Unit 9 - Strategic Methods: How to Pursue Strategies Flashcards
Why do businesses grow?
- to reach break even point and make a profit
- take advantage of economies of scale
- become more efficient (if output moves closer to full capacity, fixed costs will be spread over more units of output, causing average costs to fall)
- remain competitive
- growth by diversification allows a company to spread its risk
- easier to cope with recession and fluctuations in the business cycle if the company is large
Disadvantages of business growth:
- increased costs due to more employees
- need more storage/warehouse space which increases costs
- diversification may disrupt business esp if don’t know how to
- economies of scale could become too expensive (diseconomies of scale)
Businesses can grow if there is:
- increased demand for product
- strong competitive advantage (large market share)
- strong economy
- new markets for existing products (but costs)
- new products for existing markets (but costs)
What are the two types of growth?
- organic (internal)
- external (integration)
What is organic growth?
- most common
- growth is from the business’ core
- growth tends to be slower but is less risky
What is external growth?
- normally achieved alongside organic growth
- a business will acquire another business through takeover or merger
- growth is quicker but more risky
How can a business grow organically?
- increase output (more efficient technology, build more factory space, more workers)
- but increases costs and there may not be the demand for the extra products
- gaining new customers (reducing prices, opening new shops, better marketing)
- but reduced prices may mean that costs have to be reduced which could lead to poorer quality
- develop new products (appeal to a wider range of people)
- increase market share (more customers and sales than competitors)
Where does the finance for organic growth come from?
- retained profits
- borrowing
- new investors
Give an example of a company that grows organically
Apple with new products etc
How can a business grow externally?
through a merger or takeover
Give an example of a business that grew externally
- Amazon took over Whole Foods
- Glaxo Wellcome merged with SmithKline to create the largest pharmaceuticals company at the time
What is retrenchment?
the cutting back of an organisation’s scale of operations
Why do businesses retrench?
- to survive recession
- delayering to improve competitiveness
- to prevent losses at the end of a product’s life cycle
- strategic change of direction (less diversification)
How can a business retrench?
- reduction in staff (delayering, redundancy)
- recruitment freeze (not replacing nay staff that leave, not recruiting any new staff)
- closing divisions or factories (e.g. Weatherspoons had to close 21 pubs)
- targeted cutbacks (cheaper utilities etc)
What are the advantages of a recruitment freeze/voluntary redundancy/early retirement?
- reduces number of staff and therefore labour costs
- is a fair way of getting rid of staff
- the business knows that the employees that remain can do a good job
What are the disadvantages of a recruitment freeze/voluntary redundancy/early retirement?
- may result in reduced productivity as fewer staff
- will have a fairly high cost due to paying the staff to leave
- remaining staff may be stretched to complete the work = stress
- good employees are leaving
What are the advantages of closing a division or factory?
- reduces fixed costs immediately which impacts the break even point
- if the business rents out the premises then it is an extra source of income
- capacity utilisation may rise in remaining factories
What are the disadvantages of closing a division or factory?
- once closed it is difficult to reopen when economic conditions allow
- lose many good staff
- lose part of the business so revenue could fall
- may need to outsource the production that was happening in the factory if the business cannot do it itself
What are the advantages of delayering?
- should not affect production line
- may empower or enrich remaining jobs
- fewer labour costs
- better communication
- could remove duplicates of jobs
What are the disadvantages of delayering?
- may intensify work of remaining managers, increasing stress
- could lose a generation of managers who have experience
- fewer promotional prospects for those who remain as now have a further gap between them and next up
What are the advantages of making redundancies throughout the business?
- opportunity to reshape the business to meet future demand
- able to keep the good staff so average quality level may rise
- lower labour costs
- removes unnecessary jobs
What are the disadvantages of making redundancies throughout the business?
- less job security which could demotivate staff (‘who’s next’)
- possible problems of perceived fairness
- low staff morale for period afterwards
- increased workload for remaining staff
What are economies of scale?
- the advantages a business gains due to an increase in size
- reduced average costs
- spreads the fixed costs over more units
What are the benefits of having reduced unit costs?
- more efficient and better trained staff
- less waste, and more motivated staff
- leading to reduced costs and recruitment costs
- more profit
- leading to reduced costs and recruitment costs
- less waste, and more motivated staff