Unit 9- Strategic methods: how to pursue strategies Flashcards
What are the three types of economies of scale?
-Technological
-Specialisation
-Purchasing
What are the benefits of achieving these?
-Lower unit costs
-Barrier to entry
Sources of economies of scale?
Internal: arise from increased output of the business itself
External: Changes in the market conditions due to the size of the business
What are the internal sources of economies of scale?
-Bulk buying
-Specialisation of the workforce
-managerial economies of scale
-marketing economies of scale
-technical economies of scale
What are the external sources of economies of scale?
-Infrastructure improvements
-Suppliers concentration
What is the experience curve?
it shows the effect of experience on unit costs. The more experience the business has, the lower the costs to produce.
What does the experience curve suggest?
-Experience is a barrier to entry
-Firms should try to maximise market share
-Acquisitions might be the best way to do this if a business can acquire a firm with strong experience
What are the two types of growth?
-Organic and inorganic growth
What is organic growth?
Involves internal growth and expansions form within a business
e.g:
Open new branches
Investing in tech or new facilities
Increase capacity
Develop new products
Enter new markets (new segment or country)
What are the benefits and drawbacks of organic growth?
-Less risk than acquisitions
-Easier to manage increase in size
-Usually financed by retained profits
-No interference from the CMA
-Slow growth, less competitive
-No opportunity for synergy or acquire their customer base
What is inorganic growth?
Involves external growth by taking over or merging with other businesses?
e.g
Acquire/takeover (buy) a competitor, supplier, customer or a completely different business
Merge with another business
What is franchising?
arises when a franchisor grants a license to another business to allow it trade using the brand / business format
What are the advantages / disadvantages of franchising?
-Speed up growth
-Less HR costs
-Less operational costs
-Initial fee, ongoing profit
-Franchisee may bring you to national/international level
-Reduced control
-PRofit sharing
What are the key features of a merger?
Less common than takeovers
Both businesses are likely to be equal
Both businesses are likely to be in the same industry
Same dangers as takeovers
Potential for synergy
Why should a business do a merger?
-Achieve economies of scale by buying more in bulk
-To increase market share
-To secure supplies
-To reduce risks
-To acquire knowledge, IPP, Improve product portfolio
-To acquire talent
Why doe takeovers fail?
Risk of taking on significant debts to fund takeover
difficulties and costs of integrating systems
concerns over loss of profits may lower share price
clash of cultures
loss of key staff members and customers
paying too much for a takeover
bad timing
What is a synergy?
The combined performance of 2 or more businesses is greater than the performance of each business working separately.
What are the two types of synergy?
Cost synergy and revenue synergy
What are the benefits of cost synergy?
-Better deals from suppliers
-Lower management costs
-New distribution channels
What are the benefits of revenue synergies?
higher productivity
cross selling to customers
access to new geographic markets
What are the types of integration?
Backwards vertical- Involves acquiring a business operating earlier in the supply chain
Conglomerate- This involves the combination of firms that are involved in unrelated business activities
Forwards vertical- This involved acquiring a business further up in the supply chain
Horizontal- Here business in the same industry and which operate at the same stage of the production process are combined
What’s a joint venture?
A separate business entity created by two or more parties, involving shared ownership, returns and risks.
What are the advantages and disadvantages of joint ventures?
Stronger together = achieving synergy
Faster results = first mover advantage
Enables diversification & economies of scales & scope
Reduces risk of failure
Culture clash & conflicts
Longer decision making
Potential loss of intellectual property protection (patent)
Unequal contribution or commitment = conflicts
What are diseconomies of scale?
Occur when a business grows so large that the costs per unit end up actually increasing.
How do diseconomies of scale happen?
Communication problems- more people become employed due to growth, leading to decrease in team spirit due to less interpersonal connections, decisions making too long due to instructions unclear.
Co-ordination: New departments can cause problems as people may manage people differently which causes clashes
How to overcome diseconomies of scale?
-Change organisational structure
-Use IT to improve communication
-Employee development
-Use of budgets to reduce co-ordination
What is overtrading?
A business expands too quickly without having the financial resources to support the rate of expansion. Overtrading can cause business failure if suitable sources of finance are not obtained.
What are some symptoms of overtrading
-High revenue growth but low gross and operating profit margins
-Persistent use of a bank overdraft facility
-Significant decrease in the current ratio
-significant increase in the payables days and receivables days ratios
-Low levels of capacity utilisation
-Very low inventory turnover ratio
Ways of managing overtrading?
-reducing inventory levels
-enforcing better payment terms with customers
-leasing rather than buying capital equipment
-obtaining better payment terms from suppliers
-scaling back the pace of revenue growth until profit margins and cash reserves have improved
What is Greiner’s model of growth?
5 phases & 5 crises that businesses may experience as they grow.
What is phase 1 and crisis 1?
Phase: Creativity
Crisis: Leadership
Informal communication starts to fail
Business now too big for leader to get involved in everything
What is phase 2 and crisis 2?
Phase: Direction
Crisis: Autonomy
Business now has functional management
But founder / leader still struggling to let go
What is phase 3 and crisis 3?
Phase: Delegation
Crisis: Control
More formal management structures in place
But new layers of hierarchy needed to keep control
What is phase 4 and crisis 4?
Phase: Coordination
Crisis: Red Tape
A dangerous growth in organisational bureaucracy
Slowing decision-making & missing external changes
What is phase 5 and crisis 5?
Phase: Collaboration
Crisis: Growth
Growth slowing as business runs out of ideas & organic growth is no longer sufficient. Alliances are sought (mergers, takeovers, joint ventures or new business over)
What’s good about Greiner’s growth model?
Warns leaders that growth strategy is difficult
Highlights potential signs of ‘crisis’
Suggests methods to overcome these crises
What’s bad about Greiner’s growth model?
Too simplistic model?
Not all businesses will suffer crises as they grow
Model doesn’t really take account of other external factors e.g. PESTLE + C
What is retrenchment?
Cutting down or reducing the size of a business to become more financially stable.
What are the reasons for retrenchment?
-Changes in the market
-Failed takeover
-Economic downturn
-Improving performance
What are the measures for retrenchment?
Recruitment freeze or voluntary redundancy
making redundancies
-closing down division or factory
-delayering
What is innovation?
Innovation is the ‘commercially successful exploitation of ideas’
What are the two types of innovation?
-Product innovation
-Process innovation
What is the benefit of product innovation?
Opportunity to build early customer loyalty & benefit from “First mover advantage”
Premium or skimming pricing strategy (high profit margin)
Publicity
Varied product portfolio (Boston matrix, PLC)
What is the benefit of process innovation?
Greater efficiency
Improved quality
Faster production time
Reduction in unit cost
Enables mass customisation
Greater flexibility
Better customer service
What are the drawbacks of innovation?
-Competitors copying innovative product/process
-uncertain commercial returns and no guarantee of success or time scale
-May require high financial investments
What is disruptive innovation?
Disruptive innovation is an innovation that disrupts an industry making products, processes or businesses redundant
What pressures innovation?
Pestle + C and shareholders
How do you protect innovation?
-Copyright
-Patent
-Trademark
What are the ways to be innovative and what are they?
R&D - investment in scientific research & tech development
Intrapreneurship - encouraging all employees to think like entrepreneurs
Kaizen - philosophy of continuous improvement
Benchmarking - identifying best practice and then emulating it
What are the key reasons for targeting international markets?
-Size of the market
-Ease of doing business/political environment
-Domestic competition
-Economic growth/level of disposable income
-Exchange rates
-Infrastructure
What is an emerging market/economy?
the economy of a developing nation that is becoming more engaged with global markets as it grows.
What is a multinational company (MNC)?
A business that has operations in more than one country - not just selling in multiple countries.
What are the ways of entering an international market?
-Exporting
-Licensing
-Alliances
-Direct investment
What are the advantages and disadvantages of exporting
-Increase size of target market
-Manufacturing stays in uk aiding quality control
-Less capital expenditure to set up abroad
-May have limited knowledge of international market
-Products may need to be customised/specialised as a result
-Tarrifs/Quota may apply to a country you are exporting too
What are the advantages and disadvantages of licensing
-B gains access to existing distribution network
-Revenue from fee
-Avoid issues with quota or tarrifs
-Risk of brand being damaged
-Only receive small percentage of profits
-Common to offer exclusive rights within an agreement
What are the advantages and disadvantages of alliances
-other business (b) may have local knowledge
-b made support issues with cultural differences
-Synergies may be created
-share profits
-Each B may have a different objective
-Trade secrets may be revealed with an alliance
What are the advantages and disadvantages of direct investment
-Retain control of foreign ops
-Profits kept and not shared
-DI may seek vertical intergration
-High investment outlay -> capital expenditure.
-Different organisational culture -> pressure on HR
What is the difference between offshoring & outsourcing?
Offshoring: The relocation of a business activities from the home country to a different international location
Outsourcing: The transfer of business functions from being done within the business to be provided by a supplier
Key reason for offshoring
-Cheaper labour
-Cheaper land
-Less tax
-Lower salary cost
-Higher savings on operational cost
-Access to different talented employees
Potential drawbacks of offshoring
-Social barriers
-Communication problems
-Maybe unethical
-Security concerns
-Higher utility costs
-Time zone differences
-Legal and political environments
-Reduced control of business functions and operations
What is reshoring?
Involving a business returning production or operations to the host country had previously been moved to a different international location
What is Bartlett & Ghoshal’s model strategies for international businesses?
Identified four different types of strategies and how they are linked to how they balance the pressures of cost reduction with being able to respond locally.
What is Bartlett & Ghoshal’s model low responsiveness and high global integration or cost pressures ?
Global strategy: a standardised product sold around the world.
A business using this strategy maximises the benefits of economies of scale & efficiencies but will struggle in markets where localise needs exist
What is Bartlett & Ghoshal’s model high responsiveness and high global integration or cost pressures ?
Transnational strategy: highly responsive to local markets but business is highly integrated sharing knowledge & expertise.
A business using this strategy operates as one entity & there is lots of sharing & learning together. Very hard to implement effectively, but successful transnational businesses benefit from economies of scale but remain responsive to demands of local markets
What is Bartlett & Ghoshal’s model low responsiveness and low global integration or cost pressures ?
International strategy: products produced for the domestic market with some slight alterations for international markets (perhaps to meet national standards)
A business using this strategy focusses on domestic markets but makes slight tweaks to its products to satisfy localised demand & to export
What is Bartlett & Ghoshal’s model high responsiveness and low global integration or cost pressures ?
Multi-domestic strategy: products tailored for local markets; subsidiaries may operate independently of one another.
A business using this strategy is a MNC: the business is completely focused on meeting local needs through decentralisation. Highly adaptive but difficult to manage & control parts of the business (subsidiaries) in different countries
What is ERP?
Software system that helps businesses integrate and manage their often complex financial, supply chain, manufacturing, operations, reporting and human resource systems
Benefits of ERP?
Financial management: better control over assets, cash flow and accounting
Supply chain & operations management: streamlined purchasing, manufacturing, inventory and sales order processing
CR management: improved customer service, and opportunities to cross-sell
Project management: complex projects better managed and to lower cost
HR management: may help attract and retain good employees
Business intelligence: improved management reporting, analysis, and business analytics
IB management: helps coordinate multi-location business management
What is big data?
The process of collecting and analysing large data sets from traditional & digital sources to identify trends that can be used in decision making
Benefits and drawbacks of big data
Tracking and monitoring the performance, safety & reliability of operational equipment
-Generating marketing insights (needs and wants of customers)
-Improved decision making
-More efficient management of capacity
-European wide regulations like GDPR
What is data mining?
The process of analysing data from different perspectives and summarising it into useful information, including discovery of previously unknown interesting patterns, unusual records or dependencies
What is e-commerce?
Businesses and consumers come together in a virtual marketplace to trade
Benefits and drawbacks of e-commerce?
Change to the marketing mix:
-Use less outlets
-Less costs
-Reduce break-even output
-Reduce risk
Increase reach:
-Make sales beyond local areas
-Suits globalised markets
-If international: weak exchange will increase price competitiveness
Increased profits
-Need website
-Inital costs
-Ongoing costs
-Inventory cost
How can digital technologies enable a business to grow?
-Serve existing customers better
-Reach new customers in new segment & locations
-Offer new ways of delivering products and services using digital technology
-Reduce costs by integrating digital technology into operations
-The needs to respond to digital innovation by competitors
-Access, analyse and action data that provides key insights into customer needs and business performance
