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9 - Strategic methods: how to pursue strategies (Factors influencing the…
9 - Strategic methods: how to pursue strategies
The reasons why businesses grow or retrench
Growth
may be
achieved
either
internally
(organically) or
externally
through takeovers or mergers - it is an
important objective
and there are a number of reasons for this....
Survival
- essential part of growth.
Reduce risk
- growth in the form of diversification or moving into new markets can be used to reduce risk.
Increased profit
- increase in share price, greater dividends to shareholders. Positive media attention, greater security for the CEO and board members.
Increase market share
- more dominant market position, greater power over suppliers and prices.
Retrenchment
is the
opposite of growth
and means cutting down or
reducing the size of a business
, usually with the aim of becoming
financially stable
. There are a
number of reasons
a business might pursue this strategy...
Failed takeover
- not unsuaual for a takeover to fail and for a business to demerge part or all of the business taken over.
Economic downturn
- sometimes this leads to a business retrenching in order to better cope with the changed economic environment.
Changes in the market
- changes in taste and fashion, technological development or the arrival of more competitive businesses.
The difference between organic and external growth
Organic
growth -
expanding a business by means of opening new businesses, shops or factories
(internal growth).
External
growth -
expanding a business by means of merging with or taking over another business.
WHEREAS
How to manage and overcome the problems of growth and retrenchment
Issues with growth
Economies of scale
Definition: the
proportionate saving in costs as a result of an increase in the size of an operating unit.
Benefits... (FIT MATE)
Ma
-nagerial - managers become expert
Te
-chnological - technology can be used to lower unit costs
T
-rading - bulk buying becomes possible (purchasing economies of scale)
FI
-nancial - raising finance is easier
Economies of scope
Producing
more types of products.
Definition: the
proportionate saving gained by producing two or more distinct products, when the cost of doing so is less than that of producing each separately.
Cheaper
to produce
two or more types
of product than it is to produce them
separately
.
Diseconomies of scale
Definition:
refer to a situation where economies of scale no longer occur and unit costs begin to increase rather than decrease.
Reasons for this...
Lack of control and coordination
Alienation of the workforce
Poor communciation
The experience curve
The idea that the more you do something, the better you get at it, enabling quicker and cheaper production
As a business gets
bigger
, it should gain a
competitive cost advantage
which is why this curve is linked to a
cost leadership strategy.
Overtrading
Definition:
where a business grows too quickly, undertaking more business than its working capital can cope with.
Cash often has to
leave
the business
before
more cash comes
in
. Quickly leads to
liquidity problems.
Synergy
Definition: the
idea that the value and performance of two businesses combined will be greater than the sum of the two parts.
Greiner's word of growth
Definition:
describes different phases of a business's growth and provides a framework to help understand different organisational structures and coordination methods.
Link to the model explained:
https://drive.google.com/file/d/1m9zqWrPG1Y_EjQ0K-TIhrADogb4LrQR7/view?usp=sharing
Issues with retrenchment
It involves
downsizing
, resulting in inevitable
job losses
and
redundancy
, which leads to the biggest
potential
problem of
workforce alienation.
However, a key
good
outcome is the
development
of a retrenchment procedure that
achieves objectives
while
minimising workforce impact
. This requires careful
consideration
, with
early consultation
and
collaboration
with trade unions and worker representatives in order to
minimise potential issues.
The impact of growth or retrenchment on the functional areas of business
Marketing
- relates to decisions regarding
changing marketing objectives
in a growing or declining market and the
impact
on the
marketing mix.
Finance
- decisions regarding the
finance of growth
in terms of
capital
and
capital investment
. Alternatively, it might relate to achieving
financial stability
in a
declining
market, including the finance of
redundancy payments.
Operations
- whether
increasing
or
decreasing
scale, the impact is likely to be in relation to
unit costs
,
capacity
and how to
use technology.
Human resources
- impact of a
change in size
is likely to be in relation to
organisational structure
and
responsibilities
, the need for
recruitment
,
selection
and
training
as well as
how to approach redundancies.
Assessing methods and types of growth
Mergers and takeovers
Mergers
occur when
two or more
businesses agree to
join together
, whereas
takeovers
are when
one business
gains
control
of another business through the
purchase of a controlling interest.
Link to a diagram showing types of mergers and takeovers (explained):
Ventures
One method of
combining
two businesses
without
undertaking a
full takeover or merger
is to form a
joint venture
with another business.
Joint venture: a business arrangement where two or more businesses agree to pool their resources for the accomplishment of a specific task.
It enables an
established business
to
benefit
form the
local knowledge and expertise
of a business
already in the market.
Franchising
Franchising: a method of growth where an existing business (the franchisor) grants another party (the franchisee) the right to use its trade name and sell its products or services.
Franchisee usually has to
pay a fee upfront
and a
percentage of sales revenue
as a
royalty
each year.
For the
franchisor
, this method of growth brings many
benefits
...
Finance
provided by the
franchisee
.
The franchisee is likely to be highly motivated.
It is
relatively quick.
Organisational
structure
is
less complex.
The pressures for innovation
Innovation: the process of converting an invention into a good, service or process that creates value for a business.
Pressures for change...
Shareholders and the City
- businesses are under
pressure
from
shareholders
and
City analysts
to
perform well
in order to
increase revenues and profit
. One way of achieving this is innovation.
Competitive environment
- in order to
stay ahead
of competitors and
maintain
and perhaps
improve market share
, innovation is
essential
.
Survival
- many examples of when companies have fallen on hard times due to the failure to innovate. Companies must
continue to innovate
to
maintain market share
and
competitive position.
Social and ethical
-
pressures
for change and innovation may come from a
change in social attitudes
, particularly with
regards to the environment.
The value of innovation
Aligned to strategic positioning
Stakeholder value
Competitive advantage
USP
Builds reputation
Improves efficiency
The ways of becoming an innovative organisation
Kaizen
Definition: a
Japanese business philosophy of continuous improvement in working practices and efficiency.
Recognises there is always
room for improvement
and wants workers to be
confident
about
offering suggestions.
Relies on
teamwork
and
quality circles
, and worker groups
meet and work
together.
Research and development (R&D)
It is about
developing new products
and
processes
. The
amount spent on R&D
varies
from industry to industry and business to business, but there's no doubt it is
essential for new product development.
Intrapreneurship
Definition: the
practice of entrepreneurship that exists within an existing business.
By
embracing
this approach, a business can tap into the
entrepreneurial talent
of its
workforce
and thereby
stimulate innovation.
Benchmarking
Definition: a
strategic and analytical process of continuously measuring an organisation's products, services and practices against a recognised leader.
Benefits
...
Cost-effective
Quicker way of making improvements
Efficient
How to protect innovation and intellectual property
Intellectual Property
(IP) is an
intangible asset
belonging to the owner or organisation. It may be in the form of inventions, symbols, artistic or literary work and
stems from innovation.
Ways of protecting Intellectual property...
Trademarks
- a trademark is a
recognisable name, logo, slogan or design that denotes a specific product or service and legally differentiates it from others.
Must be
registered
.
Copyrights
- a copyright is the
legal protection provided for the work of authors, composers and artists.
Patents
- a patent is a
government licence that gives the holder exclusive rights to a process, design or new invention.
It
encourages
innovation. The
exclusivity
of a patent enables a business to
charge higher prices
and
recoup
the R&D
costs
.
The impact of an innovation strategy on the functional areas of the business
Finance
- innovation requires
funding
with
no guarantee of a return.
Marketing
- innovation may
steam from market research
or
require market research. New
products or services require
promotion
, which adds to the
costs
of a business.
Operations
- process innovation
directly affects operations
and the
way
a product is made.
New
products may require
new processes
or perhaps even
new capacity.
Human resources
- in terms of
skills and training
required for
new products and processes.
May be affected through the
culture of the business
.
Reasons for targeting, operating in and trading with international markets
Diversify risk
Trade liberalisation
- the
World Trade Organization
has helped achieve
greater cooperation
between nations, making markets
more accessible
. Costs of
trading
have
reduced
.
Economies of scale
- more will be
produced
which may enable the
better use of capacity
,
improve
productivity and
reduce
unit costs.
Greater production
=
further
economies of scale, i.e.
purchasing, managerial and technological.
Tax
- many organisations
gain tax advantages
through
trading internationally.
This may be as a result of
transfer pricing
or by
declaring profit
in the country with the
lowest corporation tax.
Growth and profit
- enables
future growth
of a business,
satisfying a key objective
and
benefiting its shareholders
and overall
economy
.
Factors influencing the attractiveness of international markets
Economic factors
Cost
Legal and political environment
Culture
Market potential
Methods of entry
Competition
Risk
Reasons for producing more and sourcing more resources abroad
Cost
is the primary reason for
sourcing materials
from abroad. If resources of the
desired quality, quantity and reliability
can be obtained
overseas
, it
makes economic sense
to purchase them.
Cost
is also a big
factor
in an organisation's decision to
produce abroad
or to
off-shore production.
Off-shoring is the movement of the operations of a business to another country.
Ways of entering international markets and value of different methods
Licensing
- when a business grants a licence or the right to a business in another country to
produce its product
. Provides a
quick, low-cost method
of entering a
foreign market
that
avoids tarrifs
and
other trade barriers
as well as knowledge of the local producer. However,
dependent
on the
local producer.
Alliances
- involve a
cooperative agreement
between a
company and overseas business.
Provide
access to a foreign market
as well as benefiting from the
knowledge and technology of the products
concerned.
Exporting
- can be
indirect
(through agents) where there is
no direct contact
with customers or markets, or
direct
where
customers and markets are dealt with
and a relationship is
developed
.
Benefits: relatively little investment is required; entry may be gradual which allows local knowledge to be acquired; avoids any restrictions imposed on foreign investment.
Drawback: suffers from vulnerability to tarrifs and other trade barriers, cost of transport and lack of local knowledge.
Direct investment
- gives
direct control
over operations while
avoiding tarrifs and trade barriers
.
Reduces transportation costs
and possibly labour costs. However, it has a
high initial cost,
results in
greater exposure
to
economic
and
political
risk and may create
problems in terms of management
and
control
of overseas operation.
A business that has
production facilities
in
more than one
country is known as a
multinational company.
Influences on buying, selling and producing abroad
Reasons for choosing international locations to buy, sell and produce...
Greater pool of labour
Access to raw materials
Less regulation
Increased global market opportunities
Lower costs
To avoid trade barriers
Issues relating to international locations...
Level of service and maintaining quality
Supply chain issues
, e.g.
timing, reliability and flexibility.
Cultrual differences
Ethical issues
Language and communication barreirs
Problems can be
dealt
with
re-shoring
(
when businesses bring back to their home country operations which had been moved overseas
).
Managing international business including pressures for local responsiveness and pressures for cost reduction
Bartlett and Ghosal's international strategies
Definition:
identifies four international strategies according to the pressure for local responsiveness (high or low) and the pressure for integration (high or low).
Highlights
cost pressures
(potential cost savings from being globally integrated) and
pressures for local responsiveness
(to need to respond to local market conditions).
Link to the diagram and an explanation of the four different strategies.
The impact of internationalism on the functional areas of the business
Finance
Operations
Marketing
Human resources
The pressures to adopt digital technology
Improved performance
-
essential
in a competitive market, digital technology can lead to
lower costs
and
quicker and more efficient decision-making
, enabling an organisation to stay
one step ahead
of the
competition
.
Keep up with the consumer and market trends
- digital technology means a more
flexible
business that can
quickly respond to changes
in consumer
tastes
,
fashion
and
market trends.
E-commerce
Relates to
buying and selling
goods and services through an
electronic medium
. It might be business-to-business (
B2B
), business-to-consumer (
B2C
) or consumer-to-consumer (
C2C
).
Consumers
have access to
more
products and services at
cheaper prices
, information is
available instantly
and it enables
participation at auctions.
Consumers are
unable to examine products personally
(dependent on system reliability).
Personal
information can be
stolen
through
hacking
and some people today aren't
connected to the internet.
In relation to this,
m-commerce
is the same as e-commerce but through
wireless technology
using
mobile phones and tablets.
Big Data
Definition: the
ever-increasing amounts of structured, semi-structured or unstructured data that have the potential to be mined for information.
Can be
characterised by four Vs...
Velocity
Variety
Volume
Veracity
Link to diagram about Big data:
Benefits
Allows businesses to
target consumers
more
directly
with promotions.
Business processes
such as stock levels, supply chains and delivery roots can be
optimised
.
Create a
better understanding
of customers and
purchasing habits.
Can
improve
sports performance, national security and health.
Data mining
Definition: the
process used by organisations to turn large amounts of data (big data) into useful information.
Enterprise resource planning
Definition: ERP is
the business management software system by which an organisation manages and integrates the important parts of its business.
Benefits
Eliminates duplication.
Integrates all functions and processes.
Greater accuracy.
Better analysis and planning capabilities.
Lower costs.
Drawbacks
Can be costly as irt needs to be adapted to each individual organisation and takes time to set up and test.
Requires dedicated staff and training.
The value of digital technology
Lower costs
in the
long
run.
Ability to access a
wider
target market.
Customer
expectations.
Major growth
area for all businesses.
Offers an
additional route
to market.
Enables
monitoring
of which products are selling and where.
The impact of digital technology on the functional areas of the business
Marketing
- opened up new markets, enabled more targeted promotions and reduced marketing costs.
Operations management
- greater production automation, more efficient inventory control = lower costs, better quality, greater flexibility and reduced waste.
Financial
- monitoring and analysis are both quicker and easier to undertake.
Human resources
- more flexible, multi-skilled workforces who work under better conditions and can be more closely monitored. Comes with a cost in terms of recruitment and training and in some cases can lead to industrial relations problems.