3.9 - Strategic methods: how to pursue strategies

What are strategic methods

• The different strategies a business might pursue to achieve its objectives.

4 reasons why growth can be seen as important

1) Shows progress - good for managers in their own careers and shows shareholders why they are valuable

2) Financial benefits - higher revenues and lower unit costs

3) Momentum - new opportunities for employees to keep them engaged, boosting staff retention rates and attract higher quality staff

4) Greater market power - lower costs due to bargaining power

What are the 2 forms of growth?

1) Organic growth

2) External growth

What is organic growth?

• When a business grows through expanding its own operations, e.g. selling more of its existing products or launching new products for customers

What is external growth?

• Growth by joining with other businesses. e.g. takeovers or mergers

A benefit and a drawback of internal/organic growth

• Tends to be slower than external growth

• May be easier to manage

A benefit and drawback of external growth

• Clashes in the way organisations operate

• Immediate jump in the scale of a business

When do economies of scale occur

• When the unit costs fall as the scale of operations increases

What are the 4 types of economies of scale?

1) Purchasing economies

2) Technological economies

3) Financial economies

4) Managerial economies

What are purchasing economies?

• As a business gets bigger it will purchase more supplies, this gives it more bargaining power over suppliers as suppliers become dependent on the business and may be willing to reduce their prices to keep the orders

What are technological economies?

• When a large scale of operations enables particular technologies to be used efficiently, e.g a small farm does not use their equipment very frequently therefore it is inefficient but if it grows they use equipment more so it is more efficient

What are financial economies?

• As a business gets bigger it has more assets and this may mean a bank is willing to lend to it at a lower interest rates as the risk is lower, this reduces interest costs

What are managerial economies?

• As a business expands it may bring in specialists to focus on parts of the business, e.g. an expanding business may create a specialist HR department which is probably not cost effective in a small business

What are economies of scope?

• Occur when a business gains cost advantages by sharing costs between different products and divisions; these economies relate to the scope of activities of the business

What is the experience effect?

• The cost advantages that occur when operating within an industry on a large scale and therefore being able to make better decisions

What are diseconomies of scale?

• Occur when unit costs increase as a business expands

What is overtrading?

• Occurs when there are liquidity problems linked to the financing of rapid growth

3 reasons why diseconomies of scale can occur?

1) Communication problems - Businesses operating in different markets and different countries causing communication to be more complex; slower decision making or poor decision making therefore higher unit costs

2) Control and coordination problems - Having more things to manage and monitoring quality of work can become more difficult 3) Motivation issues - Employees may lose contact with senior managers and the overall vision of the business; they may feel insignificant to the success of the business leading to demotivation

4 methods of growth

1) Merger

2) Takeover

3) Venture

4) Franchise

What is a merger?

• When owners of two or more businesses become owners of a new shared organisation

What is a takeover?

• One business gains control of another and gains ownership of it

• Can be voluntary - Both sides agree it is in their interest

• Can be hostile - One company wants buy control of the other but the directors of the target company do not advise the shareholders to sell; buyer has to convince owners of target company to sell shares against their directors’ guidance

What is a venture?

• Businesses sharing information and resources on some projects but each retaining their own identity

What is a franchise?

• When one business sells the right to another business to use its name and sell its goods or services in return for a fee

• A franchisor sells the franchise to a franchisee

Advantages of selling a franchise

• Quick growth as funds are provided by franchisee

• Franchises may be very motivated as they own part of the business

Disadvantages of selling a franchise

• Lose complete control over what franchises do

• Do not gain all the profits from operations

Advantages of buying a franchise

• No need to think of own idea as product is established

• Data already available on buyer behaviour and costs

• May be provided with training, experience and support of other franchises

Disadvantages of buying a franchise

• Do not have complete independence to decide what to do

• Do not gain all the profits from the operations; have to pay money to franchisor

3 types of integration

1) Vertical integration

2) Horizontal integration

3) Conglomerate integration

What is vertical integration?

• When a business joins with another business at a different stage of the same production process, e.g. one business joins with a business that supplies it (backward vertical integration)

• Or a business can join together with an organisation closer to the final customer, e.g. a manufacturer joining with a retailer (forward vertical integration)

What is horizontal integration?

• Occurs when a business joins together with another business at the same stage of the same production process, e.g. 2 glass businesses having a strong presence in different continents joining together to benefit each other

What is conglomerate integration?

• Occurs when one business joins together with another business in a different production process, e.g. a computer games business joins with a sportswear business, this spreads the risk of a business being affected by change in one market

What is retrenchment?

• When a business reduces the scale of its operations

How does growth impact functional areas of the business?

• Finance - capital may be needed to finance growth

• HR - Extra duties and place a greater burden on staff unless recruitment is undertaken at appropriate times

• Operations - Can improve capacity utilisation short term but can place additional burdens on business if resources are working to their absolute maximum for a period of time

• Marketing - Increased marketing may be required to generate the demand for growth

How does retrenchment impact functional areas of the business?

• Finance - Scaling down the operations is likely to cost money short term as redundancy payments have to be paid

• HR - Managers have to negotiate who is made redundant

• Operations - Scale of operations will be reduced which may be more efficient reducing unit costs

• Marketing - likely to be more focused on a smaller core business allowing for better integration and more consistency in approach

What are the 5 pressures for innovation?

1) Political change - may open up new geographical markets through trade deals

2) Economic change - create pressure for a lower cost solution

3) Social change - put pressure for new environmentally-friendly approaches

4) Technological developments - online stores

5) Competitive pressure - from rivals

What are the 2 types of innovation?

1) Product innovation

2) Process innovation

What is product innovation?

• Provides extra benefits to consumers in terms of what they’re buying, e.g. Longer lasting products

What is process innovation?

• Affects how we work, e.g. people using apps such as zoom to communicate online

What is the value of innovation?

• To remain competitive and maintain profitability

• Can enable a business to offer better quality, lower costs, faster delivery or more reliability

What are the ways of becoming an innovative organisation?

• Accepting that failure can occur - managers must accept this and allow people to take risks

• Making sure funding is available for experimentation

• It is good to share - allowing different departments to share ideas

• Kaizen

• Benchmarking

• Intrapreneurship

What is Kaizen?

• A process of continuous improvement. A management approach in which employees regularly look for small improvements in the way they do their work

What is Benchmarking?

• When a business tries to match the approach and success of a particular process that is used by another organisation

What is Intrapreneurship?

• When individuals within organisations are being entrepreneurial - taking risks and generating new ideas

What areas can a business get intellectual property protection for?

• Names of products or brands

• Inventions

• design or look of products

• things that are written, made or produced

Methods of protecting intellectual property

• Copyright - e.g. art, films, photography (automatic right)

• Trademarks - e.g. product names, logos (need to be registered)

• Patents - e.g. inventions and products like machines (need to be registered)

• Design rights - shapes of objects (automatic right)

• Registered design - appearance of products e.g. shape, colour, packaging

What is the impact of innovation on functional areas?

• HR - Management of employees and how they are rewarded must encourage them to bring new ideas forward

• Finance - Money will need to be made available for R&D and innovation projects

• Marketing - Initial stimulus for innovation may come from marketing research

• Operations - Innovation may require project management to develop new products