Please enable JavaScript.
Coggle requires JavaScript to display documents.
Unit 9: Strategic Methods- How to Pursue Strategies - Coggle Diagram
Unit 9: Strategic Methods- How to Pursue Strategies
Strategic Methods- How to persue strategy
The need to assess a change in scale helps peruse strategy. These involve:
Corperate objectives- business physically wanting to aim to grow
Benefits to stakeholders- wanting higher dividends, more custom or higher salaries
Increased demand
Market share increase- more advantage
Economies of scale- bigger boost in the growth due to benefits
Diversification(spreading risks)- if one product within the business is not going well they have other
innovations
that they can still rely on
Economic growth and opportunities
Any other external factors
Issues to consider when managing growth:
Structure
Different expertise needed for expansion- for example a coffee shop expanding into a café would need to hire chefs.
More employees may result in a lack of direction
Increased delegation due to more employees, so original employees may lose control.
Culture of the business may start to change
Increased administration
Diseconomies of scale
Risk of overtrading(taking on more than can be coped with)- ending up in a failure from not having sufficient resources to maintain
Internal and External Growth
Internal
- new products and new markets. Can sometimes be known as
organic growth
. Growing through enterprises or expanding production.
Often had opportunity cost as using profit to grow could be used for increased advertisement.
External
- merging or taking over. Known as growth through integration with another business.
Advantages of external growth
- known to be a faster process. Getting involved with a business that is already set up(less costs)
Disadvantages of external growth
- there could possibly be problems with communication, administration and duplication of resources. It depends on point?
Retrenchment- cutting back the scales of operations. Can also be known as
downsizing
. A main problem with downsizing is that it is a process that takes a long time, so employees that were affected by the downsizing would've been kept in the dark. Therefore, a lack of trust is generated between manager and employee.
Greiner's model of Growth
The main premise of the model is to show the different phases of company growth.
The main aim is to help managers to anticipate and address future challenges.
Phase 1: Growth through creativity
This phase is survived by identifying a strong charismatic leader who is focused on the product and the market not just management activities. Also successfully communicate with employees
Therefore this stage can be met with a
leadership crisis
because as the business f=grows through the creativity stage more effective management is required
Phase 2: Growth through direction
This is where growth becomes more successful because a centralised organisational structure is pursued and standards are aquired.
The stage is eventually associated with an autonomy crisis- as the growth continues employees become more experienced and therefore want to move away from the directional form of management and want more autonomy
Phase 3: Growth through delegation
To move forward from the autonomy crisis, management will establish a decrentralised structure by delegating the company
A control crisis occurs because senior management become aware that they are losing their high authority position to an increase in management
Phase 4: Growth through co-ordination
Phase 3 is survived by merging decentralised structure into groups that is treated as an investment centre- return on investment is a specific field that gives or reduces funding
The co-ordination can cause lacked confidence between managers in head office and staff in the decentralised units. Staff in decentralised resent the heavy direction from senior management and they then view this as the staff being unco-operative
Phase 5: Growth through collaboration
Solves the red tape crisis by working through teamwork, previously controlled systems being simplified and economic rewards being geared to team performance rather than individual reward.
Experiences a growth crisis because there is no internal solution
Phase 6: Growth through alliances
Sometimes businesses grow further by forming takeovers or mergers with other businesses (external growth)
They face the possible challenge of having the appropriate resources and expertise to develop effectively
Disadvantage
: Important to keep in mind that the model does not include any time scales or address how different businesses grow at different times.
therefore it depends on any sort of external influences
could also depend on the business' history
Integration
Vertical Integration
- same industry but in different stages of production.
Backwards- acquiring a business from earlier in the supply chain
Forwards- acquiring a business from further up in the supply chain
Booker integration with £40 million worth of budgens and londis stores.
Horizontal integration
- same industry and stage of production. Often when horizontal integration is occurring it is with competitors, mainly to obtain more market share.
Example: 2015 Dominos buy largest pizza chain in Germany for $86 million
Advantage- less costs. This is because merging with an existing brand may be cheaper than organically growing a brand. Less fixed costs, so more room for variable costs being higher so maybe higher quality charging for premium pricing? Most importantly merging with another company blocks barriers to entry.
Blocking barriers to entry will cause the company to grow a dominant position in the market and grow a reputation that will keep it this way.
However- depends on how the dominant position is managed. It is important that the dominant position is not abused through actions such as predatory pricing which breaks the competition legislation. If it is smaller companies may be funded by the government so the larger business loses its market position.
Conglomerate integration
- where businesses take over a business that is not related to their industry. Can be a problematic method if the necessary expertise don't exist.
Takeovers
Motives for a takeover
:
It can be faster than organic growth, there is acquisition of technical expertise, brands are expensive to develop(buying a ready made brand), patents are valuable in the deal.
Success of takeovers:
When successful it can grant a business with economies of scale, reduced costs and higher profit margins and market shares.
However, it is important to ensure that the takeover is well planned as problems such as cultural differences, diseconomies of scale and duplication of resources can come into effect.
Economies of Scale
Managerial economies of scale
- achieved by investing in expertise as the organisation grows.
Specialist managers who oversee and improve production can streamline processes and increase productivity, resulting in lower unit costs and obtaining economies of scale.
Economies of scope
- benefited by businesses when they produce multiple different products. Aimed to be achieved when it is cheaper to produce a range of services rather than focusing on a small number of products.
Product line width
- range of products they sell
Product line depth
- variations of the same product
The experience curve
- the more experience a firm receives in manufacturing a product, the lower the average costs become. This is because it becomes more productive and quality is higher.
Synergy
Overtrading
This is where a business grows too quickly without having enough long term funding. Can be a result of many things, such as
over-investment in fixed assets
,
too much stock
or
not enough working capital
Venture
- arrangement between two or more firms which engage together in developing a new product or moving into new markets.
Can often be high risk strategies
.
Venture capital
- someone who invests in the business, tending to be for a start up in small business.
Franchising
- this enlists where a business uses the name, products and services of another more well known business.
Advantages of Franchising
:
The set up is free, there is quick growth, control can be retained and economies of scale can be persued.
Disadvantages of Franchising:
Capital is needed, there are marketing costs, training will be needed for new staff and importantly,
there is heavy reliance purely on the franchise alone.
A concept that if more people join together a lot more can be achieved. "The whole is greater than the sum of its parts".
Innovation
The successful exploitation of new ideas to add value and enable a business to be competitive
Product innovation
- the development of new goods and services, OR a significant change to an already existing product.
Process innovation
- development of new strategies that improve how the product is manufactured.
Strategic innovation
- When a business undertakes a serious change in their management practices, structure or strategy in order to improve its competitiveness
Improving chances of success
Early planning
- This is where a pipeline is created which considers where existing products sit on the product life cycle. Innovation is then planned to keep products in maturity.
Ensuring a supportive culture
- encouraging the use of initiative. This can be through rewards, recognition for hard work. Business terms- quality circles and types of management approach i.e. laissez faire and democratic.
Making sure the products are protected
- this can include using copyrights, patents and trademarks to ensure the company has sole ownership.
Off-shoring
This is where businesses subcontract or outsource to another country.
Re-shoring
is where businesses move back to their country of origin
Why is there an increase in the amount of businesses who are re-shoring?
Shift in consumer preferences- for example supermarkets such as lidl and aldi have begun to market their meat as made in Britain. Stemmed from a desire to improve quality of products for customer service. Re-shoring makes it easier to reduce production to market lead times- being in the UK will be more responsive to demand. There is also a desire to obtain more predictable legal or regulatory systems.
These are benefits received from staying purely UK based.
Off-shoring can lead to fluctuating exchange rates which can result in uncertainty. International transport costs are currently changing and disruption can lead to supply chain risks.
Further disadvantages of off-shoring when put in comparison to re-shoring.
Advantages and disadvantages of offshoring
There are lower costs, for example cheaper labour in places like China, technology increasing so easier to use overseas, skilled and low paid workers, specialisation of certain industries and access to more of a variety of resources.
However, there is an increased risk from using off-shoring. There is always the possibility of instability with another countries politics or problems with management. There may be increased costs when setting up, currency fluctuations, and communication issues.
Pressures of local responsiveness and cost reduction (linked with
internalisation
- the prospect of businesses operating in various countries increasingly)
The trade off
- needing to balance keeping costs down while also responding to local customer needs and wants
Local responsiveness:
This can be
catering
for
different lifestyles
and expectations in countries and understanding the different tastes in other countries. There may also be a
difference in infrastructure
- may need to have additional investment or preferences of walk in shopping or online shopping. Finally, the
political
and
economical
demands from that government must be taken into account.
Cost reduction
:
Can be done by minimising unit costs where possible, using least cost sites or offering standardised products.
When cost reduction is most necessary
- if you brand homogenous products (lack of differentiation so compete for price). Competition when based in a low cost area results in more pressure to minimise costs to match competitors. If there is excess capacity, there will result in a downward pressure on prices. Consumer power may also be strong- there would be low switching costs from a consumer if there is change to a different product.
Barlett and Ghoshall's international strategy grid
Shows four different strategies that businesses can take to balance cost reduction and being locally responsive
Multi-domestic strategy
- low pressure for cost reduction and a high pressure for local responsiveness. It is mainly based upon responsiveness to local market demands- products are produced for domestic markets but have local customisation of products.
Advantage- opportunity to customise products and meet local differences
Disadvantage- can't experience the maximum benefits of the experience curve because there is more than one product being manufactured.
International strategy
- low pressure for cost reduction and local responsiveness. Limited customisation of products and often developed at home.
Advantage- lack of customisation may make the production process slower so business can meet customer demands faster
Disadvantage- limited local responsiveness from non-differentiated products
Transnational strategy
- a high pressure for cost reduction and differentiation. Knowledge and innovation is fought out in order to achieve economies of scale and maximise the benefits from the experience curve.
Disadvantage- difficult to implement fully due to organisational problems. Individual difference because high levels of knowledge are needed. Staff skills?
Advantages- experience curve and product customisation can become available. Could lead to mass customisation, they gain more global knowledge from this strategy so mass customisation could be faster
Global strategy
- high pressure for cost reduction but a low pressure for differentiation. Standardised product released worldwide with a heavy pressure to achieve economies of scale. Can lead to aggressive pricing strategies.
Disadvantage- lack of local responsiveness because of the standardised products
Advantage- the experience curve can be exploited. If the product is standardised, the business becomes more used to manufacturing that product so can identify ways to decrease costs
Assessing greater use of technology
:
big data
,
data mining
( mining for information- how do we use the information to make it appropriate for business),
e-commerce
and
enterprise and resource planning
( IT systems helping to integrate data)
E-commerce
- commercial transactions online.
Advantages
- cost- effectiveness, flexibility, increased demand, improved efficiency
Disadvantages
- a greater element of competition, cost of technology, customers can't feel products and increased return costs.
Big Data
The process of collecting data to then identify patterns and trends. Often can be used in decision making.
Big data being used to improve efficiency
Can help firms analyse their operations- quality control, tracking and inventory control
Collecting more marketing information- for example targeting promotions based upon customer purchasing habits
Improving decision making
- understanding consumer behaviour, which therefore can make more predictions about consumers wants and needs.
Improving security- help prevent fraud/data breaches
Data Mining
Data analysis is growing rapidly and therefore a much sought after skill
Big data can provide a huge volume of data but can be unusable for stakeholders. Data mining aims to solve this issue.
Enterprise resource planning( ERP)
Using information to automate and integrate a business' core processes.
ERP can be used in order processing, inventory control and HRM
Using ERP can increase efficiency of automation by reducing human error, as well as issuing reporting. This enables faster identification of issues to address
The value of digital technology
Disadvantages: can increase stress, lower morale, increased costs from introducing and updating digital technology and changing the global competitive environment.
Advantages: improved living standards, greater competition, advances in communication and improved quality products.
Internationalisation
Being linked with globalisation, giving into the notion that businesses are increasingly operating in various countries. A company may
target
,
operate in
or
trade with
other countries markets
Reasons for targeting/operating in international markets
Avoids the risk of operating in a single market- trade rules accommodating over others meaning jobs could be at risk. This reduces opportunity costs that may have occurred if continuing to operate in the same market. This gives them competitive advantage over companies that have not moved out of the original market and are solely existing in one area.
One limitation of internationalisation is reduced efficiency. This is because they lose out on opportunities received from the experience curve and economies of scale. These can't be achieved on a domestic scale when operating internationally because the business is enlarged and therefore generates a lack of experience from producing the products. There is less chance that they will get used to operating on specific products.
Gains more market knowledge
Competing to safeguard domestic markets- to match competencies and resources of competitors
Link to ansoff matrix- market development
What makes an international market attractive?
Size and potential growth, accessibility, compatibility, availability of finance, availability of resources and level of competition
Benchmarking
A method which can identify areas where business performance can be improved.
Process involves identifying the current position of the business, comparing their performance to other companies and identifying ways in which performance gaps can be filled in
Retrenchment
When businesses put methods into place which significantly be cut down their processes
Retrenchment is usually caused by a business experiencing situations where there is risk they are becoming unprofitable, struggling to break even or their costs are too high.
Includes: high gearing, low roce, new leadership, economic downturn
Problems that arise from retrenchment
Usually causes lots of changes within the business which can be resisted by employees or not implemented into successfully.
FE: new leadership. Can lead to threat to corporate culture or an abandonment of in- process activities, which can lead to increased costs and wastage so the retrenchment method may not have actually been successful
FE: redundancies. Fewer people may decrease motivation of current staff because they may have lost their friends which was part of their culture
Depends on
: the size and scope of the retrenchment
Kaizen
An approach which introduces small or incremental changes in a business in order to improve quality and efficiency
Approach assumes that the key area that is needed for improvement are the employees, so the business must have a culture where employees are encouraged to engage in the process
FE: need of theory y workers, democratic leadership and middle level on Tannebaum and Schmidt
Disadvantage
- Kaizen can be viewed as an unrelenting process. Some firms set up ideas that cause employees to come up with a specific set of ideas in a period of time which they may view as an increase of pressure onto their job. This is more likely when Kaizen is first introduced later into the scheme, as employees may expect a pay rise. As some employees may see the increased responsibility as a burden rather than an opportunity, Kaizen may still be just as long of a process to be implemented into the business as research and development
One advantage
- Kaizen's small changes are implemented by the employees themselves which means that the changes are less likely to be rejected. This decreases resistance to change and avoids extra time within the process which may have included new strategies that come from Khotter and Sleizenger's resistance to change policies.