authors, copiers, artists). Usually lasts around 70 years in the UK
E.g. Star Wars (original fiction / non fiction work)
Trademark
A recognisable insignia, phrase, word or symbol that denotes a specific product and legally differentiates it from all others of its kind (signs,symbols, logos, words displayed on business).
Must renew every 10 years and can last forever
E.g. Apple logo, Golden Arches of McDonald’s
Problems of innovation
- uncertainty (no guarantee of success and costs will be high)
- operational difficulties
- competition
- generic products ( copies that are produced cheaply as soon as patent expires
Impact of innovation on marketing
- market research (costly and time consuming)
- product life cycle - marketing focus on extension strategies
Impact of innovation on finance
- budget must be strict as no guarantee innovation will be successful
- high costs and there’s no guarantee
- investment appraisal (need to work out the return of investment of innovation)
Impact of innovation on operations
- process innovation e.g. Redbull pit stops
- kaizen
- just in time - save unit costs
Impact of innovation on HR
- rewards needed for staff who come up with innovative ideas
- training needed for staff to learn how to use new products/services
- motivated staff
Globalisation
Companies operating internationally or on a global scale
Reasons for greater globalisation of a business?
- increased mobility of labour
- growing economies
- market opportunities
- improved transport and infrastructure
- technological change
- increase revenue potential
- growth of multinational companies
- increase consumer trust within overseas market
Multinational company
A business that operates in two or more countries, managed in own country
Why is globalisation important for business?
- reduce operating cost by manufacturing abroad
- buy raw material more cheaply due to reduction/ removal tariffs
- assess to million of new consumers
- comparative advantage - export specialised particular products to less specialised countries
- increased competition so more efficiency and more choice for customer
- global economic cycles
Support of globalisation
- provides a large market of customers, helping to encourage economies of scale
- domestic markets might be saturated and show little growth
- cheaper raw materials in countries that specialise in particular industries or have cheaper labour costs
- improvement in technology and processes
Arguments against globalisation
- competition from foreign firms so harder for uk firms to survive
- other firms can undercut prices and costs, forcing down profit margins of uk firms
- uk firms might lose skilled labourers and employees who can earn more in similar jobs in foreign firms
Emerging economies
Developing countries that have the potential to grow and develop in terms of productive capacity and market opportunities
Developing countries
Lower standards of living, weak economy with slow / nonexistent growth, agricultural
Aspects of emerging economies
- huge market opportunities
- young affluent population who aspire to consume the same types of goods/ services in developed countries
- growth in consumer spending in emerging economies has outpaced that of developing countries
- population side and age structure means they are expected to supply huge members of productive, low paid workers to the world market
Opportunities of emerging economies for businesses
- growing numbers of educated middle class consumers so growing number of consumer spending
- cultural shifts - high demand for personal products, healthcare etc
- source of high skilled but low cost labour via offshoring/outsourcing
- greater potential for joint ventures and acquisitions
Risks of emerging markets
- economics risks e.g. government taxes and restrictions on imports
- political risks e.g. unstable governments can damage business activity
- risks to brand image e,g, could be exploiting employees and damaging the environment
- cultural differences and sensitivities
Offshoring
When companies transfer business activities/ processes to a distant foreign country, unusually a more affordable, developing nation.
Companies can enter into an offshore outsourcing arrangement with a 3 rd party or set up their own offshore business operations
Why businesses engage in offshoring?
- Facilitates cost- effective business expansion
- provides access to a wider talent pool
- 24/7 business opportunity (continuous workflow, improved efficiency and client satisfaction)
- provides access to lucrative (attractive, wealthy) overseas markets that have better understanding of their local trends and risks, saving you time and effort
- government incentives and tax breaks
Drawbacks of offshoring
- Cultural and language barriers
- data security and intellectual property issues
- negative corporate image due to loss of local jobs in base
- quality control issues (distances makes it harder to monitor productions to quality inconsistency)
- supply chain risks (vulnerability to delays and logistical problems)
- ethical and reputational risks
- hidden costs such as tariffs, transportation etc
Reshoring
The reverse of offshoring. Involves the repatriation of business activities from overseas back to the home country
Benefits of reshoring
- enhanced resilience (reduce dependence on distant locations so less susceptible to disruptions abroad)
- improved communication and quality control
- reduced lead time and shipping costs
- sustainability benefits
Licensing
A contract allowing a party to use and or earn revenue from the property of someone else.
E.g. songs, DisneyPandora, Lego Star Wars
Advantages of licensing
- no commercial costs
- retaining ownership
- lower risks
- amplify brand awareness
- local knowledge
Disadvantages of licensing
- loss of control over product
- licensee being responsible for production, marketing and selling
- being stuck with the working business
Alliances
An agreement between businesses to collaborate for a mutually beneficial objective. This may involve sharing strengths and resources to create ideas, products or services
E.g. Brew dog and Budweiser in China, Redbull and go pro, uber and Spotify
Advantages of alliances
- synergy
- access to new markets
- sharing knowledge and expertise
- sharing resources
- improved brand awareness
- share risks (share costs)
- more ideas
Disadvantages of alliances
- performance risks related to how well your partner does their job
- some companies may have a hard time letting go of managerial authority
- changes in the business environment can threaten a strategic partnership and so worry about the outcome of products from partners side
- may need to modify agreements
- cultural differences
- data confidentiality at risk
- quality issues
- lack of commitment to alliance
- misaligning goals and strategies
Direct investment
Allows a business to access international markets through investing in facilities abroad
E.g. a production centre abroad
Advantages of direct investment
- increased employment
- improved productivity
- improved technology
- economic growth
- avoid tariffs and trade barriers
- reduce transportation costs
- become localised (manufacture in the market it trades)
Disadvantages of direct investment
- loss of control over strategic industries
- need for globalisation
- potential social and cultural impacts
- high initial costs
- greater exposure to economic and political risks
Local responsiveness
Changing product / operations to meet demands of foreign culture
E.g. McDonald’s changing products in different countries, Starbucks 100 year old tea house in Japan
Pressures for local responsiveness
Pressure for a company to cater for the different lifestyle and expectations of consumers in different countries. This emerges when consumer tastes differ significantly and there are differences in the infrastructure and distribution channels.
Pressures for cost reductions
Pressures come from greater international competition and means a company must try to minimise its costs. This is likely to emerge where there is a lot of competition and where consumers and buyers are powerful
How to reduce pressures for cost reductions
- economies of scale
- supply chain
- location production facilities where costs are lowest
Digital technology
The use of computers to find, store, analyse, manipulate and communicate digital info. Includes automation, e-commerce, big data, data mining
Automation
The use of machines and computers that can operate without needing human control which has decreed the need for a large highly skilled workforce
E-commerce
The buying and selling of goods and services over the internet. Includes online retailing, b2b transactions
Reasons why automation could be the answer for uk business growth
- increase business output
- improving productivity and service quality
- meet higher levels of demand
- create new jobs and improve job quality
- lower expenses
# employees can complete tasks aligning with their skill set instead of mundane repetitive tasks
Amazon and e-commerce
- marketplace model allows 3rd party sellers to list their products on Amazon and they get commissions on every sale
- e-commerce has led Amazon to having strict inventory expectations as they have to constantly meet demand
Technological change has BLANK product life cycles and enabled new BLANK BLANK to challenge established market leader
Shortened, market entrants
E-commerce has significantly reduced…
- barriers to entry
- start up costs
- difficulty to expand into international markets
Advantages of e-commerce
- global market reach (increase purchasing power and diverse customer base)
- lower operational costs (increased price competitiveness, improve cash flow)
- 24/7 availability (loyalty to customers, optimise revenue potential)
- improved data analytics and customer insights
Disadvantages of e-commerce
- increased competition (price transparency)
- cybersecurity risks and frauds
- customer service challenges (lack of personal interaction, less loyalty and awareness)
- reliance on technology (website crashes, maintenance costs, halt production)
Big data
Large pools of data that can be captured, communicated, aggregated, stored and analysed. Expressed in terms of its high volume, high velocity and variety.
E.g. messages, gps signals from phones, customer transactions, market intelligence, images posted to social media etc
How is big data changing business?
- more targeted marketing
- proactive customer service
- improvements in operational efficiency (constraints easier to recognise)
- reduced costs (accurately predict future events soimproves budget planning so less waste)
- better fraud protection
- more robust cybersecurity
Data mining
The ability to manipulate and analyse the data to inform decision making
E.g. sales forecasting, extrapolate trends in the market, target advertising, take advantage of influencers etc
The value of digital technology
- ease of entering new markets
- more informed new product development
- greater intergration of functional areas (hr, marketing etc)
- availability of information to stakeholders
- improved efficiency
- improved communication
