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
What are the four types of economies of scale?
- technical
- purchasing
- managerial
- financial
What are technical economies of scale?
- use of more efficient techniques of production
What are purchasing economies of scale?
- bulk buying
- enables a business to make specific demands about product quality, specifications, services etc
What are managerial economies of scale?
- can hire specialist managers, which can lead to better planning and increased productivity
What are financial economies of scale?
- banks are more willing to lend at lower interest rates as the risk is lower
What are diseconomies of scale?
if a business grows too large it may suffer disadvantages that lead to lower efficiency and higher production costs
What are the consequences of diseconomies of scale?
- communication problems
- control and coordination problems
- motivation issues
What are economies of scope?
- where a business uses the same resources and infrastructure already in place to produce a new product or develop an existing product
What are the benefits of economies of scope?
- risk is spread over several products
- enables organisation to lower its unit costs by using the same facilities, equipment, labour force, and technology
What are examples of businesses that benefit from economies of scope?
- Dyson
- Amazon Pantry
- Coca Cola
- Proctor and Gamble
What is synergy?
- the concept that the value and performance of two companies combined will be greater than the sum of the separate individual businesses
- done through external growth
- problems occur when promised synergy does not happen
What are examples of businesses that are synergised?
- Sainsbury’s, Argos, Habitat
- Pets at Home, Tesco
- Mothercare, Early Learning Centre
- Vistry Group, Countryside
What is overtrading?
- when growth happens quickly, the business may face problems associated with overtrading
- the business has taken on more than it can support
- rapidly growing businesses may take on orders they cannot fulfill
- small businesses may have poor credit control which can lead to cash flow problems
- can cause liquidity problems
What impact does growth have on HR?
- job security
- as employees would need to know that growth will continue
- selective hiring
- as the workforce grows, HR have to hire more staff
- these staff have to fit within organisation, understand culture and their roles within it
- as the workforce grows, HR have to hire more staff
- self-managed teams
- part of introducing a more team-based approach to managing
- managers may need training and support
- compensation policy
- different financial motivational techniques need to be used
- extensive training needed
- workforce may need training on new machinery, new processes, new IT or new management techniques
- information sharing
- as business grows, more info needs to be shared and so organisational structure changes from entrepreneurial style to more traditional hierarchy in which managers are further away from workforce
What impact does retrenchment have on HR?
- job insecurity
- employees may be made redundant which will impact morale of remaining employees
- may make managers risk-averse
- HR would be busy with redundancies and retraining for existing staff
- selective firing
- HR may have to select employees for redundancy, use voluntary redundancy, delayer management, have recruitment freeze, or retrain staff to take on more responsibilities
- self-managed teams
- as workforce/managers reduce in number, more employees may have to take on supervisor/manager roles (esp if delayering), and employees would have to be selected and trained for this role
- compensation policy
- bonuses paid may have to change
- redundancy payments may be needed
- could put a strain on already tight HR budget
- extensive training
- as business and workforce reduce in size, employees may need training to do roles they were not hired to do
- information sharing
- as business shrinks, the processes would be reduced and might make information sharing easier
What is the impact of growth on operations?
- processes
- may need to change way products are manufactured, which can cause problems with experience curve, as it takes time for the changes to e embedded and improvements in efficiency to be made
- technology
- may use more technology to produce goods and to track work-in-progress, stock levels, orders, etc
- whole process can be much more efficient, but also more complex and relies upon IT skills and not necessarily n manufacturing
- resources
- may require far more investment into new machines, computers, training, etc which all needs to be planned and budgeted for
- workforce
- workforce may change from being labour-intensive to being machine-intensive which has its own problems
What is the impact of retrenchment on operations?
- processes
- if business shrinking, processes may need to change to reflect drop in demand
- business unable to afford large stocks of raw materials, work-in-progress or completed products as this is money that is unnecessarily tied up
- less investment in new technology which could injure the business’ ability to compete, and unit costs may rise higher and faster than competitors’
- lack of resources
- limited investment in new machinery means old machinery has to work harder
- businesses producing less may have low capacity utilisation which would increase the unit cost
- workforce may become unmotivated with low morale, and may prove difficult to hire good staff in future
What is the impact of growth on marketing?
- growth itself may be due to improved marketing
- marketing strategies would need to reflect competitiveness and complexity of business
- specialisms
- more specialists will need to be brought in through employment or outsourcing
- more resources needed to implement more complex marketing strategies
- more market research needed esp if investing in new products or new markets
- workforce
- need a greater specialism in marketing as it may become more complex to reach more customers
What is the impact of retrenchment on marketing?
- mostly HR issues
- workloads increase as specialists were made redundant etc
- would place strain on remaining workforce
What is the impact of growth on finance?
- capital
- more capital may be required to fund growth
- cash flow
- timing and amount of cash required to replace or upgrade capital equipment is important, and how the business resolves this can affect their ability to grow
- current asset ratio
- businesses need enough money to fund their day to day operations, so if rapid growth occurs this may be an issue
- would need good receivables and payables terms
- taxation
- as business grows, its financial affairs become more complex, including liabilities for taxation
- specialist tax advisors may be needed to ensure business is efficient as possible when paying taxes
- shareholders
- growing business may be on stock market and so shareholders expectations of dividends and share price rises have to be taken into consideration
- if business remains ltd then shareholders may still have high expectations of being able to take money out of the business
- controls
- finance dept. needs to control costs of organisation better
- better budgeting, more efficient purchasing, greater responsibilities taken over cost of goods
- specialists needed in finance dept. and financial training for managers so they can manage budgets more accurately
- finance dept. needs to control costs of organisation better
What is the impact of retrenchment on finance?
finance department may have to sell off fixed assets, sell off current assets, renegotiate bank loans or debts, chase debtors so that cash flow can be improved
What are the 4 methods of growth?
- mergers
- takeovers
- franchises
- ventures
What is a merger?
- where two or more businesses agree to come together under one board of directors
- benefit from economies of scale, synergy and economies of scope
What is a good example of a merger?
Glaxo Wellcome merged with Smith Kline to make largest pharmaceuticals company
What is a takeover?
- where one firm buys the majority shareholding in another business and takes full management
- can be hostile or friendly
- popular during a good economy
What is a good example of a takeover?
Amazon took over Whole Foods
What is vertical integration?
when a business joins with its suppliers and/or distributors
What are the two types of vertical integration?
- backward vertical integration
- forward vertical integration
What is backward vertical integration?
acquiring a business backwards in the production process
Give an example of backward vertical integration.
Morrison’s bought farms in Scotland to supply their supermarkets
What is forward vertical integration?
acquiring a business forward in the production process
Give an example of forward vertical integration.
Jaguar Land Rover bought garages to sell their cars
Give an example of a business that acquired both forwards and backwards.
Zara owns its entire chain of production (suppliers, manufacturers, retail)
What are the advantages of vertical integration?
- cost savings
- internal planning and coordination easier
- builds barriers to entry for new competitors
- removes profit margins of suppliers / retailers so overall able to spend less and make more profit
- supply of goods can be guaranteed
- control of how product is sold
What are the disadvantages of vertical integration?
- short term cost increase due to acquisition
- requires further management as more complex operations
What is horizontal integration?
where a business joins another business in the same stage of production process
What are the advantages of horizontal integration?
- economies of scale
- lower unit costs
- removal of some competition
What are the disadvantages of horizontal integration?
- closing of branches
- job losses
- could result in diseconomies of scale
What is conglomerate integration?
the coming together of firms that operate in unrelated markets, concentrating on diversification
What are the advantages of conglomerate integration?
- spreads risk over different markets
- good for businesses to invest rather than having money sitting in the bank
What are the disadvantages of conglomerate integration?
- potential job losses due to duplication
- may not result in synergy due to difference in industry
What are ventures?
- an arrangement between two or more firms usually involving companies in the early stages of development that have high potential to grow
- venture capitalists invest
What is franchising?
- when a business (franchisor) gives another business (franchisee) the right to supply its product to customers
- method of growth as brand is expanded but without the need to acquire or invest in new opportunities as the franchisee invests
- if franchisor has a recognised brand they ‘sell’ the business idea to franchisees
What are the benefits for the franchisor?
- receives share of profits
- rapid expansion enables franchisor to develop business idea
- economies of scale
- economies of scope
- retains control over quality
What are the drawbacks for the franchisor?
- considerable capital required to build franchise infrastructure
- might get unsuitable franchisees
- franchisor has to disclose confidential information to franchisee about nature of business (such as recipe, business approaches, etc)
What are the benefits for the franchisee?
- least amount of risk for a new business
- investing i established brand name
- banks are more willing to lend
- benefits from national advertising by franchisor
- exclusive rights in that area
- established relations with suppliers
- support and training is offered by franchisor
What are the drawbacks for the franchisee?
- can’t change anything
- non-competition clause so franchisee is not allowed to set up own competing business
- if franchisor goes out of business or changes the way it does things this will directly impact the franchisee’s business
- franchisor can pull the franchisee at any time if it doesn’t do well
Give an example of a business with a franchise.
McDonalds
What is innovation?
when a business exploits new ideas which have been developed and turns them into something that can add value
How can innovation be sought?
through research and development, with scientific investigation into new products and new manufacturing processes
Give examples of innovative businesses.
- Apple
- Amazon
- Samsung
- Huawei spent $19bn on R&D in 2019
Why is innovation important?
- impacts every functional area
- will need innovative staff and bigger budget due to increased risk
- need market research and correct branding
- will need state of the art technology for operations
- can be used to motivate the workforce
- can be used to reduce waste and costs
- but also needs to be protected from competitors by copyright etc
What are the benefits of innovation?
- access to new markets (e.g. Wii was marketed at families and older people as well as gamers)
- create new products and demand (Apple created the tablet market with iPad)
- create new ways of doing business (Amazon dominate online businesses)
What are the pressures on innovation?
- external environment (PESTLE)
- competitive pressure from rivals may require a response or will lose market share
- internal pressures as some employees may be eager to experiment and try out new ideas
What is product innovation?
- the development and marketing of the introduction of new or redesigned goods or services
- the redesign could have more desirable functions (iPhone), new materials (GoreTex) or compnents
What is process innovation?
- the implementation of a new or improved production process, delivery method or communication process
- can include software, equipment, or techniques
What are the advantages of innovation?
- improved quality
- ability to enter new markets
- increase value added to products
- increase in product range to spread the risk
- reduce costs and especially unit costs
- improved flexibility
- increased capacity
- easier to meet regulations
- reduce environmental impact of manufacturing process
- improve health and safety
- provide stimulating working environment
- competitive advantage
What are the disadvantages of innovation?
- uncertainty of demand for new products so may not be worthwhile investment as no guarantee it will work
- employees may not adapt to the change
- rivals may be tempted to join the new market
- competitors can make copies of the innovative product
- costly
How can an organisation become innovative?
by making an environment where
- it is acceptable to fail and take risks
- there is funding available for experimentation
- it is good to share (don’t want ‘silo affect’ where only think about department)
- complaints aren’t a bad thing as can learn from them
- time and money is spent on R&D
What are the 4 methods of innovation?
- kaizen
- research and development
- benchmarking
- intrapreneurship
What is kaizen?
- ‘continuous improvement’
- part of lean production
- eliminates waste from every part of manufacture
- improves productivity and efficiency
- achieved sustained continuous improvement
- targets small incremental changes routinely over a long period of tie to create larger change
- empowers and motivates employees
Give examples of businesses that use kaizen.
- Toyota factories where each employee tasked with coming up with 2 new improvements each month to improve efficiency
- Amazon’s senior managers are required to work at least one day a year in customer service so they have direct contact with customers in order to better understand their needs
What is research and development?
the sustained investigation into new ways of doing things
What are the 2 forms of R&D?
- customer orientated business where customer needs are identified and then solutions are found
- e.g. Amazon, Coca Cola, Nike
- product orientated business where products are developed and then markets are sought
- e.g. early Apple, Tesla, early Netflix
What does the R&D spend depend on?
- the industry of the business
- pharmaceuticals = 43% of revenue
- technology = 7% of revenue
- other = 3.5% of revenue
- anything over 15% is considered a high technology business (innovative)
What determines the R&D budget?
- funds available
- how much a business needs to develop a product to remain competitive
- the industry and nature of the product
What determines the success of R&D?
- whether the research is accurate
- the resources available
What is benchmarking?
- identifying the best practice used in production process and delivery of product itself
- can be against other industries or used internally
- should be a continuous process
What are the 4 key steps of benchmarking?
- understand in detail the existing business process
- analyse the business processes of others
- compare business performance against the other businesses analysed
- implement steps to close the gap
What is intrapreneurship?
- the act of behaving like an entrepreneur while working within a larger organisation
- the skills and qualities of an entrepreneur are valuable to a business
- McGregor Y employees where staff take initiative, should be innovative, creative, and can transform ideas into profit
- done through the culture of business
- learning from failures
- but need to continually control costs
Give examples of intrapreneurship in businesses.
- Facebook ‘hackathons’ to produce new ideas
- McDonald’s Happy Meal = tasked with making fast food more appealing to families = Happy Meal created with burger or chicken nuggets, fries and a toy = interactive experience especially as toys were tied in with popular kids TV = massive success since introduction in 1979
