Unit 9 - How To Pursue Strategies Flashcards
Reasons for growth
- take advantage of their brand image , USP
-increase sales revenue -increase market share
-enter new markets
-be more competitive by gaining economies of scale and reduce costs
-compete with rivals
-may be attractiveness in new market
Retrenchment
Reduction in size of organisations operations- selling off bits of business
To
- focus on core competences, so reduce losses or sell of less profitable parts of the business
- leave high risk, unprofitable markets
-experiencing diseconomies of scale(not managing growth very well) and reduce costs, to maximise profits by focusing on core competencies
Eg- Tesco sells Giraffe restaurant chain - wanted to focus on there core competence of understanding the UK grocery market - refocus on this
Organic growth
Expanding internal operations and current business
Ie - franchising
-expanding asset base, new factories
-increasing product range
-employ more staff
-entering new international markets
How is organic growth funded
Could be
Retained profits
Or
Loan
Issue more shares to sell
(Still internal)
Money is external but pay back so
Example of organic growth
Lego
- grown through own sales
External growth
Increase sales through intergrating with other businesses
Ie
-merger -FB and WhatsApp
-takeover
-strategic alliance, joint venture (google and Nasa, developed google earth)
Benefits through share expertise
Funded through external sources of finance- selling shares, loans
Merger example
Facebook and WhatsApp
Joint venture example
NASA and google- google earth
Nestle and Starbucks- global coffee alliance - Starbucks capsules for Nescafé and nespresso - shared expertise, from cafe style to at home
Business takeover example
Kraft food, took over Cadbury
+ and - of organic growth
+more controlled
+maintain culture, management style, brand image, USP
+less risky
+higher worker morale, doing well, pay could be increasing, motivating
+good for high uncertainty avoidance (HOFSTEDE NATIONAL CULTURES)
-slower than external
-risk of missing out opportunities in fast growing market,
As .. takes time to increase product range or number of stores
When is organic growth most appropriate
When
-strong USP and Culture, best to retain this instead of diluting it by mixing with another business
- in slow moving market, have time to come out with new product, increase number of stores
-competition issues, legal say too big, cant merge
+ to external growth
+gain sales and market share quickly - basically buying that organisations customers - assuming they will stay
+ gain SYNERGIES , combined effort is better than when alone ie merge to marketing departments, share expertise, collaborate, meet obj quickest, eliminating any roles that dont add value, reduce costs, more experienced (experience curve) , lower average costs- economies of scale, more powerful
+gain expertise ie joint venture, nestle and Starbucks, created GLOBAL COFEE ALIIANCE, from cafe cofee to at home pods in Nescafé, nespresso machines
+new tech, produce goods more efficiently
+new intellectual property, patent goods, often used in silicone valley high tech, big business takes over small business that has a patent, simple to gain their intellectual property
+reduce comp
+
- to external growth
- difficult to merge cultures, managerial systems , can collide , not efficient
- impact on motivation, job losses, redundancies, work reorganised
-risk of unknown
-not for high uncertainty avoidance ( HOFSETDE) - buying another businesses liabilities , and debts - be prepared to have to pay off
-ethical risks, in emerging markets, where staff have less ethical treatments, have to improve this to prevent any negative publicity - high cost of integration - time , spenny
Economies of scale
Lower average unit costs - from increasing size of operations - avg cost of each unit falls
Purchasing economies of scale
Bulk buy- discount
Negotiate discounts or longer periods of trade credit - reducing avg costs
Technical economies of scale
Large organisation can afford for sophisticated tech- better the tech - more efficient-
Ie inventory stock level - automatic, dont need to manually count - cut cost of time involved recording stock
- increase productivity, lower average costs
Managerial economies of scale
Big businesses, afford to pay higher wages for more specialist, experienced employees to fulfil particular roles
Ie employing qualified accountant, reduce outsourcing costs and increase efficiency, lower average costs
Diseconomies of scale
Lack of
Communication
Coordination
Motivation
Diseconomy of scale- communication
Bigger the business- harder and costly, have to make sure everyone understands
- ie international growth, employees don’t speak same language, takes time to translate
Average costs will rise as loss of effiency
Diseconomy of scale- coordination
Hard to coordinate everyone- making sure everyone knows corperate objectives
- monitoring systems and junior managers
-especially if decentralised, flat structure, join leadership style, everyone wants to input own ideas, hard to navigate
- if new strategy, hard to implement
- need to add layers to hierarchy- more tall structure, more costly - increasing average costs
Diseconomy of scale- motivation
Ass communication and coordination becomes more centralised- motivation decreases
- dotn feel as valued
-lost in big business
- employees feel disempowered
- they don’t see how their efforts will contribute towards the achievement of corporate objectives
Is beneficial for business to grow
Economies of scape
Benefits for a business who produce range of products
Eg- APPLE - iPad, desktop, headphones,
Unilever- many different brands
+ of economies of scope
+same production facility’s can be used - ie apple, similar factories
+ same staff utilised- ie apple hired very skilled staff, use them from many products not just one
+same distribution networks used
+same raw materials - tech
Lead to lower average costs
Increased revenue streams
Increase profit - more satisfied shareholders as more dividends
Higher customer satisfaction- ie grocery stores, all get from one supplier, easy- BUT power of supplier (porter), reliant on one can be bad
+improve brand awareness
Experience curve
Lower average production costs as a result of all output over time
When does experience curve occur
- refine production process overtime, becoming more efficient
-worker skill level increases the more units of output that are produced - more efficient, lower avg unit costs - power of experience memory, more efficient solutions to problems, lower average unit costs
Implications ( good or bad ) of experience curve
Cost benefits- increased market share - econ of scale
- expertise, lowers production cost becoming a good barrier to entry - less attractive for comp to enter, lower production costs than anyone can compete with
Experience curve depends on
- assumes that experience leads to greater expertise - not guaranteed
-increased size lead to diseconomies of scale
Synergy’s
Cost synergy
- cut cost when come together -
-purchasing economies of scale as can negotiate deal with suppliers- businesses in same industry
-managerial economies of scale, appoint the best experts from bits companies, cut employment costs, more efficient as one doing best job- experience curve , more output quicker, lower average costs
-integrate functional activities , don’t need two HR departments - delayering
Revenue synergy
- opening new markets, ie Argos distribution network, opening up more fro Sainsbury’s
- complementary goods, ie want product from Argos and Sainsbury’s, delivered in same truck, consumer satisfaction
- share learning, improve innovation and marketing
Example of synergy from merger
Salisburys and Argos
- Argos delivery network, efficient,
Sainsbury’s get Argos distribution network
Argos get brand awareness and some of Sainsbury’s floor space -more exposure
Evaluate synergy’s- do they always occur
Often more complex to achieve - not that easy to cut down departments, have to make hard cuts, may loose experienced people
- impact on motivation- teammates made redundant
Overtrading
Grow so quick, run out of cash
Causing cash flow issues
Occurs when
- significant investment in new capacity, (fixed assets) , not generating revenues yet, new shops, factories
- spending on new capacity was more expensive than budgeted
-new capacity takes longer to build the anticipated, not generating cash yet
-business accepts a contract that requires a significant investment before revenues are generated- get into financial difficulties- cash flow issues - too many outflows
- payable days are shorter than receivable days- customers not paying as quickly as anticipated
How to deal with overtrading
-sell buffer stock
- sell unused assets- ie new factories or shops, in return for cash
-chase up debtors, use debt factoring
- reduce trade credit- shorter receivable days
- get a bank loan - improve liquidity at the expense of gearing - allows immediate cash, can pay off over years when company expanded and gains revenue- helps financial cash flow in short term and liquidity position
Or
-reduce expenditure
Greiner Growth model
As b. Grows - each stage comes to an end with a crisis then has a strategy to overcome
Creativity- ended by leadership crisis
