Business - 3.9

AQA Business A-level Strategy

why do businesses grow? (x6)

1. to increase brand awareness

2. maximise profits and sales

3. access economies of scale

4. increase supply to meet demand

5. meet strategic objectives

6. gain a competitive advantage

synergy

when the benefits are far greater than the costs involved

organic growth

internal where a business increases their sales (new markets, launching products etc.) and utilises their retained profits to then grow

slow and closely managed so lower risk and costs of growth spread over longer period of time

example of organic growth

Costa Coffee opening new stores (facilitated by their strong branding and good reputation)

advantages of organic growth (x5)

1. considered less risky, costly and fewer cultural problems

2. no loss of control as no outsiders involved

3. hiring more staff brings more ideas and expertise

4. investing in new equipment increases production capacity

5. can reach new markets

disadvantages of organic growth (x5)

1. dependent on the growth of the industry that the business is in (limited if the market is saturated)

2. risks associated with investing heavily

3. USP needs to be developed

4. can be slow

5. restricted by finance available

merger

when two businesses believe and jointly agree that they can increase their combined profit, or achieve other objectives by merging two companies together

takeover

when the acquiring firm offer the company’s shareholders more money for the shares they hold than if they were to be sold on the stock exchange to gain more than 50% of shares

backwards vertical + example

a business acquires another behind it in the chain of production

E.G. IKEA acquiring a wood supplier

advantages of backwards vertical (x4)

1. guarantees quality of raw materials

2. cuts out the “middle man” leading to increased profits

3. can limit supplies to competitors, gaining a competitive advantage due to a cost advantage

4. assures the business of supplies for stock at a lower cost

disadvantages of backwards vertical (x3)

1. company is in a different sectors so not familiar with operations etc.

2. CULTURE CLASH - can cause managerial economies of scale

3. coordination is more complex

forwards vertical + example

going forwards in the chain of production

E.G. Greene King owns about 3100 pubs across the UK

advantages of forwards vertical (x3)

1. guarantees somewhere to sell the product

2. cuts out the “middle man” leading to increased profits

3. more control over the pricing and product display

disadvantages of forwards vertical (x3)

1. company is in a different sector so not familiar with operations etc.

2. coordination is more complex

3. limited economies of scale

horizontal integration + example

companies from the same sector join / merge together

E.G. Facebook’s acquisition of Instagram in 2012

advantages of horizontal integration (x3)

1. removes a competitor from the market

2. opportunity for greater economies of scale as they produce more

3. greater market share (advantages associated with being the market leader)

disadvantages of horizontal integration (x5)

1. could lead to retrenchment due to duplicated activities

2. CULTURE CLASH

3. product portfolios may differ e.g. branding or perception

4. growth may be too fast so diseconomies of scale

5. job losses and hostility

conglomerate + example

a business acquires a business in a completely different sector (= unrelated diversification in Ansoff)

E.G. Amazon’s acquisition of Whole foods Market

advantages of a conglomerate (x5)

1. spreads risk across markets so if one declines, they can rely on another

2. targets new markets so larger potential customer base

3. business gains customers, experience, knowledge and assets from the acquired business

4. increases brand visibility

5. good for global brands as established customer base and reputation

disadvantages of a conglomerate (x6)

1. often unrelated so no knowledge of new market

2. very little contacts and “know how”

3. little scope for economies of scale

4. coordination and control is difficult

5. different target market

6. CULTURE CLASH

joint venture + example

where two businesses join together for a mutual benefit e.g. on a particular project but remain a separate legal entities so NOT a merger

E.G. Tiffany & Co had a failed venture with Swatch

advantages of joint ventures (x8)

1. shared investment + resources so shared financial burden

2. shared technical expertise and “know how”

3. limits risk if new market as existing foothold

4. synergy benefits as combine experience and expertise

5. quick growth with multi-channel distrbution

6. gain access to IPRs

7. enhance credibility

8. greater market power so avoid competitive pressure

disadvantages of joint ventures (x4)

1. CULTURE CLASH

2. sharing of sensitive information with a competitor may erode a competitive advantage

3. one may input more resoures and time

4. difficult to exit from the agreement before the agreed time (better to have an exit strategy)

franchise + example

a business model in which an individual operates a business using the name, products, services and processes of a larger company for a fee and ongoing royalties

E.G. McDonald’s, Premier Inn etc.

advantages to the franchisor of franchising (x5)

1. enables fast growth with the franchisee taking on the financial risk of failure

2. increases brand visibility and customer base

3. franchisee provides money to purchase the franchise + ongoing royalties, providing finance

4. enables greater economies of scale as must purchase products from the franchisor

disadvantages to the franchisor of franchising (x4)

1. a rogue franchisee can damage reputation

2. some loss of control depending on ability to follow rules

3. difficult to adapt to local conditions as franchise businesses look the same and offer the same products/services

4. franchisee may want to sell the franchise so would need someone to purchase it

advantages to the franchisee of franchising (x4)

1. gain business experience with an established business

2. less chance of failure is proven/tried and tested idea

3. support received in terms of marketing/recruitment/finance

4. receives the profits (excluding royalties)

disadvantages to the franchisee of franchising (x6)

1. little to no independence

2. no control over what they sell or how (no freedom to adapt to local conditions etc.)

3. rely on franchisor for marketing/recruitment/finance etc.

4. must buy products from the franchisor

5. can be expensive

6. specific to a geographical area so limited growth potential

retrenchment

the cutting back of an organisations scale of operations

causes of retrenchment

poor performance, poor economic conditions, strong competition, job losses, decreased demand/capacity, may desire focusing on specialisation etc.

economies of scale

as output increases, average unit costs fall

purchasing economies of scale

as a business grows, it will purchase more supplies which will give the business higher purchasing and as such bargaining power (suppliers reliant on their custom)

E.G. supermarkets pushing prices so low for UK dairy farmers that non-existent profit margins

technological economies of scale

a large scale of operations enables particular technologies to be used efficiently e.g. clothes manufactures using machinery to bulk produce

reduce average unit costs as spread out amongst a greater level of output

financial economies of scale

as a business grows, it has more assets and in return, a bank is more willing to lend to the business at lower interest rates as more ‘credit worthy’ (= risk is lower for banks since can seize the assets if repayment fails)

cheaper to fund expansion

managerial economies of scale

as a business grows, it may bring in specialists to focus on parts of the business which may enable better decision making to increase efficiency

economies of scope

cost savings associated with providing several product lines or operating in several markets as costs spread over a higher number of products (e.g. management, transportation etc.)

E.G. Amazon uses the same delivery networks, warehouses for a variety of products

diseconomies of scale

average unit costs begin to rise despite increasing output

causes of diseconomies of scale (x4)

1. communication issues e.g. international or long chains of command means more complex so misunderstanding and poor decision making

2. control and coordination problems e.g. more employees, products, decisions, quality harder to monitor so mistakes increase

3. motivation issues as less contact with management (productivity falls)

4. speed of growth

overtrading

when a business grows far too quickly that its working capital cannot sustain the growth (leading to liquidity and cash flow issues)

E.G. Toys ‘R’ Us opening hundreds of stores causing debt and operating costs to increase = lead to bankruptcy

disadvantage of overtrading

high opportunity cost as less of a focus on profitable aspects of the business

Why could overtrading occur?

expansions involved in growth may be funded through loans which put strain on cash flow due to repayment (+ growth not generating cash inflow quick enough)

how can overtrading be avoided?

slowing growth, introducing new share capital to ease the strain, effective cash flow forecasting and improving management of working capital e.g. reducing stock

impact of growth on functional areas (x4)

1. finance → either from external sources like investors or internally from retained profits → must be aware of cash flow to ensure survival as may be a delay in inflows

2. HR → growth can offer more opportunities, responsibilities and promotion prospects BUT may place pressure on staff until new employees hired or additional training may be necessary

3. operations → growth may improve capacity utilisation which may place burdens on resources so invest in new capacity or need new production technology

4. marketing → increased efforts may be needed to generate required demand for growth

impact of retrenchment on functional areas (x4)

1. finance → scaling down likely to cost money in short term as redundancy payments paid BUT could increase if selling off assets or particular divisions

2. HR → method of redundancies must be clear to staff to avoid industrial unrest and demotivated staff

3. operations → may cause efficiency to increase as scaling back due to diseconomies of scale

4. marketing → marketing needs to focus on the core business + decisions made about resources allocated / marketing mix

innovation

developments in product or process that is then put into place e.g. adding value to products or increasing efficiency of process

innovation in the UK

in 2020, 45% of businesses in the UK were engaged in some form of innovation

when is a business named as ‘innovation active’ (x6)

1. the introduction of a new or significantly improved product, good or service

2. introduction of a new process for making or supplying a product

3. spending in areas such as research and development

4. training or the acquisition of external knowledge

5. introduction or new machinery or equipment

6. when a business undertakes major changes in its management practices, organisational structure or marketing strategy to improve competitiveness

external pressures to compete (x4)

1. a need to compete (especially as becoming global)

2. try to differentiate their products or services to stay ahead

3. meet changes in customer tastes/preferences

4. need to meet requirements of government legislation (e.g. health and safety standards)

internal pressures to compete (x3)

1. constant need to keep quality and range of products up

2. shareholders want high added value

3. reducing costs to achieve cost leadership

benefits of innovation (x7)

1. improve quality to attract customers (establish a USP + reputation for core competences etc.)

2. replace outdated products or processes

3. increases product portfolio (replacing those in decline)

4. meet regulations (+ reduce environmental impact)

5. reduce costs to increase competitiveness

6. improved flexibility

7. stimulating working environment

problems of innovation (x

1. uncertainty as high spending required

2. operational difficulties if rushed etc.

3. may encourage rivals to undertake similar action

4. patent protection may mean generic products that can be copied by rivals at a cheaper cost

5. financing costs and availability

6. uncertainty of demand

kaizen as a method of becoming innovative

gradual, small improvements that are based upon everyday ideas generated by employees → utilises talents and abilities of employees

benefits of research + development (x6)

1. helps businesses to invent new products so USP

2. unique ideas can be patented so monopoly of product

3. new inventions can capture the market

4. improve production process which lowers unit costs

5. improve durability, appearance + reliability (possibly allowing a premium price)

6. creative nature can motivate employees

intrapreneurship

when a large business encourages its employees to demonstrate entrepreneurial traits within the working environment e.g. creativity, willingness to take initiative, calculated risk-taking etc.

E.G. produced ‘like’ button on Facebook

requirements of intrapreneurship (x5)

1. support senior managers and enable them to set aside time for it

2. excellent two way communication so express ideas to managers

3. innovative working environment and culture so supported

4. rewards e.g. recognition or promotion

5. ownership of projects

benchmarking

the process of setting competitive standards based on the achievement of other firms

benefits of benchmarking (x4)

1. can gauge what is possible to achieve and compare it to their own level of performance

2. data from other firms can provide ideas and inspiration

3. identify areas needing improvement

4. improvements in process can involve cost reductions

drawbacks of benchmarking (x3)

1. may encourage a firm to copy another

2. some innovations may be protected by copyright or staff not having necessary skills to do effectively

3. can be difficult to gather reliable, up to date info (may be reluctant to share their ideas etc.)

internal benchmarking

comparing one division of the business with another to investigate reasons for success and copy across

intellectual property rights

protect the business’s name, logo, designs and inventions

benefits of intellectual property rights (x4)

1. can set the company apart from competitors

2. be sold or licensed forming an important source of income

3. offer customer something new and different

4. form an essential part of the marketing or branding

patents

protect new processes, equipment, components or products to prevent others from copying the invention and making, selling, importing or using it without permission (for up to 20 years)

characteristics of patents (x4)

1. allows further development meaning can reap revenue and profits without fear of it being copied

2. property of the owner so can be bought, sold, rented or licensed out

3. purchasing a small business with an existing patent can be a good proposition

4. complex and lengthy application process with an annual fee after the 5th year

copyrights

if the business creates or employs someone to create an original piece of literacy, dramatic, musical or artistic artwork, it automatically holds copyright and so cannot be copied without permission (may involve paying royalties etc.)

trademarks

help customers to recognise the products of the business and distinguish them from the products of other businesses E.G. Starbucks symbol and style of wording

impact of innovation on functional areas (x4)

1. finance → expensive and so must plan accordingly (through investment appraisal, monitoring of cash flow and budget setting)

2. marketing → market research needed to establish whether will appeal to customers etc.

3. HR → additional training and recruitment to instill a culture supporting innovation e.g. highly skilled etc.

4. operations → product-led innovation, kaizen and benchmarking planned by operations

globalisation

the increased integration and interdependence of national economies (involving increased international trade, increased inward investment and an increase in the role of global MNCs)

emerging economies

developing economies that have the potential to grow and develop providing opportunities for investment and high returns e.g. BRIC economies

reasons for globalisation (x7)

1. growth of free trade areas e.g. EU

2. protectionist policies reduced due to WTO

3. increased communication and transport links

4. large growth of MNCs

5. improved technology allowing sharing information

6. improved mobility of capital meaning easier to borrow from foreign banks and institutions

7. increased mobility of labour

why are emerging economies important for business?

1. account for 50% of global GDP

2. growth in consumer spending outpaced developed nations

3. provide huge market opportunities as 85% of global population (both young and increasingly affluent)

4. destination for exports and source of cheap imports

5. supply cheap labour to the rest of the world

importance of globalisation for business (x5)

1. comparative advantage → nations can specialise in an area of trade that has particular expertise e.g. China = low cost cheap labour vs UK = advanced technologies

2. increased competition so greater efficiency, variety and lower prices

3. migrants can work in UK to fill job vacancies etc.

4. global economic cycles influenced due to trade etc.

5. global brands e.g. Coca Cola, Starbucks

reasons for operating internationally (x5)

1. ‘risk spreading’ as not dependent on one market

2. take advantage of economies of scale and the experience curve (e.g. ‘know how’) as can transfer experience in own domestic markets to international ones

3. boost profits as cheaper labour, reduced transportation costs, avoiding exchange rate fluctuations, icnreasing customer bases etc.

4. competitive advantage can be maintained

5. takes advantage of government incentives e.g. tax breaks

factors influencing the attractiveness of international markets (x6)

1. size of potential market and expected growth

2. accessibility including geographic, political, legal, technological and social barriers

3. compatibility or alignment with existing market

4. availability of finance nd other resources e.g. materials, employees, infrastructure etc.

5. competitive environment (e.g. saturated or not)

6. external environment (PESTLE framework)

off-shoring

the practice of relocating a business process or operation to another country e.g. moving manufacturing plants, customer service centres etc.

outsourcing

contracting out certain business processes or tasks to third-party vendors that may be located domestically or internationally

reasons for off-shoring (x7)

1. cost advantages as cheaper labour

2. fewer environmental and employment restrictions

3. may be more flexible in meeting customers’ needs

4. key resources and inventory may be abundant overseas

5. free trade areas e.g. Nissan to access European markets

6. better understanding of international markets as closer proximity

7. reduce transport costs if operating globally

problems with off-shoring (x7)

1. political instability and natural disasters can disrupt the supply chain

2. increased additional costs like managing the transition abroad

3. potential diseconomies of scale as complex communication (reputational difficulties etc.)

4. currency fluctuations can impact profits

5. difficulties in controlling quality of goods

6. communication barriers e.g. language differences

7. logistics including delays in transportation etc.

re-shoring

involves the transfer of business operations back to their country of origin

in 2014, 1 in 6 manufacturers that off-shored re-shored back to the UK in order to improve quality and reduce lead times

what drives re-shoring (x7)

1. shifting consumer preferences to ‘Made in the UK’

2. reduction in the wage gap that exists between developed and developing countries erode the cost advantages

3. fluctuating exchange rates

4. supply chain risks and difficulties in dealing with transportation etc.

5. desire to improve cash flow by reducing inventory held (foreign suppliers too remote for JIT)

6. desire to improve quality and reduce production-to-market lead times

7. desire for a solid legal and regulatory framework to work within

exporting to enter international markets

selling the same products in overseas markets that it sells in domestic markets

direct = markets and sells it products overseas on its own behalf

indirect = selling products to agents with local knowledge of the export market

E.G. BP exporting oil + gas OR RioTinto exporting metals and mining

advantages of exporting (x4)

1. reduces risk and little investment required

2. speeds up entry to international markets

3. makes use of existing production facilities

4. possible to achieve economies of scale

disadvantages of exporting (x3)

1. may face import tariffs + other trade barriers

2. incurs transport costs

3. limits access to local information (especially if indirect)

licensing as a method of entering international markets

when a manufacturer in a certain country are given permission to make a product by the original manufacturer (common if strong branding and set up costs for a foreign base are high)

E.G. Coca Cola OR Disney in China (allows characters to wear clothing suitable to that market)

advantages of licensing (x4)

1. reduces risk and little investment required

2. speeds up entry to international markets

3. avoids import tariffs and other trade barriers

4. can be adapted to meet local tastes in terms of colour, styling or materials

disadvantages of licensing (x2)

1. lack of control over marketing

2. licensee might set up in competition with the company (especially if had access to design ‘secrets’)

alliances as a method of entering interational markets

agreements between businesses to combine their strengths and expertise to enter an international market (but different to a joint venture as companies remain independent and separate)

E.G. Starbucks + Target, Red Bull + GoPro OR Apple Pay + Mastercard

advantages of alliances (x3)

1. combines resources and strengths of two or more businesses

2. potential for learning and benefitting from one another

3. less investment required than if alone

disadvantages of alliances (x4)

1. can be difficult to manage

2. less control than if alone

3. greater risk than exporting and licensing

4. partner in the alliance may eventually become a competitor

direct investment

owning manufacturing operations in a foreign country by directly investing in manufacturing in the country with which it intends to trade

advantages of direct investment (x6)

1. can avoid high import taxes, reduced transportation costs, utilise cheap labour and gain increased access to raw materials

2. localised business (gains local knowledge and can adapt product to meet local needs)

3. help develop a global brand

4. transfer existing knowledge of production etc.

5. gain incentives from foreign government e.g. tax advantages and subsidies

6. spreads risk

disadvantages of direct investment (x5)

1. higher level of risk

2. requires huge financial resources and a long term commitment (so limited to large businesses)

3. requires a well thought through strategy with regard to managing local resources + overcoming cultural barriers

4. brings management challenges due to coordinating activities across different countries

5. cultural differences

multinational companies

organisations that have production or retail bases in more than one country

benefits of MNCs (x5)

1. can bring skills and expertise

2. provide employment

3. bring in investment to a country

4. increase demand for local goods and services

5. increase tax revenue

limitations of MNCs (x3)

1. businesses can exploit local resources and not share resources with the local economy

2. senior staff tend to be brought in from overseas

3. often find ways to avoid paying high levels of tax

why are cultural differences a risk of internationalisation

can be significant differences in language, attitudes and custom across countries making doing business abroad challenging e.g. Japan = common for employees to gather together first thing in the morning to sing and exercise together

E.G. McDonald’s adapt menus depending on tastes and preferences like the ‘McAloo Tikki’ in India which caters to vegetarian diets

why are differences in negotiating and decision making style risks of internationalisation

US = managers get straight to the point and a hand shake means agreement

Japan = great deal of consultation and involvement of different staff meaning it takes longer

why are ethical standards a risk of globalisation

what is unethical or illegal in one country may be acceptable or inevitable in others (+ level of bribery and corruption vary considerably from country to country)

limitations of globalisation (x4)

1. can be criticised as destroying local cultures as local businesses can’t outcompete larger ones that access economies of scale etc.

2. danger of a government being overthrown in less politically stable countries

3. risk of military rule and social unrest

4. currency can change significantly in response to any difficulties in the market, increasing uncertainty and making it difficult to plan ahead

what does the management of internaitonal business depend on (x5)

1. local customer requirements e.g. cultural differences, legal requirements (e.g. Europe = stringent emission standards) and local competition (e.g. Coca-Cola with unique flavours like Thumbs Up to rival local competitors)

2. costs associated with adapting the product

3. cost benefits from standardising products (economies of scale etc.) e.g. Ryanair maintain profitability by streamlining all operations OR Primark customers prioritise affordability

4. ease of managing centrally from one location

5. strength of global branding

digital technology

involves the use of digital resources to find, analyse, create, communicate and use information digitally e.g. e-commerce, social media marketing